Memorandum submitted by the Association
of British Insurers (PC 18)
1. EXECUTIVE
SUMMARY
- ABI welcomes the Government's strategy
to tackle poverty among pensioners and the proposals for the Pension
Credit.
- The Pension Credit will reward the
thrift of today's pensioners; but
- Changes will be necessary to the Government's
proposals to permit the dissemination of the message `it always
pays to save'.
2. ABI'S
ROLE IN
WELFARE REFORM
2.1 The ABI is the trade association for
Britain's insurance industry. Its more than 400 member companies
provide over 97 per cent of the insurance business in the UK.
We represent insurance companies to the Government, and to the
regulatory and other agencies, and provide a wide range of services
to our members. ABI member companies account for more than a fifth
of investments in the London stock market.
2.2 The insurance industry is committed
to working with Government to maximise the positive impact of
savings and insurance products on the country's overall welfare.
It is only through this partnership that a fair and workable system
can be developed—one which encourages those who can afford
to save for their retirement to do so, but one that provides Government
support for those who cannot.
2.3 Recent independent research commissioned
by the ABI (summary attached) showed there is a £27 billion
a year gap between what people currently save and what they need
to save for a comfortable environment. Both Stakeholder Pensions
and the Pension Credit can play a role in closing this savings
gap. Further measures which could help include:
- a modernised and less costly sales
regulation process reflecting the protection now built into many
modern savings products. This would improve the reach of advice
and enable pension and savings products to reach more moderate
earners;
- further action to encourage employers
to play a bigger role in providing or encouraging pension provision.
Well targeted incentives could prove cost effective alongside
other forms of practical support. We are keen to explore this
area further with employers, trade unions, Government and regulators;
- possible further refinements to the
State Second Pension which could help close the gap between the
MIG and non means-tested pension entitlement for the lower paid.
3. ABI WELCOMES
THE GOVERNMENT'S
STRATEGY TO
TACKLE POVERTY
AMONG PENSIONERS
3.1 ABI has long advocated measures to combat
pensioner poverty and to reward those who save. The Government
has done much to help the very poorest pensioners, and it is right
that attention is focused on the millions who, now and in the
future, retire with modest retirement incomes. While increasing
the level of means-tested benefits to pensioners rather than providing
an across the board rise in the Basic State Pension does redistribute
to the poorest pensioners, it has the negative effect of lessening
the incentive for people to save for their own retirement.
3.2 To address the negative impact the Government
plans to introduce the Pension Credit, which is designed to reward
saving. ABI has welcomed Government plans for the Pension Credit
as a step in the right direction. In our view the Pension Credit
provides a welcome boost to retirement incomes for many of today's
and tomorrow's pensioners who may previously have found themselves
penalised for saving but who will now be able to share in the
nation's prosperity.
4. THE
PENSION CREDIT
WILL REWARD
THE THRIFT
OF TODAY'S
PENSIONERS
4.1 The Government's proposals for the Pension
Credit will, without a doubt, reward today's pensioners. The examples
given in `The Pension Credit: the Government's proposals'[1]
provide a good illustration of the benefits that the proposals
will bring. Certainly, they represent a major improvement on the
current situation in which pensioners can be penalised for saving.
4.2 In other words, those that have saved
in the past will benefit from the Pension Credit. Those on the
lowest incomes will see increases in income from the guaranteed
element of the Pension Credit—formerly called the Minimum
Income Guarantee (MIG)—and those with small or modest pensions
will be rewarded for their saving through the savings credit element
of the Pension Credit.
4.3 The streamlined procedure for pensioners
to claim the Pension Credit that they are entitled to is also
to be welcomed. Any measure which simplifies the process of claiming
state benefits is likely to increase take-up and enable assistance
to be directed to where it is most required. We will monitor with
interest the setting up and performance of the Pension Service
in this regard. With the proportion of pensioners who are subject
to some form of means-testing set to increase substantially[2]
it will be imperative that this service makes it easier for pensioners
to claim their entitlements.
