Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. Ladies and gentlemen, can I call the proceedings to order and start off by explaining that we are in this room for a very particular and very happy purpose in that we have with us a distinguished, visiting group of parliamentarians from the Russian State Duma. It is hard enough trying to understand pension policy in English but for a VIP group of parliamentarians from Russia, the least we could do was provide translation facilities for them. We are delighted to welcome our friends, who are part of a twinning programme with the Russian State Duma Employment and Social Affairs Committee. We have visited them and this is the return visit. We are delighted to have them with us and we hope that they have an instructive visit here in the United Kingdom. Our friends from the Association of British Insurers have been good enough to provide evidence for the Committee. The Committee is embarking on a new inquiry into the proposed Government Pension Credit and we have a delegation from the Association of British Insurers, headed by Joanne Segars who is well known to the Committee and has helped us to good effect in the past. Perhaps you could introduce your colleagues, make a short opening statement and then we will go straight to the questions, if we may.

  (Ms Segars) Thank you for giving the ABI the opportunity to comment on the Pension Credit today. With me today are Adrian Boulding, who is the Director of Pension Strategy at Legal and General, and Chris Curry who is a senior economist at the Association of British Insurers. The ABI welcomes the Pension Credit very much. We believe the Government has done much to tackle the poverty of today's pensioners and we think it is right that attention is focused on those pensioners who have managed to save for retirement but nonetheless have modest incomes in retirement. Our concerns are focused on tomorrow's pensioners and we are concerned that, as currently drafted, it will not be the case that all pensioners or would be savers will benefit from the Pension Credit. This is because some groups—for example, women and the low paid—may not see the full benefits of saving as envisaged by the Pension Credit. We have a number of constructive suggestions for minor changes to the design of the Pension Credit legislation that will enable us to say with confidence that it pays to save. Nonetheless, we want to stress that Pension Credit is, we believe, a significant improvement on the current position. We also think it is helpful to see the Pension Credit in the wider pensions and savings context. There is a £27 billion savings gap between what we are currently saving for retirement and what we need to save for an adequate pension. Our work is now focusing on filling that savings gap. The Pension Credit will play an important part in encouraging people to save, but for the Pension Credit to meet the objectives set by the Government in its expectations of future generations of pensioners it must result in Government, advisers and regulators being able to say with confidence—for everybody—that it pays to save. Our proposals for change focus on trying to achieve that objective. They focus on helping those with less than a full entitlement to the Basic State Pension; identifying an equitable solution for women aged between 60 and 65; rewarding those who have saved small amounts for short periods of time; and addressing the issue of helping the self-employed. We recognise that these changes are not without cost, but we believe the benefits will eventually outweigh the costs involved. It will be much easier then for us to say with confidence that it pays to save and we will be able to advise and help those people who are currently not saving to save and ensure that everybody can retire with a decent pension.

  2. Maybe I am reading too much into the textual analysis but it occurred to me that the submission you made to the Government in the formal, government consultation process talked about you warmly welcoming the proposal. The written evidence that you gave to us was a bit more sceptical. Am I right in saying that your thinking has shifted and that you are now more concerned about some of the drawbacks than you previously were when the official consultation took place?
  (Ms Segars) I do not think that is the case. We are now at the stage of identifying particular issues where we can make some small changes to reach the objectives that I have just described.

  Chairman: If it is my imagination, I am pleased to hear that.

Mr Mitchell

  3. You have touched on some of these points already, but I would like to ask three fairly precise questions. It is part of the Government's aim to ensure that this new scheme addresses two things. First of all, the issue of poverty amongst today's pensioners and secondly for the future as a boost to the incentives to save. Can you tell us in relatively quick and simple terms to what extent, on those criteria, the Government will meet them?
  (Mr Curry) On the issue of poverty amongst today's pensioners, it will to a certain extent address a lot of those concerns. It will increase the income of many of those who are already retired, whether or not they have some savings. The issue of means testing is a fraught one, but given that it is used at the moment it will increase incomes for those who claim means tested benefits. Looking at the impact on the incentive to save for those in the future, incentives to save are very difficult and complex to look at. I will try not to go into the detail. In my view, in the vast majority of cases, it will give people more of an incentive to save than exists under the current system of Minimum Income Guarantee.
  (Mr Boulding) What is important is that today there are some people who are put off saving because they fear that if they do not save at all they will be just as well off. If you like, it is the next door neighbour who did not save and would end up with as much money in retirement as they will, even they had foregone some current income to save. The Pension Credit in principle changes that.

  4. The Minimum Income Guarantee has reinforced those feelings, has it not?
  (Mr Boulding) It has. The Pension Credit in principle changes that because it enables us to assure a potential saver at the point where they are wavering, wondering whether to start a savings plan or not, that if they do save they will be better off in retirement than if they have not saved, bar the fact that we have identified one or two glitches in the legislation where it is not true in 100 per cent of cases.

