Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses (Questions 60-81)




  60. You were talking earlier about the importance of information technology systems. Is it your understanding that automated credit transfer will be the vehicle that will be used to deliver this credit when it comes on board? There is the frightening thought of trying to means test five million people and then pay it through ACT rather than through giro books. Have you had any discussions with the Department about the system of delivery and whether ACT will be targeted as the delivery mechanism?
  (Ms West) It is the Government's intention to phase in ACT for nearly all benefit claimants between 2003 and 2005.

  61. Will this start in October 2003 with the Pension Credit?
  (Mr Wilson) It will be greatly encouraged. That will be the top option on your form and having it paid through the Post Office Counter in the normal way will be very much discouraged.

  Chairman: Option 16!

  Rob Marris: Do you think that will have social implications in terms of Post Office Counters?

  Chairman: It certainly will.

  Rob Marris: Will it have adverse health implications?

  Chairman: You should talk to your local postmaster about this. I am sorry, I am interrupting you. There are four important areas to cover and time is always the enemy.

Miss Begg

  62. Could I take you back to the treatment of earnings. The Government has said that it is still considering the treatment of earnings in the Pension Credit. What attitude would you urge the Government to adopt on this issue and why?
  (Mr Lynes) The Government has now said what it is going to do about earnings, which is that they are going to keep the existing £5 disregard or £10 for a couple and earnings above that level will count as qualifying income for the savings credit, so 60 per cent of your earnings above £5 or £10 will be disregarded. I think I am right in saying we all take the view that we would rather see a larger disregard.

  63. Any idea about the figure?
  (Mr Lishman) We have talked about £30 or £40 between us here. That is again one of the questions about whether there is an element there of encouraging people to do a little work and thereby enabling that to be accommodated in a disregard.

  64. Do you think £30 would encourage pensioners to do a little work whereas £5 or £10 would not? Would it make that much difference?
  (Ms West) We talked about a day's work. We originally suggested £30. We would be happier with a bit higher than that with the intention of allowing a day's work without it disrupting the administration of the system and encouraging people to keep active in work if that is what they wish to do.
  (Mr Lishman) A particularly interesting area, which may invite other areas the Committee is interested in, is transfers within families related to work. There is some evidence of an increasing transfer within families for grandparently duties in particular, and if there is a transfer of that sort, then again there are questions that arise in this context.

  65. Is there a difficulty with the fact that the Pension Credit assessment is done every five years unless there is a major change in income? Would the £30 be classed as a major change in income where you would have to do a reassessment? You do not know?
  (Mr Lishman) No.
  (Ms West) In terms of earnings?

  66. The answer to Rob Marris was, yes, the assessment will only have to be every five years unless there is a major change in income. Is there any indication of what level that major change in income circumstances would be and would what you are suggesting come under that?
  (Ms West) It is the change of circumstances, things like being widowed or change of address things like that, not a change of income in terms of your pension income or your savings. So the question is how earnings will be treated in terms of whether you need to report an increase in earnings over the disregard. Certainly if you had a higher disregard to make the administration simpler, I think that would benefit everybody, including the Pension Service.
  (Mr Lynes) I find it very difficult to believe that you are going to be allowed to declare your earnings when you retire and then nobody asks any questions about it for the next five years, but perhaps that is one of the questions you could put to the Minister.
  (Mr Lishman) An increase in retirement income does not happen in that traditional way.

James Purnell

  67. I would like to ask the same questions I asked in the industry part of this session, which is do you have a view on uprating the guaranteed element of the Pension Credit, starting with Mr Lynes?
  (Mr Lynes) I certainly have a view about uprating. If you look at the little publication that the Government produced about long-term projections of the Pension Credit, they present three possible scenarios, of which it seems to me only one actually makes any sense, and that is that both the MIG and the savings credit threshold should go up in line with average earnings. If you do that then the broad shape of the Pension Credit remains the same over the years. If you do not increase the threshold in line with average earnings then the result is that the numbers of people entitled to the Pension Credit grow very rapidly, the cost grows very rapidly, and the level of income up to which people are entitled also grows very rapidly and I do not think any of those things can be what the Government intends. However, having said that the sensible thing to do is to put up both the threshold and MIG in line with average earnings, if you do that, the implication is that there is going to be a growing gap between the Basic Pension rate, which presumably will continue going up roughly in line with prices, and the starting point for the savings credit, which will go up in line with average earnings. It is one more argument for saying the Basic Pension should also go up in line with average earnings. If you do that, then the whole policy begins to make some sort of sense.

