Means testing the only way forward on state pension

Martin Herrema
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Pensions expert Professor Paul Sweeting says the UK’s poor state pension needs to be increased but that this will only be possible if an element of means testing is introduced.

Commenting on a new study from the Organisation for Economic Co-operation and Development (OECD) showing Britain’s basic payout of £122.30 a week is the worst in the developed world, the University’s Professor Sweeting, says means testing is the only fair way to provide an adequate pension in the future.

He comments: ‘The low level of the basic State Pension would be less worrying if it were supported by a flourishing occupational pension market. However, closures of defined benefit pension schemes in recent years have eroded the value of this benefit. These schemes, which offer a pension for life calculated with reference to an employee’s salary, are increasingly being replace by defined contribution arrangements.

‘Such arrangements have no such guarantee. This would not itself be an issue if the level of contributions into defined contribution schemes was sufficient – but it is not. In particular, the rate of contributions going into schemes through auto-enrolment is unlikely to provide an adequate pension for the vast majority of workers.

‘This suggests that the Basic State Pension should be increased. However, for this to happen, someone needs to pay. The basic State Pension is a pay-as-you-go scheme, which means that the pensions are paid out of the taxes of those still working. Demographic changes mean that even with projected increases to the State Pension Age, the cost to the working population is likely to rise sharply.

‘This will adversely affect a generation that is already suffering from increased housing costs and reduced private sector pension provision. If the basic State Pension is to be increased, the only fair way will be through the introduction of an element of means testing.’

Paul Sweeting is Professor of Actuarial Science at the University’s School of Mathematics, Statistics and Actuarial Science. 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.

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