  5. In your submission to us, you made it clear that there are some groups that simply will not benefit. It will not pay for them to save. How many? How big is that grouping? Have you a shopping list of things that could be introduced into the legislation which would meet your concerns on that specific point?
  (Mr Curry) Looking at precise numbers, it is very difficult. I can give you some contextual information. One of the groups we have identified, women aged 60 to 64, as the legislation is drafted, would not benefit from the savings element. It is estimated that there are 1.5 million women in this age range at the moment. That will increase over time to about 2.2 million by 2031. That is a potentially sizeable group but I must stress that it is not all women within that group who would be affected by this. The other groups we have identified are those who have a less than full record of Basic State Pension. Estimates I have seen from the Government Actuary's Department suggest that at the moment 93 per cent of all men have a full Basic State Pension record but if you look at those who have only just recently retired that drops to 88 per cent. But for women the corresponding figures are 53 per cent of all retired women but only 25 per cent of those newly retired. There is definitely some scope there for people who do not have a full Basic State Pension to not benefit fully from the impact of the Pension Credit. The other groups we identified were the self-employed. There are currently over three million people self-employed in this country and the particular problem there is that they are not automatically members of the existing compulsory second tier pension provision in this country, so they have perhaps a larger gap to make up through saving.

  6. You argue that the self-employed should be brought into the State Second Pension so that they can gain access to the Pension Credit but are you clear that they are excluded from that?
  (Mr Curry) They are not excluded from the Pension Credit, but they are excluded from the State Second Pensions. If they are included in the State Second Pension, they have a much better chance of gaining from the Pension Credit.

  7. There is a specific point in your submission that suggests that those people who save £50 a month would suffer negative return. Could you explain that to us?
  (Mr Curry) The reason for that is because, under the proposed Pension Credit, say for example a person had a full Basic State Pension and £10 of saving's income on top of that; their total income would only increase by £6 because of the tapering effect within the Pension Credit. If you look back at the contributions people have made to build up a pension fund which gives you £10 income in retirement they will only see £6 income in retirement so their rate of return as it affects their total income is lower than the private rate of return on their pension contributions. If you only save for short periods of time, the effect of not getting the full benefit of your saving takes the rate of return on those contributions below zero. It is negative in the examples included for up to ten years. Under the existing Pension Credit scheme, that is still a considerable improvement on the Minimum Income Guarantee system where it can take over 20 years to achieve a positive rate of return.

Mr Stewart

  8. Continuing on the theme of incentives to save, do you believe that the Pension Credit will have a positive effect on future patterns of saving or would you agree with the Norwich Union that "incentive to save is insufficient"?
  (Mr Boulding) I think it will be a significant incentive to save, particularly amongst the lower income groups where we have the hardest battle in terms of persuading people to save. There is a genuine fear at the moment of being made to look a fool. People think they are being made to look a fool if somebody similar to them that did not save got as much through means tested state benefits as somebody who does save. The Pension Credit removes that fear of being made to look a fool.

  9. Pension Credit is in effect a means tested benefit as well, is it not? It has been suggested to us that increased reliance on such benefit for pensioners would discourage small scale saving. Do you agree with that or disagree?
  (Mr Boulding) I disagree with that. I think it is increasing the chance that people are going to save for the reasons that I have given. Although it is a means tested benefit, whereas most means tested benefits have this cliff edge cut off that, as soon as you move out of the range you lose entitlement, this is a means tested benefit that is only progressively withdrawn over a taper. You can clearly see that as you save and as you save a bit more you still get some benefit from making that saving.

  10. Presumably interaction with Housing Benefit is crucially important here?
  (Mr Boulding) Absolutely. One of the points we made in the early submission, when it was originally a consultation document, was that this interaction with housing tax benefit and also Council Tax Benefit needs to ensure that it is still a progressive taper as it is withdrawn. Indeed, that has been taken account of in the drafting of the Bill.

  11. The Government has set itself a target of changing the ratio of private to public pension provision from 40:60 to 60:40. Will the Pension Credit help to achieve this target?
  (Mr Curry) It is difficult to say until we know exactly how the change in incentives affect behaviour. It could be that the Pension Credit does lead to an improvement in savings rates amongst people, in which case the Pension Credit will be supplemented by higher private income in retirement as well. In theory, if things work that way, it can move towards helping that objective. As a counter balance, it does also increase the amount of income that the state will be putting into retirement income in the future. That will tend to work slightly in the opposite direction.

