The Week 31 March 2023

Headlines have been made this week by continuing protests in France to a proposed increase in the State Pension age. This side of the channel, we had our?own Review?of what this age should be.

The context? We expect to spend ￡117 billion on the State Pension in 2022-23. As the Government is right to point out, pensions remain “the foundation of income in retirement” and have made a significant contribution to alleviating pensioner poverty.

However, to ensure pensions can sustainably fulfil this purpose, while accounting for their growing and uncertain impact on the public finances (equivalent to more than 8% of GDP by 2071), the age at which people receive the State Pension was expected to increase. First, to 67 in 2026-28 and then to 68, in 2037-39.

Yesterday’s review, based on forecasts of life expectancy (and so, the proportion of life one can expect to spend in receipt of the State Pension) — as well as “wider factors relevant to setting State Pension age” — has confirmed the first of these increases, but suspended the second.

One of the main reasons, we are told, is a shocking slow down in the rate at which life expectancy has been increasing (graph below). The last pension age review (from 2017) projected that by 2020, 65-year-olds could expect to live a further 23.1 years. This time around, data shows they will likely live 20.9 more years — even before accounting for COVID’s impact on mortality. Meaning 2.9 million fewer pensioners than 2014-based estimates.

Projected life expectancy at age 65

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At the same time, long-term fertility rate projections mean a much smaller working-age population to pay for the State Pension.

The enormous costs of delaying an increase in the State Pension age (more than ￡60 billion if we delay to the mid 2040s, according to?our friends at the IFS) make clear the sheer scale of the trade-offs at stake in this debate.

For Government to realise its ambition of an “affordable” pension system in the long-term, there will need to be some form of cost constraint. There are three main options for achieving this.

First, increasing the age at which it is received. People now spend up to a third of their lives in retirement – this was never the intention. In 1908, when the State Pension was first introduced, life expectancy was?nearly 30 years lower?than the age at which it began being paid, and only 24% of people reached the age to receive it. With people receiving this transfer for potentially decades, taking an increasing share of public spending, it is therefore a legitimate question to ask whether receipt should be tied to life expectancy. Particularly when we know the old-age dependency ratio is set to increase further, with stark implications for the intergenerational fairness of the State Pension.

Second, toughening entitlement. Payment is based on National Insurance Contributions (or Credits) – one option would be to revisit work history eligibility, raising the bar for what qualifies an individual to receive the full State Pension. Even more radical, the Government could target the State Pension at those on lower incomes, effectively means-testing it, as in other countries.

Third, reducing its generosity. The triple lock means that, in the long-term, the OBR estimates that the State Pension will increase in value at a faster rate than earnings – that doesn’t seem very fair.

For the State Pension to be genuinely sustainable, and continue to support people in retirement, some combination (or indeed all) of these options are going to have to be on the table. The alternative is a State that provides healthcare and pensions, and very little else.

This week also saw the Health and Social Care Select Committee publish its long awaited?report?into the autonomy and accountability of Integrated Care Systems (ICSs). If you don’t know what these are, they’re now the chief commissioning bodies within the NHS and therefore responsible for spending around ￡120 billion of public money. So making sure they are as effective and accountable as possible is vital.

The report makes some familiar claims: our health system remains too top-down and NHS England and the Department of Health and Social Care tend to be meddling micro-managers rather than helpful facilitators of a more devolved approach. The top line solution to this problem is to re-conceive the role of the centre — making it responsible for setting outcomes-based targets and letting local systems get on with the job.

The report is strong on culture — how do we make local authorities and the NHS work more effectively together and how do we build “system” rather than organisational leadership? — but light on more nuts and bolts detail. Answers to thorny questions about aligning financial incentives between healthcare providers and making sure that governance structures truly make ICSs “partnerships of equals” are dodged. To us this feels a missed opportunity for the main parliamentary scrutiny body to highlight key shortcomings in the model. Perhaps Particia Hewitt’s review on the same topic, due out next Tuesday, will fill that void.