5. CHANGES
WILL BE
NECESSARY TO
PERMIT THE
DISSEMINATION OF
THE MESSAGE
`IT ALWAYS
PAYS TO
SAVE'
5.1 Though the Government's proposals will
benefit today's pensioners the effect that they will have on tomorrow's
pensioners is less clear. Most importantly, under the current
proposals it is not true to say "the Pension Credit will
make sure that it always pays to save".[3]
This is because some groups will not see the benefit of saving.
5.2 Overturning a number of anomalies that
currently exist with the Pension Credit proposals is essential
to allow Government, pension providers and advisers to give the
message `it always pays to save' and for this to be reflected
by the Financial Services Authority in their Stakeholder Decision
Trees. To allow the dissemination of this message, a number of
issues need to be addressed. These include:
(i) Ensuring that those with less than full
entitlement to the Basic State Pension (BSP) receive the savings
reward that the Pension Credit will provide. Under current proposals,
less than full entitlement to the BSP will mean that the first
part of a pensioner's personal savings will be used to bring them
up to the level of the BSP and will not attract the additional
saving credit. For example, if a pensioner has an incomplete contribution
history and receives a BSP of only £67, but has £10
from a personal pension, they will receive the guaranteed income
(i.e. the Minimum Income Guarantee element) of £100 but no
credit for their savings. Failure to award the Pension Credit
to those with less than the full BSP, but who have some private
savings for retirement, could act as a disincentive to save, particularly
amongst women who are most likely to fall into this category of
saver.
(ii) Identifying an equitable solution for
women between the ages of 60 and 65 who, under current proposals,
will not benefit from the Pension Credit—a fact that detracts
from the fact that women, particularly older and poorer women,
will be one of the main beneficiaries of the Pension Credit;
(iii) Addressing the whole issue of the self-employed.
One of the stated aims of Government pension policy is to ensure
that all pensioners share in rising prosperity.[4]
The current system manifestly fails to ensure that this is the
case for the self-employed. The Pension Credit proposals will
extend this inequitable situation. ABI urges Government to grasp
the nettle and address the issue of pension provision for the
self-employed. We endorse the recommendations put forward by the
Pension Provision Group,[5]
namely that the self-employed, as a group, ought to be brought
into the State Second Pension (S2P). Doing so would allow all
self-employed persons to benefit from S2P—thereby enabling
them to gain access to the savings credit element of the Pension
Credit.
(iv) Making sure that individuals who may
save small amounts for a short time receive value for money from
saving. Under the proposals as they are currently outlined in
the State Pension Credit Bill and the accompanying document `The
Pension Credit: the Government's proposals' (November 2001), the
impact of means testing means that individuals who save only small
amounts for short periods of time could see a very low, or even
negative, return on their saving. This issue is discussed in more
detail in the attached Annex which analyses the implied rate of
return on saving and suggests one simple way to improve the economic
benefit derived from saving small amounts for a short time.
5.3 If the issues outlined are not addressed,
they will have a negative impact on future pensioners' incentives
to save. If not all saving is rewarded, one cannot be certain
that it will pay to save and advising tomorrow's pensioners to
save for their retirement will be fraught with difficulty. Given
this, the message to be given to tomorrow's pensioners can only
be something more equivocal like `the risk of not saving is greater
then the risk of saving'.
ABI urges Government to address the issues
outlined to enable the clear and unequivocal message `it will
always pay to save' to be given.
January 2002
1 `The Pension Credit: the Government's proposals',
Department for Work and Pensions, November 2001, p. 7-8. Back
2
According to ABI's Response to the Pension Credit Consultation
Document, by 2025 approaching two-thirds of pensioners may be
entitled to the Pension Credit or Minimum Income Guarantee. Back
3
The Pension Credit: the Government's proposals, Department for
Work and Pensions, November 2001, p. 3. Back
4
See, for example, The Pension Credit: the Government's proposals,
Department for Work and Pensions, November 2001, p. 2. Back
5
`Pension Provision and self employment', Pension Provision Group,
5 December 2001, p. 5. Back
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