  12. If you were able to alter the current proposals for the Pension Credit to encourage more people, particularly those on lower incomes, to save for their retirement, other than through private means, how would you do that?
  (Mr Curry) We put a specific proposal into our consultation response and it is also mentioned in the written evidence to the Committee. We feel that there would be a lot of merit in adding a disregard into the Pension Credit so that the initial sums of saving are not subject to any withdrawal rate and are kept in full. We suggested initially that this might be at a level of £10. This may have some expense, both short term and longer term, but we feel it could be either met out of public expenditure or there could be ways of adjusting the taper rates within the other areas of the Pension Credit, which mean it could be done on a cost neutral basis.
  (Mr Boulding) The two groups we have identified that are particularly disadvantaged—women aged between 60 and 65 and both men and women with an incomplete Basic State Pension—are disadvantaged because of the way the legislation has been drafted. The formula for calculating the Pension Credit uses the actual Basic State Pension that is payable from 65. If the drafting of the legislation was changed to refer instead of the full rate of Basic State Pension to the rate of Basic State Pension available to the particular individual, those two categories would be fully included in the Pension Credit. We could also say to those people that it will always pay to save.
  (Ms Segars) There are relatively easy changes that could be made at this stage to the legislation.

  13. Which is very important when it comes to drafting?
  (Ms Segars) Precisely.

Mr Goodman

  14. Baroness Hollis has described the Pension Credit as the "final bit" of the Government's pension strategy. On the other hand, Sue Ward, of the Northern Pensions Resource Group, has said that the Pension Credit "reduces the Government's strategy to incoherence". What is your view?
  (Ms Segars) I am not sure we would concur with Sue Ward's comment. As we have suggested, we do see the fact that the Pension Credit should increase incentives to save and should help people save for private pension provision. We do have a number of improvements to make around the margins but we believe that the principle is right and that the overall mechanism is right. It is one that we see as being a building block in the Government's pension strategy.
  (Mr Boulding) It is a very important correction to a lot of damage that the minimum income guarantee has done. The minimum income guarantee, which has been set at a level considerably higher than the Basic State Pension, introduced a disincentive to save and was putting people off saving. The Pension Credit is correcting that disincentive.

  15. If you think of all the elements of the Government's pension strategy, MIG, stakeholder pensions and so on, if you put them all together, how difficult does this make for private insurers to provide effective advice to clients? Is there any recommendation you would make here?
  (Mr Boulding) The important thing to realise on advice is that we are talking at people who are essentially going to be buying stakeholder pensions in the workplace and the advice they are getting is going to be generic in the sense that it will be a financial adviser standing up, doing a presentation to a number of workers rather than trying to sit down with each one, one at a time, and individually assessing their own situation. The particular thing which we believe is very important in the Pension Credit is for that advice to hold at the generic level. It is not practical for an adviser to spend time trying to assess an individual's likely future entitlement to means tested benefits (a) because of time but (b) because means-tested benefit will be very dependent upon the individual's future circumstances which at best are a crystal ball gazing prediction. It is critically important for that adviser to be able to give the same message to everybody in the room. If the details of the Pension Credit are sorted out so that it works properly, they will be able to deliver that message and quite simply say to them, "If you save some money now, you will be better off in your retirement than if you had not." I think that is a very important message for them to be able to deliver.

  16. In its memorandum to us, the Institute of Actuaries said that, owing to the extension of means testing, the introduction of the Pension Credit would "make it impossible to provide savings advice to those on low to medium incomes" and "means testing institutionalises mis-selling since certain groups will receive a negative return on their savings, regardless of the private provider's efforts." Would you agree with that?
  (Mr Boulding) I agree with the point on negative returns on savings. There will be some instances, and it is the effect of a tapered withdrawal of means tested benefits, where you can get a negative return on savings, but they are nevertheless getting some benefit from their savings. This was not the case before the Pension Credit was introduced, where you had people who could save and get no benefit from their savings. I do not agree with the Institute of Actuaries' view that we cannot give advice to people on low income. Indeed, my company is in the position of doing just that, going out into the workplace and setting out the stall for how these things work for people on low incomes.

  17. It sounds to me as though you would agree with the DWP who said, "... it will be possible to make a reasonably positive statement that for most ... people, most of the time, they would be better off saving for retirement through a pension." Is that statement helpful? What further advice or information would you seek from Government?
  (Mr Boulding) The statement is helpful if it can be made more definite. The statement "for most people, for most of the time" throws doubt into the workplace if you are making a presentation, because the workers are left not knowing whether they were in the "most people" group or in the "less than most people" group.
  (Ms Segars) Hence our suggestions around women, those with small savings and so on, so that we can say that for everybody it pays to save and you are better off saving than not saving.

James Purnell

  18. The Government has said that it is going to uprate the guarantee element of the Pension Credit in line with earnings for the rest of the Parliament. Neither the Government nor any political parties have said what their intentions would be after that. Does the industry have a view on the level of uprating which should be pursued?
  (Mr Curry) No, certainly not that I am aware of. It is interesting that even though nobody has committed to increasing in line with earnings beyond the end of the next Parliament it tends to be a fairly widely held belief that it will have to increase by more than prices. If those who are already retired are to share in increasing prosperity of the nation, it probably means that we are expecting the guarantee element to increase faster than prices.

  19. There is an assumption that it will increase faster than prices, although people are not sure whether that should be in line with earnings in perpetuity?
  (Mr Curry) That is right.

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