I shall make a brief contribution and oppose amendment 2, tabled by Opposition Members, which would leave out lines 22 and 23 of clause 9— essentially subsection (1)(a) and (b)—and insert in its place
“65, or current pension scheme age if lower”.
That would drive a coach and horses in many ways through one of the Bill’s key provisions, which is to have a link between the normal pension age and the state pension age. I think that is an important way to minimise the risk of longevity to the taxpayer.
Paragraph 4.5 of the final report of Lord Hutton says:
“It is generally assumed that longevity will continue to increase in the future, but there is significant uncertainty about the scale of any future changes.”
He goes on to say:
“Increases in life expectancy have historically been… underestimated”
when the calculations have been made.
In paragraph 1.2 on page 22, Hutton says:
“As a result”
of this underestimation,
“pension costs…have been much higher than originally expected.”
He cites the example of a female pensioner in the NHS scheme who would retire at the age of 60 in 2010, and says that she would be expected to spend around 45% of her adult life in retirement, compared with about 30% for pensioners who retired in the 1950s. That is the issue that Hutton is trying to address. Spending 45% of one’s life in retirement is simply not sustainable for any pension scheme—even one backed up by the vast coffers of the state sector.
Page 9 of the Hutton report states:
“The main risks within defined benefit schemes are: investment; inflation; salary”—
because salaries can be put up without actuaries being aware of the rises—
“and longevity risk. While government, as a large employer, is capable of bearing the majority of the risk associated with pension saving…present schemes involve too much risk for government and the taxpayer.”
He went on to say:
“There should be a fairer sharing of risk between government”
and scheme members. It is that risk that amendment 2 would push back to the taxpayer.
Hutton says that the increases in life expectancy have been recognised within the state pension scheme, and he therefore recommends that we should follow that lead when it comes to helping members bear pre-retirement longevity risk. That is why he recommends the link between the state retirement pension age and the normal pension age. Recommendation 11—it is in a shaded box, which will please the shadow Minister—states:
“The Government should increase the member’s Normal Pension Age in the new schemes so that it is in line with their State Pension Age.”
Lord Hutton also says:
“The introduction of the link to the State Pension Age, which will initially move Normal Pension Ages to 65, will move the proportion of adult life in retirement for public service pension scheme members back to about a third: roughly where it was in the 1980s. The current State Pension Age of 65 is already the Normal Pension Age for most new entrants to public service pension schemes.”
Teachers, for instance, have a 2007 scheme and a pre-2007 scheme. For those who joined before 2007 the normal pension age is 60, while for those who joined after that date it is 65. Lord Hutton goes on to say:
“In the long term, the timetabled increases in State Pension Age should help to keep the proportion of adult life in retirement for members around this level”
—that is, a third—
“on current life expectancy projections.”
I believe that amendment 2 is a mistake, and would increase risk disproportionately for the taxpayer.