  68. Is that a shared view?
  (Mr Wilson) As you were saying, taking away the lower threshold from the Basic State Pension would seem the logical way to do it but, again, that is the only real figure in the calculation of the savings credit that the thing is related to that is not the product of some obscure calculation that no-one can understand. It starts at the level of the full Basic State Pension. When you take that away you are making it a bit more confusing and, of course, it will have the effect, because people's pensions—state and occupational—rise in line with prices of bringing less and less of an occupational pension within the band of the savings credit. So already every year your amount of savings credit is going to change and that will add extra complications if it is operated in that way. Essentially there is not one sensible way of uprating the Pension Credit.

  69. You would not think it is sensible?
  (Mr Wilson) All the options have strange consequences in terms of bringing vast amounts of people into means testing over the next 20 or 30 years or changing the formula in some way that makes the benefit less clear.

  70. You said you would like to see the Basic State Pension uprated in line with earnings as well as the guaranteed amount and the threshold. I know the projections of the cost of just uprating the two elements of the Pension Credit are very significant. The cost of doing that and uprating the Basic State Pension would be enormous. If you had to choose between getting the money through the Credit or spreading the same amount of money more thinly amongst the whole of the pension population, which one would you favour?
  (Mr Lynes) I do not think that is the choice, in fact, because nobody is suggesting that the money that the Government is not spending on linking the Basic Pension to earnings is instead going to be spent on targeting benefits. It is not what the Pension Credit is about because the Government is more or less boasting of the fact that the Pension Credit is going to be a great deal cheaper.
  (Ms West) You may want to come on to incentives for younger people but one of the reasons that we certainly support the argument for a higher Basic Pension is that it gives more incentives to younger people because they know they will not face these higher withdrawal rates with their benefits and it may be more likely, with a decent level of State Pension, that the stakeholder pensions and second state pensions will be successful and will encourage people to save because they will have a firm foundation on which to build up extra income.

  71. Just one final question on a slightly separate topic. A number of MPs have had communications from people representing foster carers about their eligibility for Home Responsibilities Allowance that parents get when they receive Child Benefit. They do not get entitlement to a full State Pension, they do not get credits towards it. Is that an issue which you as people at the sharp end would come across? Do you think it is a serious issue and what is your favoured solution to it? Is it through the Pension Credit or through the Basic State Pension?
  (Mr Kohler) In honesty, it has not been an issue which has come to Help the Aged's attention but I guess that is because foster parents would not think of Help the Aged as being a port of call to make a protest. I am sure that there is a logical case for things like the HRP to be applicable in a wider and more liberal way. There must be a better case.
  (Ms West) It is not an either/or situation, is it really, because if somebody gets HRP it will mean they are more likely to get the full Basic Pension and therefore they are more likely to benefit from the savings credit if they have had additional income at the same time. Like Help the Aged, it is not something that we have had a lot of enquiries about, but if you are busy caring for a family you are not thinking about your own future pensions and certainly it is an area that we would want to see addressed.

Rob Marris

  72. Ms West mentioned earlier the key issue of Housing Benefit and Council Tax Benefit. What do you see as the inter-relationship here when the Government has said in the White Paper that nobody will lose Housing Benefit or Council Tax Benefit as a result of the Pension Credit? Mathematically, as it is set out now, do you think that will hold good?
  (Ms West) Yes that is right, because they are going to increase the applicable amounts within Housing Benefit and Council Tax Benefit for people over 65 when they apply for savings credit. As far as I can see, it is right in saying that people cannot lose.

  73. The formula is right?
  (Ms West) I think so, yes.

  74. What about claw-backs in terms of residential care charges or home help charges?
  (Ms West) I will say something else about the Housing Benefit issue first. What it does mean because of the inter-action between the different systems is that you get higher marginal reduction rates, which is an issue of incentives and people feeling that they are better off than their neighbour who saved less. You will get interaction between Housing Benefit, Council Tax Benefit, savings credit and income tax for those people that are taxpayers. Your highest possible marginal deduction rates, other than the people who get 100 per cent reduction because they have not got a full pension, for people with savings credit, the Minister says the highest reduction will be 93 per cent. That will be for people on Housing Benefit and Council Tax Benefit and also taxpayers. That will mean for every extra pound of income they will only get 7 pence. For people getting Housing Benefit and Council Tax Benefit and savings credit it will be 91 per cent. I was looking at marginal reduction rates and doing all the different calculations and I came up with at least 15 different marginal reduction rates depending on different circumstances and I do not think I got to the end of it.

