Examination of Witnesses (Questions 184
- 199)
WEDNESDAY 13 MARCH 2002
RT HON
ALISTAIR DARLING,
MP AND MR
PAUL GRAY
Chairman
184. Good morning, ladies and gentlemen. Can
I call the Committee to order in the formal proceedings this morning.
We are delighted to welcome the Secretary of State for Work and
Pensions this morning. The first thing I would want to say is
that I hope, Secretary of State, you will be able to give our
best wishes to the Minister of State, who was originally scheduled
to do this. You have very kindly agreed to fill his slot and I
trust that it will not be long before he is back, fit and well,
and able to get back to his ministerial duties. In that regard,
we are particularly grateful to you for picking up the Report
which is actually technically quite complicated and these are
difficult matters. We have had some very good evidence from the
pressure groups and some of the experts. The intention that the
Committee is really seeking to achieve is to try and inform the
process of the Standing Committee and the legislative stages when
the Bill comes back from the House of Lords as it will probably,
according to the business managers, some time after Easter. It
might help if you could perhaps start by saying a few words, maybe
describing the work that Paul Gray does within the Department,
and whether there have been any changes, or any changes that you
perceive, as a result perhaps of proceedings in the House of Lords,
if any, and make a short opening statement and then we can start
with some of the questions that we would like to address to you
this morning.
(Mr Darling) Well, thank you very much,
Chairman. Firstly, thank you for your good wishes. I am quite
sure Ian will come bouncing back very shortly. All of us know
Ian very well and know that he will be only too keen to get stuck
into this Bill when it comes to the Commons, which, as you say,
is not too far away, so thank you for your good wishes. I have
Paul Gray with me. Paul, as I think the Committee is aware, is
in charge of overall pensions policy and strategy and has overall
responsibility for that part of the Department. As I have told
your Committee before, from the beginning of April the Department
will be effectively run along client focus groups. There is the
working age side, which we have discussed in the past, the pensions
side, which exists alongside the Child Support Agency, and Paul
is in charge of pensions. At some stage during the course of today's
hearing, you may well want to ask me about the Pensions Service,
which is fairly critical to take-up and making sure that people
actually get their entitlement, and I will be happy to do that.
I would perhaps also indicate, though it is possibly self-evident
to everybody, that if the Committee Members want to ask me anything
else about pension policy, then I will be more than happy to do
that since you have got to look at pension policy in the round
and cannot just look at one bit on its own. On the Pension Credit,
perhaps it would be helpful if I just remind the Committee where
we have come from on all this. In 1998 we published a Green Paper
which set out our proposals for reforming the basic pension system
in this country. The first priority that we had was to tackle
pensioner poverty and that is why we introduced the Minimum Income
Guarantee, which of course is absorbed into the Pension Credit.
The second thing that we wanted to do was to reform the basic
structure of the pension system in this country, reinforcing the
State Second Pension, with SERPS becoming the State Second Pension
which becomes operational in April, and I may say on that that
I do think it is very important that the partnership between what
the state does and what individuals do is absolutely essential
to the future of the pension system. I believe you need both and
you need S2P. We have also made saving possible for people for
whom it was not possible in the funded sector with the introduction
of Stakeholder Pensions; we should always remind ourselves that
whilst occupational pensions are a very important part of pensions,
a lot of people have never had access to them and the Stakeholder
Pensions have given them access. The third stage is of course
to make saving pay and that is what the Pension Credit does. It
is worth reminding ourselves that one of the fundamental flaws
of the social security system since 1948 and probably actually
in the days before that is that if you actually did what successive
governments asked you to do, and that is to make provision for
yourself, very often you could find that the state, far from rewarding
you for your effort, actually penalised you because of it. The
Credit changes that system round and it is done to make sure that
if you go that extra mile and you save a pound, we give you something
rather than saying: "Hard luck, you're not getting any help
at all". For the sake of completeness, the next stage, which
we have already embarked upon, is that this autumn we shall be
publishing proposals which I think will represent quite a radical
assault on the complexity of the system with regard to the funded
sector. I said before that I think the system is over-complex
and for all the reasons I understand successive governments have
perhaps tried to regulate themselves out of problems, to the extent
where it has become counterproductive. So what we will be doing
is publishing proposals which will build on the Pickering Report
and the Sandler Report, both of which we will have by June of
this year, and then we shall publish proposals this autumn, which
I think we will re-consult on because we will need to take people
with us. What you have got are reforms which started in 1998,
which reinforce and reform the partnership between state and individual,
we have made saving for people by extending options like Stakeholder
Pensions, the third stage is the Pension Credit and the next stage
will be that simplification. The last thing that I would say to
you is that I regard the Pension Credit as absolutely essential
to underpin all pension policy. Not only does it tackle pensioner
poverty by introducing the guaranteed minimum, but I really want
to emphasise that to go back to a system that actually almost
builds disincentives into the system seems to be fundamentally
wrong. It will benefit nearly half the pensioner households in
this country by topping them up by £400 a year, but actually
I think it is a major step forward in our social security reforms.
