One size doesn’t fit all – making the state pension work

It’s no secret that we’re all living longer than ever before – and mostly, that’s a good thing. But there are a number of different challenges that come with an increasing population; whether it’s increasing demands on natural resources , strains on our healthcare systems , or how we make sure that we, as a society, can afford state pensions in the future.

The Government has acknowledged the challenges around retirement and has already announced rises to the state pension age. So if you’re currently in your early 50s or younger, you won't be receiving your state pension until 67. But, from research we’ve just carried out,  this message isn’t sticking with the general population. Our survey results show that most people still want to retire before 67.

This isn’t the only potential obstacle to the planned increases in state pension age. In my opinion we also need to take into consideration fairness and flexibility – two significant factors that affect us as individuals and have important implications for business:

Unfair discrimination for individuals

The state pension has always been (unintentionally) discriminatory. The people who earn more throughout their working lives, and so can afford a more comfortable lifestyle, tend to live the longest. If everyone qualifies for state pension at the same age, these wealthier folk will benefit from receiving their state pension for a longer period of time, and the less well-off people will spend their lives contributing into a pension scheme that they won’t live long enough to take advantage of.  So increasing the state pension age uniformly for everyone also increases the degree of inequality, by penalising those who don’t live as long after retirement.

A lack of flexibility in the workforce

Our research told us that:

  • while most people want to retire before 67, the vast majority said that the receiving state pension was an important influence in deciding when to retire
  • almost a half of those surveyed want to have the choice to decide when they can access their state pension, and
  • a quarter say they would opt to retire earlier than a fixed state pension age even if this means receiving a reduced amount for the full life of their pension.

As the state pension age rises many people will be forced to work longer, regardless of whether they want to or are physically able to or not.  Default retirement age is now a thing of the past, so what do companies with (even legacy) defined benefit pension schemes do as their employees reach scheme retirement age and decide that they don’t want to, or can’t, retire?

At the moment many companies are choosing not to react to increases to state pension age. And I can understand why. The increases will be happening in stages over a number of years and will also be reviewed every five years which could result in a change to planned increases. So it’s difficult for companies to adjust their defined benefit schemes to mirror this. But as their employees with defined benefits rights start to reach 65, there could be some tricky end of service issues. In the future flexibility in the workforce will be key and flexibility in workforce renewal will be important.

One size fits none: finding the right flexible solutions

I think there’s a surprisingly simple solution to both of these issues. I’ve explored these in more detail in the report One size fits none: Does the flexible workforce of the future need a flexible state pension.

The solution is to replace a fixed state pension age with a state pension window. So people would be able to access their state pension from any age between 65 and 75. The amount you’d receive would be bigger if you started it later.

This window would allow 60-somethings to continue working part-time while taking a partial state pension. They could still look after elderly relatives and pursue and develop other interests to ease the transition into full retirement.

And to help businesses, the state pension window solution would provide a platform to support a flexible workforce of the future that this country needs to underpin economic success.

If you want more detail click here to download a copy of the report.


Simon Wasserman is a Senior Manager in our Pensions team. You can contact him on +44 (0) 20 7 804 9636 or by email at [email protected].