  75. Without throwing the whole thing out of kilter, is there any way of getting that 93 per cent down because that means you can change the ripple effect?
  (Ms West) You could make the tapers less steep, which means you make the thing more expensive and you bring more people into the means-tested system. That is the only way in the context of the system and one of the reasons we go back to the point that if you have a higher Basic Pension you keep people out of the taper system altogether.
  (Mr Lishman) Can we follow on to the care at home and people living in residential care question. This is an area which is primarily, we understand, a Department of Health responsibility and we have not yet seen evidence that DWP and the Department of Health have got their act together in any way which should enable people who are paying for care at home or living in a residential home to get the full benefit of savings credit.
  (Mr Wilson) It seems difficult if you are going to say saving always pays but then they give you your pension with one hand and take it away with the other, via the Department of Health and charges. That will not make sense to ordinary pensioners. Also obviously people in care homes who are on Personal Expenses Allowance (pocket money for people in care homes) will get their 75 pence in April and that will be it.
  (Ms West) I think there will be a problem if people find they are no better off, having seen all the Government advertising, because they are paying all that money over to community care fees.
  (Mr Lynes) It is worth adding that the Minister in the House of Lords said they estimated that eight per cent of people getting the Pension Credit would have the 91 per cent deduction rate because they are getting Housing Benefit and Council Tax Benefit. That means 400,000 people so it really is rather a big problem.

Andrew Selous

  76. Just going back to means-testing, which is what we started with, you have all expressed opposition to the credit on the grounds that it is an extension of means testing. Do you not accept the Government's premise that it is better to target help at those who are in greatest need?
  (Mr Lishman) We get constantly in the position where we are saying we really do not want to start from here. This is the problem we are facing in the work that we do and you as a Committee are facing in the work that you are doing, and we are asking what are the detailed effects of these particular elements? I think the thing which people are finding it very difficult to address (and it seems to me to be an area where this Committee may have potentially a very helpful role) is what has been described as the "unravelling" of the pension settlement and the need to find a common basis for agreement, which is a long-term settlement about how people prepare for income in later life. One of the problems we have is that we are constantly addressing how we cope with the current pensioner population. We will come on to savings in a moment perhaps, but in this case I think we have a significant problem that arises simply because we are saying let us look at this particular bit and think about what the options are in this particular case. It seems to me that we need to move towards a system which will provide people—for instance my son who was 26 last week—with a clear basis of knowledge which will enable them to make rational decisions in order to achieve a reasonable income in later life. Indeed, another question may be how he is to pay for his long-term care at that stage if he needs it. If we can move towards that settlement and we understand how that is going to be funded on a long-term basis, then we can work back to the issues that the Committee is now looking at and we are dealing with all the time, which are the issues about how we deal with a short-term problem. If we concentrate on looking at that short-term problem all we are going to do is find ourselves constantly asking and answering these sorts of questions about different sorts of relationship, about different sorts of long-term costs and so on. We have to look to the long-term future and then work back and I think that is an area where many of us are less than happy with the direction of the current political debate.

  77. Mr Lynes?
  (Mr Lynes) I think the NPC would want to stress the nature of the retirement pension, which is an insurance benefit for which people are currently paying their contributions and they are paying those contributions on the basis that, firstly, they are helping the existing generation of pensioners and, secondly, hopefully they are helping themselves because they are earning entitlement to benefit by their contributions. What is happening to the National Insurance Fund is scandalous. Working people are paying in their contributions week by week on the assumption that that money is going to finance benefits to today's pensioners and, in fact, the National Insurance Fund is salting away money at the rate of several billion pounds a year. I think we have got to get that right. People may not like paying National Insurance contributions particularly but they are much happier about paying them if they know that this is an insurance scheme, which is going to earn them the right to benefits than they are about paying income tax to finance means-tested benefits that they hope they will never have to apply for.

Rob Marris

  78. Can I comment briefly on that. The majority of the benefits bought by National Insurance are not means-tested, namely the Health Service and Jobseeker's Allowance.
  (Mr Lynes) No National Insurance benefits are means-tested, are they?


  79. We have had some ideas from Mr Lynes and Mr Wilson about what they would want us to put to the Minister when we see him in a fortnight. Mr Lynes, you mentioned Clause 3 as something you wanted to raise and the earnings disregards. Is there anything else that you think we should be putting to the Minister?
  (Mr Lynes) If the Government is going ahead with this scheme, which clearly they are, one of the things that I would most like to see is some clarity about what they see as its future, what they are going to do about uprating in particular, whether the 60 per cent is going to remain 60 per cent permanently, in which case why is it not in the Bill?

  80. Things of that kind? That is very helpful.
  (Mr Lishman) On the specific question of entitlement to savings credit for women aged between 60 and 64, and secondly, on the question that if 43 per cent of people aged between 25 and 34 have not considered saving at all, what is this credit going to do that will have any effect on that in the wider context of those people's lives and an overall pension settlement?
  (Mr Wilson) A commitment on the take-up level is vital otherwise it makes a nonsense of the Pension Credit.

  81. And the point you made about information technology?
  (Mr Wilson) Indeed, the ability of the Pension Service to cope.

  Chairman: Ladies and gentlemen, you have been very, very helpful. Thank you very much for your submissions and your appearance this afternoon. Thank you very much.

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