So that is really what I want to say at this stage by way of introduction.
I have not the slightest doubt that you and your colleagues will
want to question me further on that and other aspects of pension
policy.
185. Well, I am grateful that you are willing
to discuss things in the wider canvass. I want to come later on
to the role that the Pension Credit will play in the strategy,
and that is an important part of this inquiry, but we are all
very aware that the Government's overall pension policy is under
almost daily assault from press reports, like today in the Financial
Times talking about the rebate levels of the S2P and whether
that will achieve the Government's targets of getting people to
make more private provision. People are allegedly being advised
to go back into the state sector. Surely this demonstrates that
there is, at least in some of the professionals' minds in the
industry, some incoherence in the Government's plans. A lot has
changed since 1998 and I just wonder if you think that the long-term
plan, and there has got to be a long-term plan to succeed, is
actually coherent.
(Mr Darling) It sounds like a conversation I had with
Mr Humphreys a couple of hours ago. Let me just go through what
is happening at the moment and then if somebody does need some
technical explanation, but I think it is a relatively easy concept.
As you know, at the moment if you do not do anything, you are
in the state system. You pay your contributions, you build up
an entitlement to the Basic State Pension and, if you do not contract
out, you build up your entitlement to SERPS and, from the beginning
of April, what becomes the State Second Pension. That is the starting
point. If you have an occupational scheme or if you choose to
go into a contracted-out private pension, then what you do is,
in crude terms, get your National Insurance out of the state system
and you pay it into your private pension. What you see in the
Financial Times today affects people in private pensions
more than company pensions because they are operated differently,
but every year people who operate private pensions are dutybound
to ask themselves whether or not it is right for that individual
to stay in the private pension or whether or not they might be
better coming back into the State Second Pension. What is driving
all this, and indeed separately and for different reasons from
what you read about company pension schemes, is largely because
of the fact that the Stock Market has fallen in value very substantially,
for reasons of which we are all aware. That brings me to the first
point, that you should never make pension policy in response to
day-to-day headlines because pensions are a long-term business
and we will not make policy on that basis; we set out a course
in 1998, which we have consulted on, that I believe is right and
which we will stick to for the avoidance of doubt for anyone listening
to these remarks but, secondly, you do not reach a decision because
of what the Stock Market is doing on any one particular day and
somehow you need to start weaving here and there, but what is
happening at the moment is that companies are, for understandable
reasons and they do this from time to time, saying to you that
some people ought to consider whether or not they should stay
in their private pension or go into the State Second Pension.
Some of them will actually be better staying where they are and
some of them might be better coming into the State Second Pension.
There are two points to be made here: firstly, everything they
have saved in their private pension is still there and will be
there with them when they retire; but, secondly, when they come
back into the State Second Pension, they will be able to continue
to build up entitlements under that. I do think it is an opportunity
for me to re-emphasise the importance of the State Second Pension.
