Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses (Questions 140 - 159)



  140. Does that mean that the Government's projection in terms of the numbers that it is claiming it would expect to see in receipt of a private pension are unattainable?
  (Mr Hawksworth) The model does not explicitly make an assumption on that. What it makes an assumption on is incomes from all sources. It does not assume any dramatic change in the take up of private pensions. You could say it is a fairly steady set of assumptions; it does not specifically make an assumption on that, it makes an assumption about people's incomes from whatever sources, which would be partly from the State Second Pension, partly private pensions. Obviously there could be uncertainty as to what the contracting out rate is or how you split it. To some extent the model finesses that distinction by trying to look at total incomes rather than trying to second-guess precisely what the relationship there is. You need to recognise that in this kind of long-term model you have to make quite a lot of simplifying assumptions. Certainly we do not assume any dramatic change in the take up of private pensions.

  141. You are not assuming any significant behavioural change either as a consequence of all the things you have been talking about?
  (Mr Hawksworth) We are not assuming any, no. You can say that underlying it implicitly is a fairly status quo view of the situation which may be rather optimistic in some respects.

  142. Just for the record, which of the uprating proposals floated by the DWP do you think is the most likely to be adopted.
  (Mr Hawksworth) "Most likely" is difficult to say but the most plausible, given past Government statements, is policy scenario one. The Government has said that they are committed to earnings indexing the MIG For this Parliament and has an aspiration to go further than that, in its 1998 White Paper. If you do not link the savings credit lower threshold to the Basic State Pension, then you get some pretty perverse effects in the long run. So policy option two, although on the face of it plausible, is not really plausible in the long run. Policy option one is the one we have based our main case on. We have looked at others as sensitivities.

  143. So if you were Alistair Darling for 60 seconds is that what you would do?
  (Mr Hawksworth) That is a matter of political judgment, which I leave to the politicians. That seems to me the most plausible interpretation of Government pensions policy statements.

Mr Mitchell

  144. In other words yes.
  (Mr Hawksworth) It seems the most plausible interpretation to me.


  145. Is that the IPPR's view?
  (Mr Robinson) Yes.
  (Mr Brooks) It is the IPPR view that only scenario one is the plausible view of how the Pension Credit might evolve. It is not necessarily our view that that is —

  146. If I read John Hawksworth's paper right you could look at that the other way round and say the Pension Credit could erode if S2P came in and filled that gap. Did I understand you to be making that point?
  (Mr Hawksworth) There is an alternative strategy. In the paper we say basically that there are two strategies, which also seem to us to be worth consideration: one is the one IPPR have put forward, the more radical strategy; the second strategy is to say that the Pension Credit is really only a temporary measure to deal with this temporary problem of the MIG having gone up and therefore after 2010 one phases the Pension Credit out and puts the money back into the State Second Pension. Therefore this tension between the two is only a temporary thing and ultimately the Pension Credit goes to zero and you can phase it down over a period of years, 10, 20 years, whatever, put that money you save back into the State Second Pension and then you could build the State Second Pension up above the MIG again, thus eliminating the gap of 3 to 4 per cent I referred to earlier. You could put that money back in, build that back up above the MIG and then have a system based on a low Basic State Pension but a more generous State Second Pension for those who contracted in. To the extent that everyone contracts in, that would almost revert to the IPPR option because you would have two flat rate pensions on top of each other and it would almost become identical to the IPPR option, however, you would give people extra choice. That is an alternative, less radical option that has the disadvantage that the State Second Pension is rather complicated, people may not understand it, so it may not be politically sustainable, people may chip away at it in the same way they did at SERPS. To me those are the two coherent alternative strategies for the long term.

James Purnell

  147. I should like to turn to your general IPPR proposals and we are grateful to you for giving us sight of them before publication date today. May I just talk about the two goals you mention of tackling pensioner poverty and incentives to save which are the ones most under discussion in the news at the moment. Your proposals generate quite a lot of money by raising the retirement age and by abolishing, as I understand it, both the State Second Pension and the contracted out element. Did you look at the alternative of targeting that money at poorer pensioners through what is now the minimum income guarantee rather than spreading it amongst the whole population through the Basic State Pension increases you propose?
  (Mr Robinson) We took as our base case the Government's current proposals, modelled out into the long term in the way that John outlined in his previous reply. We took the Government's base case as the comparison against which to look at other possible options such as a generous increase in the Basic State Pension or trying to make the State Second Pension more generous. We have compared those three key models.

