'Engagement and overhaul needed to sustain a decent state pension'

A hotbed of controversy, today rows rage over: the state pension age, Waspi women, triple lock, gender gap and whether our children will even have a state pension to enjoy.

The focus this spring has been on 1950s women who had to work six or seven years longer than many were expecting. Most women are rightly indignant and some face hardship because their state pension age increase was botched by a lack of notice. 

For me (a woman born in the 1950s) other state pension reforms are more pressing than our plight. 

We had older friends and relatives whose pension was delayed. Most Waspi women are intelligent, how could they ignore the newspapers and discussions in parliament? Many private pensions altered their women members’ retirement ages more than 40 years ago to equalise with men to hardly a murmur of protest. That ship has sailed.

I do agree wholeheartedly that women are hard done by, especially as the whole system, both private and public, largely favours men. For women to retire with the same amount of money in their pension savings as a man, they need to work and save for an extra 19 years on average.

As pensions auto-enrolment starts at 22, this means that by age three, girls are already falling behind boys in their provision for later life according to the recent Now Pensions gender pension gap report.

Much more affordable than the reputed £10bn to compensate Waspi women, the Department for Work and Pensions and HMRC could do more to identify women with few national insurance contributions and make them aware of the availability of credits to build up their entitlement or tell them of means-tested pension credits and other benefits. 

State pension lowest in OECD

More fundamentally, and affecting both women and men, the UK state pension is low by European standards.

OECD figures quoted in the Institute for Fiscal Studies' report, "The future of the state pension", show the state pension and mandatory AE contributions only provide the mean male earner in the UK just over 20 per cent of individual earnings, compared to Italy approaching 80 per cent, France at 60 per cent, or Germany at just over 40 per cent of mean male earnings.

Despite the UK’s relatively miserly retirement provision, the cost of the state pension is colossal. Including pension credit and winter fuel payment it comes to £124bn (2023-24), or 4.8 per cent of national income. Its sustainability relies on continued UK growth of the economy – no guarantees there.

The latest Office for National Statistics figures show that annual growth in employees’ average total pay was 8.5 per cent in May to July 2023. This is the highest figure on record outside of the Covid-19 pandemic.

I fear ultimately there is a risk of death by a thousand stealth cuts, from axing the triple lock to trimming the retirement age. 

As a result, the full basic state pension will rise in April in line with earnings by £13.30 a week (from £156.20 to £169.50), while the full new state pension will rise by £17.35 per week (from £203.85 to £221.20).

This is significantly below the minimum that the Pensions and Lifetime Savings Association, the leading pensions trade association, calculates that a single person needs to live on – £277 a week or £430 a week for a couple. 

Although 8.5 per cent is a high percentage rise because of the triple lock, in absolute terms the rise is only up £17 per week. This 'widow’s mite' is not even enough to pay most council tax bills, now approaching £3,000 or £4,000 a year. 

The triple lock is one of the sacred cows of modern politics. Nobody has the bottle to meddle with it, but perhaps the IFS has the right idea when it suggests: “Introducing an Australian-style system of long-run earnings indexation, with the commitment that each year the state pension will rise by at least inflation (and never fall in cash terms), would help to protect the spending power of pensioners in bad years, and prevent their state pension incomes from falling behind the income of the typical worker over the longer run.” Just a thought.

Byzantine complexity

The whole apparatus of the state pension just too complex. It will be decades before we reach the nirvana of simplicity.

As a financial journalist with more than 30 years’ standing, it is impossible for me to check the accuracy of DWP figures, even for my own entitlement. How can the ordinary person, without even a GCSE in maths, have any hope at all? We just have to trust the DWP to get it right.

Successive reforms and penny-pinching have left us in a Byzantine mess.

If there is any money to spare, I would like to merge the old basic state pension with the new state pension. Then we will no longer wait decades for oldies to die off before everyone is on one system. We could then see the end to the nightmarish legacy of contracting out.

Even the DWP forecasts that by the 2030s only 80 per cent of people reaching state pension age in the mid-2030s will have a full new state pension.

The state pension, along with the NHS, is a precious national asset and worth fighting for so it will still be there for your children to enjoy.

With such complex transitional arrangements, no wonder research quoted in the IFS report shows that only 13 per cent of 25 to 49-year-olds and 31 per cent of 50 to 64-year-olds can estimate the state pension to within £40 a week of the correct answer.

Some countries have a means-tested state pension, like the Australian ‘aged pension’. I am against that idea as it demotivates savers. Why contribute to an AE pension if your sensible attitude to money just denies you any state pension?

Other countries have an earnings-related scheme, instead of our flat pension. That idea is worth exploring.

My current favourite is a universal pension based on residence, perhaps building an entitlement for every year UK citizens work and pay income tax. But just how many people live in the UK anyway? Does anyone know? 

IFS suggests in this scenario the number of years required for a full state pension could rise slightly from 35 to make the reform cost neutral. It would also reduce the risk of some people inadvertently falling through the net. 

How old is too old to work?

State pension age is another thorny topic, the numbers of people in poor health or disabled rises as we age. If we boost the state pension age still further, do we want to push a whole generation of workers onto disability and means-tested benefits, denying them the dignity of retiring gracefully?

Should we bring in a full disability state pension that can be awarded earlier in cases of ill-health and work-limiting disability?

When parliament legislated for the state pension age of 67 in 2028, the ONS projected that men aged 67 in 2028 would on average live a further 21.3 years and women 23.8 years, but the latest projections give much smaller life expectancies.

Yet the state pension age may rise still further to 68. We await a decision supposedly imminently, but all is silent on that front.

There are also marginal issues like the winter fuel allowance and other age-related benefits. These should be all the rolled up into one state pension – once upon a time there was a rationale for a winter fuel allowance (even millionaire pensioners get it) but perhaps no longer?

Many believe the state pension will disappear by the time they retire but there would be rioting in the streets if future generations were expected to pay for pensioners today, if they in their turn did not have a decent state pension of their own to look forward to. 

I fear ultimately there is a risk of death by a thousand stealth cuts, from axing the triple lock to trimming the retirement age. The state pension, along with the NHS, is a precious national asset and worth fighting for so it will still be there for your children to enjoy.

Lobby the policymakers. Engagement as with so much else in life from finance to litter picking is the key to the best outcomes. Don’t bury your head in the sand.

Stephanie Hawthorne is a freelance journalist