If it was not there or if we removed it, as some people have urged
us to do, then the people we are talking about would be in the
uncomfortable position of being stuck in this funded pension whether
or not it was good for them and that is why I think the S2P is
important. Now, it is worth also bearing in mind that every five
years the government actuary advises the Government as to what
the rebate level ought to be and it is also fair to say that every
time he does it, the cry goes up that it is not enough. We did
increase it this year on his recommendation and something like
an extra £11 billion will go into the system in the next
five years or so. I referred earlier to the review that we are
conducting and the recommendations that we will publish later
this year. One of the things that I think will come out of that
is that the simplification which I think we are likely to be proposing
is that an awful lot more money is available to go into the pension
pot rather than to the bureaucracy of running the thing, which
I think will be a help. What I would say as far as today's Financial
Times story is concerned is that we knew some time ago that
this was likely to happen mainly because the Stock Market has
been falling and it does happen in any event, and it happens in
a number of years, but I do think it is perhaps a justification
for us having a State Second Pension into which people can go
to continue to build up their pension entitlement towards retirement.
The last point on this is that you said I make no bones about
the fact that I want, over the long period, to move more people
into funded pensions because I think in the long term they will
be better off, but you will find over the next 50 years that the
Stock Market will go up and it will go down, but we do not change
our pension policy simply because of today's headlines, even in
such an august paper as the Financial Times.
Chairman: I am sure the Committee will want
to pay careful attention to your consultations on simplification
and indeed return to the wider picture, and that has been very
helpful as an overarching statement, but let's just concentrate
on the details of the evidence we have received on the Pension
Credit at the moment.
Miss Begg
186. If I may look at the issue of saving, you
will be pleased to know that much of the evidence that we have
received broadly welcomes the Pension Credit, especially for the
way it rewards small-scale saving. However, there is one issue
that has been repeatedly raised with us and that is the treatment
of those without a full Basic State Pension. Your own Department
estimates that there are a quarter of a million pensioners who
will be affected by the ruling, which says that if you do not
have a full Basic State Pension, your savings are not rewarded
by the Credit. Can you explain the reasoning behind this aspect
of the proposed calculation method?
(Mr Darling) Yes, it actually goes back to discussions
I have had with, I think, you and your predecessor Committee,
on the social security side, and that is that one of the features
of the contributory scheme is that if you do not contribute, you
do not get anything out of it. What the Pension Credit is doing
is rewarding thrift, saving over and above what people put into
the Basic State Pension. There are people who do not have an entitlement
to a Basic State Pension because they did not make the necessary
contributions. Now, if we got ourselves into the situation where
we rewarded people, who had not put enough contributions in to
get their full Basic State Pension, but they had other savings,
then we would be rewarding them for that, whereas what we really
want to encourage people to do is to make their contributions
into the Basic State Pension in the first place, so that is the
rationale behind it. My guess, Anne, is that over the years it
is likely to be less of a problem because of course since 1978
it has not been possible for people to opt out and the people
we are talking about to a large extent are people who have paid
the married woman's stamp, as it was known in the old days. Now,
people do pay their full stamp, but of course people in that position
do benefit in other ways because the Credit does two things in
that it tops your income up as well as rewarding savings, so somebody
in that position, if they qualified for the guarantee, would have
their income topped up, so they do get something out of it. The
rationale and the answer to your question is that we wanted to
make sure that we rewarded thrift rather than go back to the situation
where we were rewarding someone who had not actually done what
they were supposed to do and that is to pay their contributions
towards the Basic State Pension.
187. But does that not undermine the other stated
policy, which you mentioned in your opening, that the aim of the
Government is to reduce pensioner poverty, because the very people
who are poor are the ones who do not qualify for the full state
benefit and the ones with perhaps a low work record or have been
carers and are often women, so does that not undermine that basic
principle?