  148. If you stuck to your proposals for revenue raising, if I may put it that way, of increasing the retirement age and abolishing the State Second Pension and put that instead into increasing the income support amount, would that make the poorer pensioners better off than under your proposals?
  (Mr Robinson) Clearly if you raise the retirement age you can do that under any possible policy scenario. If you did that you would reduce expenditure against the base case and then you could use that extra money to boost some other part of the pensions system, whether it is Pension Credit or anything else.
  (Mr Hawksworth) To be clear, you are talking about raising the MIG even more than earnings, so boosting it even faster than earnings.

  149. Absolutely. What I am saying is that if your overwhelming policy goal is pensioner poverty, would you agree that the way of attacking that would be to put it into the MIG rather than into the Basic State Pension?
  (Mr Hawksworth) That would then also mean, assuming that you keep the Pension Credit as well, that the gap between the Basic State Pension and MIG would get even wider and therefore the Pension Credit ceiling, at which you would hit it, would go even further up the income distribution, so instead of 70 per cent you might be up to 80 per cent or whatever of people affected by the Pension Credit means test. It would then be a question of whether that actually works, in terms firstly of whether you achieve the take-up rate in terms of targeting that extra money. You would also be extending the means test yet further up the distribution. One could take that to an extreme whereby almost everybody, apart from the few millionaires like Paul McCartney, as pensioners end up being means-tested and getting sums other than means-tested benefit. Certainly that would be an alternative strategy but it would retain all of the complexities of the existing strategy as well in terms of the rather ambiguous impacts on savings incentives, which Andrew Dilnot spoke about earlier. Like every other pension strategy it is not perfect; no strategy is perfect, all of them involve trade-offs.

  150. Would you agree that that approach would target pensioner poverty more than the approach which you have put forward today?
  (Mr Robinson) Only in so far as you lick the take-up problem. So long as take-up is significantly less than 100 per cent, you will continue to have a significant amount of pensioner poverty.
  (Mr Hawksworth) It would depend also on where you define pensioner poverty. It would certainly help those people at the lower end of the pensions' scale, the people below the MIG basically. To the extent that it slightly muddies the water on saving decisions, you might end up with some people making less good decisions and being less clear about the State Pension in the next range up from the MIG upwards. It might help those at the bottom but the people who are still on quite modest incomes between the equivalent of £100 and £135, whatever it might be in the future, might end up feeling rather less well served in terms of the kinds of incentives for saving. It retains the problems of complexity.
  (Mr Brooks) In terms of addressing pensioner poverty, if you accept that the Minimum Income Guarantee, at the level it will be raised to next year of £100 per week, is the adequacy level, and that people who receive that level have been lifted out of poverty, then increasing that MIG level in itself does not actually reduce pensioner poverty it just gives those people who receive the MIG more income.

  151. I do think pensioners who receive the MIG at the moment would not turn down an increase above that level if they were offered it.
  (Mr Brooks) I am quite sure that is true.

  152. The debate is about the relative impact on pensioner poverty of the take-up problem versus the impact on poverty of giving them more money through the MIG. Would you agree that some of the issues about take-up will depend on the things Andrew Dilnot was talking about, whether the quinquennial reviews work, whether the reforms the Government propose work and whether the benefit people were getting through MIG made it worth them claiming because the difference between what they get and what they would get would improve.
  (Mr Robinson) There is another important point to make here. We have already emphasised that currently someone who had only accumulated rights to the State Second Pension added on top of their Basic State Pension would retire on an income below the MIG once the system has matured. You will face the problem that lots of people with modest private savings or private pension provision will, even if they are above the MIG, even above the Pension Credit limits when they are 65, be trickling down into the means-tested provision year by year; they will get into it at 66, at 67 or 68 or 69 or 70. So the Pension Service is going to have to do a really heroic job in catching all of these people who year by year will be falling into the means-tested system. Saying we just have to look at everybody's circumstances every five years is slightly misleading in that there will be people year, after year, after year who will be drawn into the means-tested system.
  (Mr Hawksworth) I do think also that in your solution you would really have to look very hard at whether you would want the State Second Pension and what sort of function that would serve.

