Some form of means-testing of the State Pension will be necessary to make it both affordable for future generations and fairer for those with lower life expectancy.
That’s the verdict from new research by University pensions expert Professor Paul Sweeting.
In his new study, entitled Surfing the Tsunami: A Plan for State Pension Reform, Professor Sweeting analyses how the current State Pension system, paid for by the working population, is becoming more expensive as people live longer and the birth rate remains low.
He argues that the current solution – to extend the State Pension Age (SPA) – is unfair as it benefits the wealthiest in society. This is because they tend to live longer.
Using a formula based on payment per worker (in April 2016 earnings terms), the cost rose from under £2,000 p.a. per person in 2009 to around £2,500 p.a. per person in 2015. It is projected to reach almost £2,900 p.a. per person by 2040, even allowing for the increases to State Pension Age (SPA) currently in legislation.
The level of SPA increases required to keep the cost at under £2,500 would be substantial, says Professor Sweeting. The SPA would need to rise to 68 by 2030, 69 by 2042 and 70 by 2056.
This level of SPA increase would see ‘an increasing proportion of the State Pension being received by the wealthy, who have a higher life expectancy’, according to the study. As an example, for an SPA of 69, the wealthiest would expect to receive their pension for more than 40% longer than the least well off.
An alternative, says Professor Sweeting, would be to means-test. He suggests that this could both keep the cost in April 2016 terms at £2,500 p.a. per person and keep the SPA at 65, although ‘it would mean even some basic taxpayers giving up some of their State Pension’.
A compromise, he suggests, would be to means-test the State Pension gradually for higher rate taxpayers – initially giving up only £1 of State Pension for every £10 of income received over the higher band threshold. This would result in much slower SPA rises, with an SPA of 67 being reached in 2035, then 68 in 2045, but with no further rises required until 2054.
Paul Sweeting is Professor of Actuarial Science at Kent’s School of Mathematics, Statistics and Actuarial Science. He has previously held a number of roles in pensions, insurance, and investment. Most recently, he was Head of Research at Legal & General Investment Management, before which he was a European Head of Strategy and a Managing Director at J.P. Morgan Asset Management.