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State Pension Age to be increased to age 67 for people in their 40s
13/09/2011
The Government confirmed yesterday that it is considering increasing the State Pension Age for many millions of people much sooner than had originally been anticipated.
Under the current proposals in the Pensions Bill 2011 which is shortly to receive Royal Assent, the Government is proposing to increase the State Pension Age of men and women to 66 by April 2020, whereas previously the State Pension Age was not due to increase to age 66 until April 2024.
For younger workers, the current law as set out in the Pensions Act 2007, requires that State Pension Age will increase to age 67 between 2034 and 2036 increasing to 68 between 2044 and 2046.
In an interview with The Observer on Sunday 11 September 2011 however, the Government Pensions Minister Steve Webb stated "Everybody knows we are living longer. It is like an express train. I am even more convinced now than I was a year ago that we are running to standstill on all this stuff. In a world (where) you are going to live into your late 80s, and before we know it (into your) 90s, we think now we have got to move on these things."
He went on to add "The timescales for 67 and 68 are too slow," he said. "If it is 67 in the mid-2030s we will be going backwards in terms of share of your life in retirement. I mean the problem would be worse than 20 years before."
The article in The Observer quotes “
Iain Duncan Smith, the Work and Pensions Secretary, was however more cautious stating that the Government had not yet determined the timescale for reforms. In an interview with the BBC he stated "We have been clear about this all along. The move to 67 will happen but the question only is on the timing, that's all, and we haven't made a decision about that yet."
There are a number of consequences of a change of policy in this area.
Pensions on Divorce
In many divorce cases for clients with long marriages or where they are aged in their late 40s or older, such that retirement is not too far away in the distant future, the court may rule that settlement of pension matters be dealt with by achieving parity of pension benefits or equal incomes in retirement. Detail as to what is meant by “equality of pension income” is often not initially forthcoming, as the nature of the pensions involved and how they operate is not always fully understood at the time that the court gives preliminary directions on a case. It is not however unusual for the court or the divorcing parties to initially consider achieving equality on retirement at ages of 60 and/or 65, say.
Given that State Pension Age is shortly to be increased to 66 for people in their early to mid 50s and now potentially to age 67 for people in their 40s, plus some in their early 50s, the question needs to be asked, ‘Is the retirement age at which incomes are being equalised too young?’. This question becomes even more pertinent given the Government’s scrapping of compulsory retirement at age 65 with effect from 6 April 2011 except for a handful of uniformed services occupations or where it can be “objectively justified”.
Given the clear incentives for people to work longer; higher State Pension Age; removal of compulsory retirement at 65; the pensions black hole caused by many companies withdrawing traditional final salary schemes and replacing these with cheaper money purchase alternatives providing lower benefits; improving health of the general population given medical advances, better diets etc, in 10 to 20 years time, retirement at age 60 may be a luxury few can afford with the norm being that people work to their late 60s, possibly even 70 in some cases.
Divorcing parties may therefore need to think more carefully about what is realistic in relation to equalizing pension benefits and possibly give more weight to equalising benefits at a later age than has been considered in the past, say age 66, 67 or even 68.
On a typical divorce split where the husband has larger pension assets than the wife, such a change may be good news for husbands as the later age at which pensions are equalized, the better the husband will usually fare given that if he has to provide an ex-spouse with an equalized income for a shorter number of future years, then the required percentage share of his pensions to his ex-wife to achieve this is likely to be lower.
Loss of pension rights/loss of income following injury or dismissal
The changing trend to retirement at a later age following the increase to State Pension Age is a factor that will also need to be considered when assessing the loss of pension rights following injury or dismissal which results in the termination of an individual’s employment. If working lifetime is prolonged, then the future period over which loss of income is considered should be reassessed particularly for those in their mid 50s or below who have a much more realistic prospect of working beyond age 65.
Similarly loss of pension rights calculations would need to be adjusted to consider the very realistic possibility of an individual retiring at a later age than 65, and what the impact of this might be.
Another area to consider is the loss of State Pension benefits for those who, as the result of not being able to work, are unable to pay the full level of National Insurance contributions that they would have been able to contribute had they continued in employment. Historically in Industrial Tribunal cases, loss of State Pension benefits has been assessed using tables dating back to 2003 when State Pension Age for men was age 65, and for women between ages 60 and 65. These tables need to be urgently overhauled to reflect the changes to State Pension Ages announced since that time in order that calculations can be more carried out on a more realistic basis.
Paul Windle
Actuaries for Lawyers
12 September 2011
