A think tank led by former UK prime minister Tony Blair has called for the current state pension to be ditched and replaced with a new flexible fund from 2030.
The Tony Blair Institute for Global Change has proposed introducing a “Lifespan Fund” from the end of the decade. The suggested reform would see the triple lock, used to uprate the UK state pension at a great cost to the government, scrapped.
It comes as the number of people aged over state pension age is set to rise from 12.6 million in 2026 to over 18 million by 2070, taking the cost of the state pension from 5% of GDP now to 7.7% by 2070, according to the Office for Budget Responsibility (OBR).
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Under the think tank’s proposals, individuals would build up credit through work and other activities. They would have the option of drawing on it during their working life, for example if they need cashflow due to an unemployment spell of up to six months, or if they have had to take on caring responsibilities.
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The report says this would only be permitted for those taking time out of work to “boost their future earnings potential or to engage in another socially useful activity”.
Individuals would be able to pay a higher contribution rate after returning to work to ensure their eventual entitlement was enough to live on.
The report also suggests scrapping the state pension age and replacing it with a system where individuals could choose when to retire and receive a personalised amount based on their age and life expectancy.
That said, access to funds would only be possible if an individual had built up enough credit to ensure their pot would last at least 10 years.
The think tank says this would mean those with shorter life expectancies, often on low incomes, could draw on the income from their fund sooner.
The proposals also put forward the idea of getting rid of the triple lock and uprating payments in line with average earnings.
Calculations by the Tony Blair Institute for Global Change suggest the Lifespan Fund would significantly lower the burden on the public purse.
They estimate the new fund would cost 5.31% as a share of GDP by 2073/74 compared to 7.65% if the current state pension system stayed in place.
New Lifespan Fund would be a ‘huge backward step’
Steve Webb, former pensions minister and now partner at pension firm LCP, has raised concerns over the proposals.
He said: “We have just created a new state pension system which is relatively simple and standardised, and which forms a firm basis for retirement planning.
“It would be a huge backward step to replace it with something fiendishly complex and highly intrusive, and which would take many decades to implement in full.”
Webb, who was pensions minister when the triple lock was introduced in 2011, added the idea of linking state pension payments to individual health records and life expectancy was “deeply troubling”.
“Leaving aside issues of confidentiality and data quality, it is very hard to make a precise leap from health records to life expectancy,” he said.
“The report says that they would not want to pay higher pensions to those who had poorer health because of lifestyle choices such as smoking, but it is very hard to see how they would exclude the impact of smoking on someone's overall health.”
Tom Selby, director of public policy at investment platform AJ Bell, echoed Webb’s comments, saying an overhaul of the state pension “could create even more uncertainty as well as complexity”.
“The most radical ideas, like setting incomes based on personalised life expectancy and health data, will surely never get off the ground,” he said.
However, Selby said the report could be “a decent guide to future policy thinking”, including that the triple lock needed to be scrapped.
He said moving to uprating payments in line with earnings “feels a reasonable compromise”, while allowing people to take state pension income at a younger age “isn’t completely inconceivable".
We look at the alternatives to the triple lock in another article.
