Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses (Questions 100 - 119)



  100. There is not one type of behaviour: it depends which part of the food chain you are in really in terms of Pension Credit.
  (Mr Dilnot) Yes.

  101. Are there any straightforward changes to the Credit, which you would suggest, particularly ones which go towards the Government saying they are increasing private provision for example?
  (Mr Dilnot) Not obviously. There are no design features of the Credit which we would say manifestly fail to meet the objectives the Government looks to set itself. We would probably argue that if you wanted the given set of objectives the Government has set itself, this looks like a pretty coherent way of addressing them. You might well have different objectives. If your objective was to get private savings into pensions to rise, then you would have to think about another set of policies. Compulsion is one you would have to visit, but the Government has not said that is its overriding objective. If it were the Government's overriding objective, then this would not be the best policy to achieve it.

Mr Dismore

  102. May I just pick up one point you just mentioned that some people will be disincentivised to save? Really people do not think in those terms, do they? What you have is a position where people who do not save now, or are only saving relatively small amounts, will benefit. You now get to the stage where owing to the taper, people will actually be better off because they have saved substantially more. The real argument, I suppose, is how steep or how far up the income distribution the taper goes and the Government has made a pitch on that. Whatever you do, you still have that same argument but realistically are we not talking about people who get to the end of the taper and therefore do not benefit. Frankly by the time you get to that stage they are going to have reasonable levels of savings anyway. They are not going to be motivated by whether or not they can qualify for this benefit.
  (Mr Dilnot) One needs to be very careful about asserting how people choose to behave. I certainly do not think there are very many people in this room, including me, who could readily do the calculation. When faced with this kind of comment about the effect of the social security system on incentives to work, I often do something which I will not do here, because I do not think any of you could catch my wallet if I threw it at you. I can throw somebody my wallet and see whether they catch it and, by and large, they do. Then I put up Newton's equation of motion on the board, S=UT+1/2AT2 and so on, and see how many people know those. Very few people do any more. It is true that the trajectory of my wallet from me to the person who catches it is described by Newton's equations of motion, but that is not actually how you catch it. You catch through practising catching things and that is how people learn how to behave in response to bits of Government action, tax and social security regimes. So the way in which people understand how the tax and social security regime affects them is much more likely to be seeing how people up and down their street, in their community who have done particular things have ended up experiencing life and that way truth will out. I do not think we can dismiss the potential impact of this kind of thing on incentives to save for those who find themselves newly entitled to means-tested benefits in this way. If it is the case, as over time it may well be, that a very significant group who have not in the past been entitled to any means-tested support find that they are entitled to means-tested support and they then discover that for each pound of savings income they have, instead of keeping that pound they then keep 60 pence, then we would expect that would have an effect on the decisions of people like them in the fullness of time. I am not for a moment arguing that is a very powerful force in the short run.

  103. At the moment they lose the lot.
  (Mr Dilnot) No, not if they are well enough off not to be entitled to be means-tested. The point about cutting the taper rate is that we are introducing a large number of people into means-tested benefits who in the past have not been entitled to means-tested benefits.

  104. The point I am putting to you is the point you just put back to me about people who saved a lot. When you get to that stage frankly trying to fiddle around with these marginal rates is not worth a candle.
  (Mr Dilnot) The people we are bringing in are not necessarily on very high incomes.
  (Mr Clark) We are talking about whether they have a stronger or weaker incentive to save. If their marginal rate has gone up and they have higher guaranteed income in retirement both those things are going to make them less likely to save than they otherwise would have been. It might be that for some reason we want to make sure everyone saves a bit and then not care if they save more than that or not, which sounds like what you might be getting at, but it remains the case that their incentive to save has been blunted.

  105. They are not losing. It is just the fact that they are not gaining something.
  (Mr Dilnot) Let us be clear about the income group we are talking about. These are people, if they are single, in the current regime with incomes of £100 to £135 a week all told. These are people with incomes of less than £8,000 a year, not people who have saved so much. Under the new regime this group will find that they have a higher income than they would otherwise have expected to have, which will tend to reduce their decision to save, to forego consumption during their working life and they will also keep less of any saving that they do, than they would have done under the current regime at the margin. So for every extra pound they save they will only keep 60 per cent and they will find they have more income anyway because of the means-tested benefit they are receiving. Both of the effects that we can identify would reduce their incentive to save.

