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The Actuary The magazine of the Institute & Faculty of Actuaries

Institute and Faculty backs radical state pension reform

The public interest would best be served by radical reform of the UK state pension to a single tier flat rate option, according to the Institute and Faculty of Actuaries.

In its response to the Department for Work and Pensions’ (DWP) consultation paper, "A state pension for the 21st century", the professional body states its preference for the more radical Option 2 proposal and argues that, in future, the state pension age should be subject to regular multidisciplinary reviews rather than having automatic changes based on a single formula on life expectancy.

"We have argued for some time that a state pension scheme that is fair, simple and transparent should make it easier for people to make informed decisions about their financial future," said Ronnie Bowie, immediate past president of the Institute and Faculty.

"We therefore support in principle the Government’s proposed option for more radical reform to a single-tier flat-rate state pension, although there are many points of detail on how the transition would be delivered that still need to be worked out.

"The ending of contracting out is likely to speed up the reduction in schemes in the private sector offering future defined benefit accrual. However, it can be argued that it is in the general public interest to have to find solutions to help manage the ending of contracting out for a minority rather than let this be a barrier to single tier reform that should benefit the majority.

"There are significant problems with trying to adopt a single formula approach to deciding on future increases in state pension age. Firstly, it will not be at all straightforward to decide on what it should be. Secondly, no single formula is likely to be robust enough to give the required stability. And thirdly, life expectancy should not be the only consideration in setting state pension age.

"We suggest that the key criteria for establishing the best mechanism in this area should be whether it provides stability and sufficient warning, is evidence-based and ensures that ultimate accountability is with Ministers and Parliament. We outline how a statutory review process would be well placed to fit these requirements."

More details on the consultation, which closed on 24 June, can be found here.