Select Committee on Work and Pensions Minutes of Evidence

Memorandum submitted by the Association of British Insurers (PC 18)


  • 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'.


  2.1  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.


  3.1  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.


  4.1  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.


  5.1  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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