  153. I am not necessarily advocating that as a solution. What I am saying is that there is a significant amount of revenue raising in your proposals and just highlighting the policy choice between targeting to the poorest or spreading it amongst the whole population. May I go on to savings? Your proposals would get rid of the current element of compulsion to save in the system, either through SERPS or through contracting out. Given the discussions which are going on about stakeholder encouraging people to save for retirement, what effect do you think that would have on people's incentives to save over the long term?
  (Mr Robinson) It is worth going back to the underlying objectives here. The underlying key objective, which we share with the Government, is to deliver an adequate income in retirement for everybody and to abolish pensioner poverty. You also want to make sure that the overall pension provision is affordable for the state. You want a system which is seen to be fair and equitable by people and you need a system, which is clearer and more simple than the system we have now. You also want to give people clear incentives to save, however increasing the overall level of saving is not a first order objective. That is a possible means to an end. In terms of the overall impact on saving of what we are proposing, as with any set of pension reforms, it is ambiguous; the word Andrew Dilnot used in his evidence, when he made a valiant effort to explain the substitution and income effects that you have with any reform to the tax and benefits system. Because everybody under our proposals would be getting a higher Basic State Pension, their income would be higher. Some people might therefore choose to save a little bit less. We would argue that because the whole system would be much more simple, much clearer, and without any means testing, that should incentivise people to save more. We had a lot of discussions with our colleagues in the financial services industry on this point about whether a more simple, clearer system would in itself be enough or whether you would have to have compulsion, if we can define compulsion very clearly here, that people would be compelled to put a certain proportion of their income into a funded private pension, either a stakeholder personal pension or occupational pension. There was some disagreement over this and in our Report we used the usual let-out clause of saying this is something we would have to look at carefully and re-visit in the medium term, depending on what we saw was happening to private savings. There are many imponderables here of course, because we know it would be difficult not to have seen all the coverage recently about what is happening to company pension schemes and switching over from defined benefit to defined contribution schemes. We are in a very difficult situation at the moment in trying to guess what is likely to happen to private savings patterns over the next few years and how people save into different vehicles. That is why it is a question that any government is going to come back to continuously.
  (Mr Hawksworth) The Stakeholder Pension is very young and we really do not know how successful it will be. We think in some ways this would make it more attractive and in other ways it would be less attractive. As always, there are effects both ways. Just on the point of compulsion, I would actually interpret the IPPR proposal as being compulsion neutral. What they are saying is that everybody would be moved to the contracted-in rate and therefore there would be a compulsory contribution to a stronger Basic State Pension. Now there is effectively a compulsory contribution to the Basic State Pension, which is lower, plus either SERPS or some sort of approved private pension. Ultimately, in terms of the level you are contributing, it would be the same. I would see it as being compulsion neutral in terms of the amount of money you are contributing to a future income in retirement.

  154. You mentioned the doorstep factor. You recommend raising the retirement age to 67. Did you do some research on what people's reaction to that would be? As politicians we would say that would have a fairly significant doorstep impact and it would be fairly difficult to justify it unless the benefits and the way money was spent were clear and significant.
  (Mr Robinson) The first thing to stress here is that this is a recommendation for 2030. Interestingly enough, I will be one of those to be first affected in that currently I would be entitled to get my basic pension in 2030. I will have to wait two more years. It comes in the decade after the retirement age will have risen for women from 60 to 65, which will sensitise the whole population to this issue of all probably going to have to work a bit longer. In a sense the issues around the official retirement age will already have been very much aired in that decade. Then if in the decade afterwards you also say it might have to go up by another two years for both men and women, so that we can afford to pay a more generous Basic State Pension to everybody, that provides the basis for a discussion, which we would need to have as a nation about what will happen to the working age over the coming decades.
  (Mr Hawksworth) It is worth making the point that in the past people proposing earnings indexation of Basic State Pension, with or without raising it to the MIG, have tended to propose that as a stand-alone policy which is justified on its own. We started from the proposition that the political realities were that you had to make the numbers add up in broad terms in the long term. That inevitably means you have to make some political choices about where the money is going to come from. One of those is the choice on the State Second Pension and the associated rebates, the other is the hard choice on raising the retirement age. It may be that you could raise the money in some other way by just raising the general rate of income tax or something else. Nevertheless we have tried to address the fact that you want to try to make the overall thing be broadly affordable in the sense of similar to the Government's own strategy, at least if you accept policy scenario one. That inevitably involves some difficult political choices and no doubt that partly explains why the Government has not reacted very well to it.


