A bold Tony Blair Institute plan would sweep aside the state pension – how would the ‘Lifespan Fund’ work?

The Tony Blair Institute has proposed scrapping the state pension in favour of a ‘Lifespan Fund’ where income would be tied to your life expectancy.

The radical overhaul would end the popular triple lock pledge on annual increases, and base payments on your age and health status – with a link to your digital NHS record.

However, you could draw on your ‘fund’ earlier than the present state pension age, currently being increased from 66 to 67, under certain conditions.

The plan to ditch what the TBI calls the ‘outdated, increasingly unaffordable, and too rigid’ state pension has received a mixed reaction, with pension experts expressing caution at best and scepticism about the practical details.

Former Pensions Minister Steve Webb, who oversaw the launch of the new flat rate state pension now worth £241.30 a week, called the Blair proposal ‘fiendishly complex and highly intrusive’.

‘The idea of linking state pension payments to individual health records and individual life expectancy is deeply troubling,’ he adds.

So how would the TBI plan to replace the state pension work, and what more do Webb and other top pension gurus have to say about it?

How does the state pension work?

The full flat state pension is £241.30 a week or £12,500 a year for people retiring from 2016 who have a National Insurance record of at least 35 qualifying years.

People who retired before April 2016 get a £184.90 a week or a £9,600 a year basic state pension, plus hefty Serps or S2P top-ups if earned during their working life, based on an NI record of 30 years.

Once you reach state pension age, which is gradually being hiked to 67 between now and 2028, you are guaranteed to receive it until you die.

And under the triple lock, which the current Government has promised to keep in this parliament, the state pension is increased every year by whichever is the highest of 2.5 per cent, inflation or earnings growth.

What about the ‘Lifespan Fund’ plan? 

With the Lifespan Fund, you would get up to 20 years’ worth of income equivalent to today’s state pension, but the annual amount would be adjusted to reflect age and health, and then turned into a guaranteed pension for life later.

The TBI explains: ‘The annual pension someone received would depend not only on the size of their fund, but also on their age and health when they converted it into a pension. This would be done on an actuarially fair basis, using population data and information from an NHS digital health record.’

You could tap the fund earlier, if you had already contributed a minimum balance to your fund, and took a lower income.

You could also draw on it early for periods if, for example, you were out of work, studying or being a carer – but in this case, you would have to pay more back into it again later.

The TBI says: ‘This would replace a one-size-fits-all pension age that penalises those in poorer health – often those on lower incomes and with shorter life expectancy – with a fairer system that better reflects differences in health and lifespan.

‘Access to pension support later in life would no longer be tied to a single state pension age, but would instead become personalised.’

You would build up your fund through years of work, caring, study, or other approved activities or recognised issues like ill health. Each full year of contribution would add half a year of lifespan entitlement, up to a maximum of 20 years.

When it comes to annual increases, the triple lock would be ditched and the value of each individual person’s Lifespan Fund would rise in line with a smoothed link to median earnings.

‘From 2030, this would replace the triple lock for all state pensions, including those already being paid, helping to maintain pension value while making long-term costs more predictable,’ says the TBI.

Meanwhile, for savers the whole system would revolve around a ‘Lifespan App’, a secure digital platform which people would access to see their balance, check whether they were eligible for withdrawals, view their projected pension at different ages, and track progress in rebuilding their fund if they had used some of it earlier in life.

‘We have just created a relatively simple new state pension’

Leaving aside issues of confidentiality and data quality, it is very hard to make a precise leap from health records to life expectancy,’ says Steve Webb, who is a partner at pension consultant LCP and This is Money’s pensions columnist.

‘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.’

Webb says where people disputed their proposed state pension rate, there could be an appeals process, but this would be ‘an administrative nightmare’.

‘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.’

‘Setting income based on age and health is hugely controversial’

‘The proposals are complex and the prospect of the government calculating an “actuarially fair” retirement income for each individual based on key details like their personal health records feels somewhat dystopian,’ says AJ Bell’s director of public policy Tom Selby.

He says it would clearly be vulnerable to people ‘gaming the system’ by over-stating ill-health and drinking and smoking habits.

Selby says the advantage of the current state pension is that it’s fairly straightforward and provides people with certainty, but it is ‘increasingly expensive and pretty inflexible’.

Meanwhile, he thinks the TBI’s plan’s option of flexibility is likely to appeal, and from the Government’s perspective it would moderate long-term costs.

This would be achieved by replacing the triple-lock with a smoothed link to earnings growth, but also creating a notional 20 years of income at today’s state pension level, which would be adjusted according to life expectancy.

But Selby says the prospect of the state determining your income based on your age and health would be hugely controversial and raise new fairness concerns.

‘The approach comes with serious moral hazard, and many people would inevitably feel aggrieved that their neighbour received a higher income due to poor health.’

Selby concludes some aspects of the report could be a decent guide to future policy thinking – a smoothed earnings link to uprate incomes, early access in exchange for a discount, and allowing for periods out of work if you topped up NI again later.

But he says: ‘The most radical ideas, like setting incomes based on personalised life expectancy and health data, will surely never get off the ground.’

‘Improving auto enrolment should be priority’

‘Any debate about the future affordability of the state pension is welcome and necessary, particularly given current fiscal and demographic pressures,’ says Mark Futcher, head of defined contribution pensions at Barnett Waddingham.

‘However, the most important question is not just how the state pension is uprated, but whether working people are being supported to build sufficient retirement income alongside it.’

Futcher says automatic enrolment must be the priority, meaning extending coverage to all workers, including the self employed and those on lower or irregular earnings, and basing contributions on total earnings rather than a narrow band between £6,240 and £50,270.

‘Equally important is adequacy. Current contribution rates are simply too low to deliver a reasonable standard of living in retirement for many people.

‘Gradually increasing minimum contributions towards levels closer to 12 per cent, with appropriate support for employers and employees, would make a far greater difference to retirement security than short term changes to pension uprating mechanisms.

‘A strong, fair and sustainable pensions system requires bold decisions on coverage, contributions and engagement, not just adjustments to the state pension formula.’

‘It’s right to revisit state pension but change must be handled carefully’

‘The state pension was designed for a time when people lived shorter lives and followed more predictable work and retirement paths,’ says Kate Smith, head of pensions at Aegon.

‘That world has changed. While it’s right to revisit whether the system still works today, change must be handled carefully as for many the state pension remains the bedrock of people’s retirement income.

‘At Aegon we’ve been making the point that a single fixed state pension age no longer reflects differences in health, work, or caring responsibilities.

‘Greater flexibility with the ability for people to take their state pension earlier would give people better choices which fit in with their personal circumstances.’