(Mr Darling) No. If you take a woman who has not got
the full Basic State Pension and, say, she was getting £60
a week, she would qualify and probably someone in that position
will not have millions of pounds in the bank or anything like
that. If she qualified for the guaranteed elements, it would bring
her basic income up to £100. So the Pension Credit works
in two ways: there is the measure that is designed to tackle poverty
with the guarantee element because it says, "Here is the
floor which you should not drop beneath"; and then the second
part of it is the savings element. But we wanted to avoid a situation
where if somebody had not paid their full contributions, but for
some reason or another they had got savings and they said, "Why
don't we get some credit for that?", so what we wanted to
do was to make sure that the assumption is that if people do pay
their full contributions, we top them up as necessary and then
we credit the savings over and above that. That is the rationale
behind it, but there are two ways in which we deal with pensioner
poverty. One is the Pension Credit, but you also mentioned people
taking time off for caring and I come back to the S2P coming in
from April where 18 million people gain from that, including carers,
so that for the first time ever from April somebody who takes
four years out to look after their child or a parent or an ageing
relative or something like that, we assume that they are earning
£10,800 a year. Now, that never happened in the past and
obviously that takes time to build up as the S2P is just coming
in. I think we are doing a lot to deal with the underlying causes
of poverty as well as dealing with people who over the years did
not have the right contributions, but we will top them up, but
the credit element, the reward element, if you like, is applied
to savings over and above that.
188. But obviously the majority of people who
fall into that category are already retired and are probably women;
it has been said that the Pension Credit will be of considerable
help to women, but for retired women it will not really help them.
(Mr Darling) Well, over half the people who benefit
are women and my recollection is that half of those are over the
age of 75, so if you look at who gets the lion's share of the
gain of the Pension Credit, they tend to be older women who are
precisely in the position that you refer to.
189. What do you say to pensioner groups who
actually say that the reduction of pensioner poverty is not the
main aim of the Credit?
(Mr Darling) Well, there are two aims. One is to continue
to provide a means of tackling pensioner poverty because many
of these same groups for years campaigned unsuccessfully, I may
say, to get governments to do more for people on low incomes.
The Minimum Income Guarantee started that and that is subsumed
into the Pension Credit, so they get the guarantee. The second
purpose of the Pension Credit is to reward thrift, and half the
pensioner households in this country who are in this position.
Everyone of us representatives have been in the position where
you meet somebody who has got a small works pension or they have
inherited something from their husband and they are really fed
up with the fact that they get nothing and the Pension Credit
will change that. It is always the case that groups will say that
you ought to do more, and I will be surprised if we ever get to
the situation where that will not happen, but I do think that
the Pension Credit is a major step forward in terms of poverty
and rewarding thrift. Both are reforms that are long overdue and
I am glad that many people who have supported us, particularly
in the Lords, were Members who were not of our Party, but who
could see the merit of it.
190. So basically you are saying that the whole
point of the Pension Credit is that you can say to someone, "It
will always pay to save". But if you take the evidence that
the Association of British Insurers raised with us, it is also
to do with those who are not on the full Basic State Pension where
they felt that it would be much easier for them in trying to sell
the idea of the Pension Credit if they could always say in every
case, "It will always be better if you save". Adrian
Boulding of the Legal and General told us that Stakeholder Pensions,
in particular, were sold to `generic' groups, such as one firm's
employees gathered in a room for a presentation, and the individual
advice in these circumstances cannot be given. Do the regulations
that we have been discussing not make it impossible for him to
say to everyone in that room, "If you save money, you will
be better off in retirement"?
