Select Committee on Work and Pensions Minutes of Evidence

Letter from the Minister for Pensions to Chairman of Committee

  Dear Archy,

  Thank you for your letter of 23 February to Alistair Darling requesting clarification of two pieces of information relating to the detailed projections of the Credit's cost, contained in the publication "The Pension Credit: long-term projections".

  Your first question asks what assumptions have been made about the proportion of pensioners receiving private pension income and the average amounts received, for the years 2010 to 2050. The assumption on pensioners' incomes was that the level and distribution of incomes would remain constant in earnings terms. This effectively means that we assumed that pensioners' total incomes would grow with average earnings. There is no explicit assumption about private pension income growth as such. However, the implication is that, for better off pensioners who will not gain from State Second Pension (S2P), private pension income is becoming a larger proportion of total income. For poorer pensioners, a combination of S2P and private pension income is assumed to make successive cohorts better off than the ones before them so that total pensioner income keeps pace with earnings.

  Part of the reason for the above assumptions was pragmatic. Modelling limitations meant that we had to use current data to project the future as we do not have suitable, simulated data of the future. Our approach is the same as used by outside commentators, such as PricewaterhouseCoopers and the Institute for Fiscal Studies.

  You also asked what percentage of men and women who do not have a full basic pension in their own right have a second income from a private pension and how much this is on average. Unfortunately, it is not possible to tell this from the Family Resources Survey (FRS) (on which we model entitlement to the Pension Credit) because respondents tend to mis-report Retirement Pension receipt, adding in other benefits like SERPS and the Minimum Income Guarantee. The administrative data is inadequate, too. Although we know from administrative data that around 1.4 million pensioners have incomplete basic State Pension rights, we do not know about their private income and whether or not they are entitled to Pension Credit.

  From the FRS, we estimate that around 500,000 benefit units over 65 will not receive the savings reward because their total incomes are too low. Therefore, these claimants have incomplete basic State Pension rights, by definition. Of these, 10 per cent have private incomes of £20 on average.

  There are likely to be another two or three hundred thousand benefit units who do receive the savings reward but have partial basic State Pension but we cannot be sure because of the data problems described above. When we start to have administrative data from Pension Credit, we will be able to merge it with the administrative data on basic State Pension and anser detailed questions about this group.

  Finally, you asked what assumptions, if any, have been made about these percentages and amounts for future years in arriving at the projected costs of Pension Credit. No separate assumption on the future of their incomes has been made for this group. The assumption on total incomes is as described above.

  I hope this information is useful.

Rt Hon Ian McCartney MP

11 March 2002

D. Hardy

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