Further memorandum from Elaine Kempson
As I indicated in my written submission to the
committee, there is little doubt that the Social Fund plays an
important role in enabling people in receipt of Income Support
and income-related JSA to cope with unexpected expenditure. The
recent changes to the way that need is assessed have been a big
improvement, although there are still substantial difficulties
relating to the fact that the budget is cash limited. This means
that some people who are turned down for loans would have been
successful if they had applied at a different time of the year.
Cash limits are also the reason why repayment levels are set so
high and why the calculation of loan entitlement is so complex.
These are two of the major failings of the present scheme.
Social Fund applicants are drawn from the most
vulnerable of the people claiming IS or income-based JSA. Compared
with non-applicants on these benefits, they have poorer health,
greater family instability, less family support and have been
living on benefit for longer periods of time (as spelt out in
my earlier written submission). It is, therefore, questionable
whether their needs should be met by loans at allor whether
grants would be more appropriate. Any grant budget would, however,
also be cash limited and would, almost inevitably, mean a return
to stringent tests of need at least for some of the awards. This
would be a retrograde step.
As I said in my oral evidence, in a Utopian
world benefit levels would be increased so that many of the needs
for Social Fund loans would simply not exist. Certainly, there
is a strong case to be made for scale rates to be increased. We
can, however, safely assume that for the time being there will
continue to be a need for something akin to the Social Fund. This
should build on its strengths but minimise its weaknesses, by
a larger grant component and a self-financing loan scheme.
Ideally, there should be a considerable increase
in the grants budget to allow for a larger number of grants and
a widening of the circumstances when they can be made. An obvious
example is grants when people are setting up home or are re-housed
at the instigation of their landlord or for specific emergencies,
such as fire or flood. It would be relatively easy to identify
the sorts of contingencies that should be coveredfrom existing
research of applicants and from the experiences of claimant advocates.
There is also a case for making six monthly
grants to those who have been claiming benefit for a year or moreto
assist those who live long-term on benefit. This would, undoubtedly
be a cheaper option than raising scale rates across the board
and a lump sum of, say, £100 would have a far greater effect
on household finances than increasing scale rates by £2 a
week. The size of the grant would, of course, be related to family
circumstances. To remove any possible work disincentive effects,
these "bonuses" could accrue and also be paid when people
leave benefit and take up employment.
A further possibility is that these six monthly
loans could be paid into a newly opened account with a credit
union or other savings and loans scheme such as New Horizons,
run by Cambridge Housing Association and Cambridge Building Society.
This would give people the added option of borrowing at low interest
in the future, using their "savings" as collateral.
Our research on credit union members who were eligible for Social
Fund loans showed that they tended to be the least vulnerable,
on benefit for relatively short periods of time and had less instability
in their lives. At the same time, however, it showed that they
usually viewed their credit union savings as collateral for future
loansnot as a pot of money to be spent.
If the grants budget were increased and eligibility
widened, the Social Fund could then be established as a self-financing
source of low-interest loans. This need not be administered by
the BA, although it would only work if repayments could be deducted
at source from income, as at present. Without this, levels of
default would be too high. (In my report to the Social Security
Advisory Committee in 1994 Outside the banking system,
I set out a number of possibilities for outsourcing the Social
Fund.) There is, in fact, much less interest rate sensitivity
among people on low incomes than might have been expected. So,
assuming that basic needs were met by grants, it would not be
necessary for the loan element to be susbsidised, although it
would need to be run on a not-for-profit basis. What people
on low incomes most value is having access to a source of credit
that is structured to meet their needs. That is:
repaid in fixed affordable weekly
payments collected by the creditorand
ideally deducted at source from their income; and
rescheduling of the loan if occasional
payments cannot be met.
They recognise that meeting their needs could
be more costly and are willing to pay a little extra for financial
services that meet their needs. They do, however, resent the high
profits that weekly collected credit companies make from the loans
they provide but continue to use them because it is one of the
very few sources of credit that is designed to meet their needs.An
interest-bearing Social Fund could not only offer loans at a cheaper
rate than these companies but, because it would not need to be
cash limited, it could offer more affordable repayment levels
than the current Social Fund. It would also allow individual credit
limits and top-up loans to be determined in the same way as other
sources of credit and so avoid the granting of reduced loans that
is widespread at present.
The acceptability of interest-bearing loans
would clearly depend upon the Social Fund grant element being
adequate to meet the most pressing needs faced by people in vulnerable
situations. I would certainly not advocate it if many more grants
were not available. Marketing of the interest-bearing loan scheme
would also need careful consideration, to avoid deterring applications.
Lessons could be learnt from credit unions that market their interest
rates as "only 1 per cent a month".
The combination of more grants and a low-interest
self-financing loan fund would, I believe, be an improvement on
the current system. If properly funded, it should provide help
to people at times when they most need it; offer a regular lump
sum to those on benefit long-term, and remove the need for the
loan scheme to be cash limited. A further advantage of this approach
is that the loan element could then be offered to a wider group
of benefit recipients than is currently the case.
Professor Elaine Kempson
Personal Finance Research Centre, University of Bristol
26 March 2001