Mrs Humble

  106. Are you not assuming a sophistication out there that simply does not exist, that people have the sort of understanding about the interaction of pensions and additional savings, earnings that simply is not out there?
  (Mr Dilnot) No.

  107. When I speak to many people, they actually do not have the foggiest idea what sort of pension entitlement they are going to have. I just wonder whether people in this particular group have the level of awareness and interest to start messing about with the odd pound here or there.
  (Mr Dilnot) I fundamentally disagree with that. If I agreed with that then I would suggest you stopped this inquiry because this inquiry is about precisely changing those rules in a way that the Government argues will change behaviour. If we do not think these kinds of changes affect behaviour, if it is all too complicated, you might as well not bother. The discussion I was having with Mr Dismore effectively was that he was saying we are cutting the taper rate so that should lead to more saving and I am saying no. When you do something like this there are two effects. Let us forget about pensions for the moment, as often that confuses. Let us think about a tax cut. Politicians will frequently say something that the Opposition often said: that cutting taxes is great—will make people work harder. There are two effects when you cut someone's taxes. One is that by cutting tax they keep more of any extra pound they earn, so if they work an extra hour they are effectively increasing the wage rate for working the extra hour. That tends to make people work harder. The corollary here would be that they save more. That is the effect of the taper rate, so we cut the taper rate and that tends to make people save more because they keep more of everything. Then there is another effect, which is that when you cut somebody's taxes it is a bit like giving them a win on the lottery. We have all seen the pieces in the local newspapers saying "I won the Lottery last week but I'm still going to go down to the factory every morning". That lasts for three or four days until the accumulated effect of champagne the night before means that getting out of bed is just too difficult. A tax cut or benefit increase makes you better off and that makes you choose to work less hard or in this context save less. For the people we are talking about, who are newly brought in to the means-tested benefit regime, they are better off than they otherwise would have been and that will tend to make them save less and for any saving they do do, because they are now entitled to means-tested benefit and their means-tested benefit will therefore be cut if they save more, they receive less. I absolutely believe these things matter.

  108. You have misinterpreted the point I was making. There is a clear message to individuals to save and that the Government is introducing a scheme which will reward them for that saving and people understand the simplicity of that message, people I have talked to. I have many pensioners who fit into this category. The issue I was actually wanting to explore a little more was whether or not the people who are in that particular narrow group, who have only very limited savings and who might then disqualify themselves from this additional benefit, would go to the effort you are describing of producing savings in order to qualify for the benefit. A lot of people are going to be outside this because they have substantial savings or a substantial occupational pension, private pension. Then we have the people who are on means-tested benefit, who understand the system and who are going to be taken through the system. It is that group with a relatively small occupational pension, small level of savings. Are you seriously saying they are actually going to go to the effort of understanding all the complexities of the system in order to manipulate it at the margins and remain entitled?
  (Mr Dilnot) I am not suggesting they will seek to manipulate the system. I am suggesting they will seek to make rational choices. They will for example quite possibly go to seek independent financial advice because these are areas where in pensions and savings questions more generally you need to.

Mr Dismore

  109. If you are on £100 a week and you have the chance of getting £130 a week by saving a bit on one side and you get 60 per cent of that on top, you are going to do it, otherwise you are stuck on £100 a week.
  (Mr Dilnot) The point I am making is that if you are thinking about the choice between £100 and £130 a week at the moment, under the current regime you would have to save the full £30. Under the new regime you would only have to save £20.

  110. And you keep the rest and you are financially better off at the end of the day. Let us change the subject, because you have not convinced me. The DWP set up three different scenarios which you can perm them all sorts of different ways about uprating all the different elements of basic and MIG and Pension Credit, to use existing terminology. Which do you think the Government is going to go for?
  (Mr Dilnot) I do not know. The implication of their statements is that the most expensive on Pension Credit is earnings indexation and the means test and price indexation of the basic, but more than five years ahead pension policy is a complete unknown and we should leave it like that.

  111. In the long-term projections DWP, said that, even under the high cost the Pension Credit scenario, the share of GDP would remain broadly the same. Do you think that would be right?
  (Mr Dilnot) Yes.

  112. Which of the options would go more to meeting the needs of encouraging individual provision, combatting pensioner poverty and being sustainable in pension expenditure terms? Is one of the options going to achieve all those three or which would achieve each of them?
  (Mr Dilnot) No, there is an inevitable trade-off. You do best on pensioner poverty if you enhance means testing and enhancing means testing inevitably is less favourable towards increasing incentives to save and a greater reliance on universal non-means-tested provision.

