November 1, 2010 8:42 pm

Hutton favours gradual pension age rise

Pension ages should rise gradually in line with a formula that takes account of increases in life expectancy – rather than jumping by a year at dates set out by legislation – Lord Hutton, the Labour former cabinet minister, who is reviewing public sector pensions, has suggested.

The coalition government announced in the spending review that the state pension age is to rise to 66 from 2020, six years earlier than originally planned. But it has yet to say how the further increases that are already planned – to 67 in 2036 and 68 in 2046 – will also be accelerated.

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“Rather than have to keep coming back to revise pension age it would be sensible to have a more intelligent way of dealing with it,” Lord Hutton on Monday told a London conference on public sector pensions organised by the consultants Hymans Robertson.

Rising longevity is a key factor in the increased cost of pensions, and in recent years each forecast of how fast it will rise has proved an underestimate. “We come back to it because we don’t get it right,” he said, “and each time there is a row about changing it. It would be far better to have a formula to keep it under review, rather than just have to come back and have another row.”

Options for doing that might include a regular review of pension age by a standing commission or a formula that raised it gradually to keep the number of likely years of retirement, or proportion of life spent in retirement, broadly constant. Lord Hutton pointed out that someone reaching 60 in the early 1970s could expect on average to live for a further 18 years while today the figure is 28 years.

Lord Hutton, whose final report on public sector pensions is due in March, said he had not reached a decision on the issue and his recommendations would re-late to public sector pension ages rather than the state pension age more generally. “But something that links retirement ages to a formula around longevity would be sensible,” Lord Hutton said.

Steve Webb, the pensions minister, has said the government is seeking a “longer term and more strategic” way of dealing with life expectancy and one option might be indexing state pension age to longevity. Lord Hutton issued a further call for evidence on how public sector pensions should be restructured, with final salary pensions set to be scrapped in favour of an approach based on average lifetime earnings. Such pensions could be provided up to a cap of salary, with some form of direct contribution offered on top.

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