  155. You are absolutely right about that. You say in a rather svelte way that we should have a discussion about this but women are going to be invited, having paid their National Insurance contributions, not to have a state retirement pension at 60 but at 67. That is a huge political argument. That is not a discussion, that is surely a significant problem.
  (Mr Hawksworth) But it is already going up from 60 to 65.

  156. I know that, but what you are saying is just another two years. Five, seven, why not make it 15? Do you think this is easy? I have to tell you that I do not think it is easy. Another thing is where have IPPR been all this time? Here we are in the middle of a huge set of reform, proposals for change, stakeholders, S2P, and suddenly you come out and say all we need to do is increase the retirement age. Why did you not do this five, six, seven years ago when we were at the beginning of this debate. Please, answer.
  (Mr Hawksworth) One important point is that to some extent it was only after the decision to raise the MIG, which was taken in about November 2000 in the pre-budget report, that I began to look at this issue in terms of thinking about what it actually meant in the long term, what it meant for the Pension Credit cost. That decision and that whole debate which followed the 75 pence fiasco, did change the terms of the debate to some degree.

  Chairman: Let me put it to you brutally. However politically appealing these proposals may or may not be, you are just out of time. I put it to you that no serious government, having gone through this degree of policy reform, is going to say okay, fine, next Monday we will just change it, unless Andrew Mitchell is going to tell me differently.

Mr Mitchell

  157. I think the Chairman, uncharacteristically, is being slightly unfair to you on this. I think your proposal intellectually is extremely coherent, as a left wing proposal on pension reform. I assume that it was born out of the incredibly complex muddle we have got into now. You are perhaps, Chairman, being slightly unfair. I disagree with your proposal because I am in favour of funded pensions for everyone, using the tax and National Insurance system to promote that, but as a contribution to the debate I think the IPPR proposal is intellectually coherent and does take the debate forward.
  (Mr Robinson) May I address the direct question of where we were several years ago? We could see the logic of the current government having tried to address the issue of pensioner poverty in the short term by significant increases in the generosity of the MIG. We could see that as a reasonable short term way forward. When the State Second Pension was announced, there were already some doubts about its rationale given the continued price indexation of the Basic State Pension. Once the Government addressed the issue of the incentives problems created by the MIG with the Pension Credit, that opened up a whole new ball game in large part because of John's work suggesting the cost of that over the long term. So we asked whether if in 1998, at the time of the Green Paper, we had known the Government was prepared to put up to 1 per cent of GDP more into pensions provision, we could have thought of a better structure in 1998 to use those resources in the most effective way to create a pensions system that would be more sustainable A critical part of our argument is that because the current system is so complex, we are not sure it is sustainable politically.

Mr Dismore

  158. I do not think your proposals are left wing at all. That is where I would start with my disagreement with Andrew Mitchell. We talked a lot about the doorsteps and talking to pensioners on the doorsteps. Have any of you actually been to talk to pensioners on the doorsteps recently?
  (Mr Brooks) Yes, I am standing as a Labour Councillor.

  159. Good. Let me put this to you. In my constituency I have one ward where 50 per cent of the population are on income support and most of those are pensioners, the rest are people bumping along on average earnings trying to bring up a family. I have to go and knock on those doors and ask these people if they will vote for me if I promise to ask them to work an extra two years, to pay more, to enable the people who live in Manchester and Mill Hill, where they have more millionaires than anywhere in London, to have £20 a week more. Do you think I will be able to sell that to them?
  (Mr Robinson) Yes, I think you would because you would be able to say to them everyone will pay into the pot, everybody will get £100 back.

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