  113. Which do you think we should do?
  (Mr Dilnot) That is up to you. You set the objectives.

Mrs Humble

  114. You have already answered many of the questions I was going to ask on Housing Benefit but you confirmed earlier that you believed the Government's announcement will protect pensioners on Pension Credit so there will be no disadvantage with regard to Housing Benefit and Council Tax Benefit. You also said it was a very expensive solution to the problem. Do you think the Government has hit on the right solution?
  (Mr Dilnot) Given their objectives it is. I have a long-running concern, which I have expressed to the Committee before, that Council Tax and Housing Benefit will never seem worth reforming on their own. Had a coherent strategy been devised five years ago, then a lot of progress could have been made on Housing Benefit and Council Tax Benefit alongside all the reforms to the means-tested benefit regime which have gone on. By leaving it aside and treating it as add-on on each occasion, it means that there is little choice for the Government but to do this, which perpetuates problems which are of long standing.

Mr Goodman

  115. This whole issue of complexity and take-up. One view has been expressed by Baroness Castle who has said it is a complicated system, which will further confuse pensioners. I take it that she is implying that people are so confused that it will affect the take-up. That is one view. However, Baroness Hollis has said that the pensioner does not have to do the calculating, that what matters is that the pensioner knows there is something there to apply for. Which roughly is your view?
  (Mr Dilnot) It is moderately more complex in that we are extending entitlement to a range of people who have not traditionally thought they were entitled. We found when things like the Working Families Tax Credit were introduced, that if you extended something to people who had not traditionally thought they were entitled, take up is a problem. That is why the approach of having quinquennial reviews and of seeking to establish entitlement at the beginning of retirement is important. As it stands, I expect this to work pretty well in terms of take-up. The biggest problems will be for those who become entitled after they first reach retirement and for a means-tested regime it is being pretty much done in as uncomplicated a way as is possible. For example, the treatment of capital all seems to have been thought about with the objective of minimising complexity.

  116. Do you think the DWP will hit its target? It is assuming a 67 per cent take-up by 2004, which is itself described as ambitious.
  (Mr Dilnot) I just do not know and particularly for 2004; we will not know until we actually see when they manage to introduce this and how the phasing-in works.

  117. Is there anything the Government could do to reduce the complexity or does reducing the complexity have effects on all the other things the Government is trying to do by introducing the Credit in the first place?
  (Mr Dilnot) Most of the things it could do to reduce the complexity would mean either spending a lot more money or increasing the coverage. There is not much capricious complexity left in the scheme. Most of the complicated elements of the scheme are there for clear policy reasons.

Mr Mitchell

  118. My question follows on the generality of the Government's pension strategy. It would not surprise you that we could go on for ages about that. You will also not be surprised to hear that the Opposition, to whom you referred earlier, are very concerned that the Government's policy on pensions is too complex; it is muddled, at times it is incomprehensible, and it really does not meet the challenges which are being heavily aired, particularly in the last month, in the papers. Can I just narrow that down to a couple of points? I want to ask you whether, if you were starting with a clean slate in terms of pension provision, you would create the Pension Credit. I want to ask you that in the context of several of the suggestions, which this Committee has heard during the course of this inquiry, many of which were a far more radical approach to the problem. Have you seen any of the more radical ideas which appeal to you or which you think would be better at tackling the problems which this inquiry is addressing?
  (Mr Dilnot) In all of this the starting point has to be objectives and what we would want to say is that it is very difficult to think of a coherent set of objectives, which are met by the Pension Credit and the State Second Pension. You could think of a coherent set of objectives met by either of them and there is certainly a coherent set of objectives met by the Pension Credit, allied with a big increase in the MIG and a steady reduction in the basic state retirement pension relative to earnings. Quite where the State Second Pension fits into that, is hard to understand.

  119. Do you think the Pension Credit effectively undermines that?
  (Mr Dilnot) Yes. If you were to ask me to gaze into my crystal ball, my own sense would be that we are very likely to see the Pension Credit, and a Pension Credit which over the next five or ten years looks rather like what it is suggested at the moment it will look like. I think the chances of the State Second Pension reaching anything close to maturity are slight, but I have been wrong before.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 12 April 2002