The Office for Budget Responsibility (OBR)’s latest ‘Fiscal risks and sustainability’ report estimates that state pension spending will rise from its current rate of 5% of GDP to around 9% by 2075/76.
The projected increase is driven by the cost of triple lock uprating and an ageing population which will become older over the long term, with the median age expected to rise from 40 to 49 in the next 50 years.
Long-term spending policy assumptions in the report reflect future planned increases to the state pension age.
Earlier this year the state pension age increased to 67, impacting anyone born on or after 6 April 1960. While the next legislated rise to 68 was set for 2044 to 2046, the report states that the current policy position is to bring this forward to 2037 to 2039.
Stuart Price, Partner and Actuary at Quantum Advisory, said: “The OBR’s latest report brings into question the sustainability of the state pension in its current form. Workers’ national insurance contributions pay the state pension for current pensioners but as people live longer and spend more time in retirement, the ratio of workers to pensioners is diminishing. Since 2000, the number of people receiving the state pension has increased by 40% and will increase by a further 40% by 2050.
“Either the state pension age will need to continue to increase, taxes will need to increase, or the amount of state pension will need to reduce – or a combination of these measures would have to be undertaken – for the state pension to remain sustainable. We are already seeing the government use the lever of raising the state pension age, with the timing of future rises potentially being accelerated.
“The triple lock will be retained for now, with the new Prime Minister Andy Burnham reaffirming Labour’s manifesto commitment. Although the policy has played an important role in supporting pensioner incomes and getting many out of poverty, it is also a major driver behind the projected increase in state pension spending.
“Instead, the government has focused on reforms to workplace pensions in the Pension Schemes Act in a bid to deliver better outcomes for savers and pensioners. The impact of these reforms will be important as the state pension only provides around 20% of average earnings. This means private pension saving remains crucial for individuals to retire at a reasonable age with a decent level of income.”
In addition to the measures set out in the Pension Schemes Act, pensions professionals are calling for the expansion of the auto-enrolment system.
The Society of Pension Professionals (SPP) is urging the second Pensions Commission, which aims to review adequacy in retirement outcomes and the barriers affecting people from saving enough for retirement, to introduce an equivalent system to auto-enrolment for the self-employed in particular.
Price said: “One of the ways we can increase the amount we retire with is through increasing auto-enrolment contribution rates and introducing the format, or equivalent systems, for those who currently do not fall into the scope for auto-enrolment like the self-employed or younger employees.
“The Pensions (Extension of Automatic Enrolment) Act 2023 has granted the government the powers to reduce the minimum age to 18 and remove lower earning limits which is step in the right direction, but is yet to be implemented.
“Even for those savers already benefitting from auto-enrolment, the current minimum total contribution of 8% of a salary is not enough to provide savers with a comfortable retirement. Increasing the total contribution rates to at least 12% could make a significant difference in driving up pension savings.”
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