(Mr Darling) Well, I think that what you are saying
there is a slightly different one. There is always going to be
a matter of judgment and a matter of advice as to whether or not
an individual earning about £11,000 a year would be better
off staying in the State Second Pension or perhaps buying a stakeholder
pension, even someone just on the margins, because you have to
take a view as to whether or not you will always be on that salary
or whether you are simply travelling through and upwards, if you
like, and that has always been a matter of advice. There is no
system in the world that can get away with that unless you say
that there is no choice in the matter, ie, it is all state or
it is all private, and certainly I think that would be fundamentally
flawed if you went down either one of those two extremes. On the
Pension Credit, the position is, though, that if you qualify for
Pension Credit and if you have a pound of saved income, then you
get a credit for it. What I wanted to do was to get a system whereby
I could say to somebody, "Even if you save a small amount
through your Stakeholder Pension, through your works pension,
whatever, your earnings, we will give you some reward, some credit
for having done that". That is what the Pension Credit seeks
to do. The Legal and General have been one of a number of companies
who have said it has made all the difference. If we had not had
it, then a lot of people could legitimately have said, "Well,
I'm not sure. Is it worth saving into a pension?" The Legal
and General have made it very clear that it has made a big difference,
but the point you raise now I think relates to whether or not
you should advise somebody on a low income, particularly somebody
who has been on a low income throughout their working life, as
to whether you advise them to go into a funded pension. I have
said time and time again that I do not think people on low incomes
will, generally speaking, do well in a funded pension, but that
is a judgment that they have to reach as individuals.
191. Can I just be clear that you are actually
saying that when you are saying, "It is better to save",
it is actually better to save through pensions, not just save
if you have not paid your National Insurance contributions?
(Mr Darling) It is better to save and I want people
to save through pensions, I want people to save through ISAs,
for example, and 12 million people are saving something like £60
billion now through ISAs, a lot of them low-paid people, or if
they work into retirement, I want them to be rewarded for that
as well, but the philosophy of the Pension Credit is that for
the first time in the social security system to make sure that
where people make the effort, where they have been thrifty, they
actually get something for it. Now, that is a fundamental break
from the past and that is what it does.
192. Perhaps I can bring up the issue of the
notional rate of income on the savings. Many of the witnesses
welcome the halving of the notional rate of income in the Credit
proposals compared to what was under the MIG, but we have received
representations that 5 per cent would be a fairer estimate of
the actual return on savings at present. Would you consider a
lower notional rate for the Credit's calculations?
(Mr Darling) Well, as I said, you will always get
people coming up with strategies for more, but can I just perhaps
make one point here which I think is important. What we are doing
is we are disregarding the first £6,000 worth of savings
and that covers 84½ per cent of pensioners. Now, 84½
per cent of pensioners today do not have £6,000. If you look
at the people who have, say, under £10,000-£11,000,
that is something like 93 per cent, and what we have done is we
have halved the rate, the notional rate. Some of you may recall
that when we started off on this, when I made my statement to
the Commons, I actually was attracted to dealing with the actual
rates, but I was persuaded by Age Concern and by others that this
would be over-complicated for people to work out, so that is why
we have gone for a reduced and far more realistic notional rate.
If you take somebody with £8,000, bearing in mind that you
are ignoring the first £6,000, the actual rate, the equivalent
rate is something like 2.6 per cent, so I think when you take
into account the disregard, the rates for the vast bulk, I think
probably under 95 per cent of people, the equivalent rate will
be less than 5 per cent, so I think we have gone a long way, and
I have to review these things every year anyway, but I think we
have made a significant improvement there.
193. As long as there are low interest rates,
then obviously the pensioner with savings will seem to be clobbered
particularly hard because 10 per cent is not—
(Mr Darling) No, but, Anne, remember that you leave
the first £6,000 out of it, that is disregarded, so if you
take the equivalent rate on your savings of, say, £10,000,
then that equivalent rate is 4.2 per cent because you have taken
out £6,000. Now, under the original scheme of our proposal,
you would take all of those savings into account, so I know these
things are complicated and, if it is any help, I would be very
happy to let you have a table which shows what the equivalent
rate is. I have got one here, and I have scribbled all over it,
nothing offensive, but—
194. So that would give the equivalent rates
including the disregard?
(Mr Darling) What it does is it shows you a level
of savings, an assumed level of savings, before and after, if
you like, but it shows how, by ignoring the first £6,000,
your equivalent interest rate is actually less than 5 per cent
for, I think it is, something like 95 per cent, or it may be 94
per cent of people. Now, I would be happy to let you have that.
It is also worth bearing in mind that if you are a single person
and all your income was from capital, you would have to have more
than £35,000 in the bank before you would exhaust your entitlement
to Pension Credit. I think when you look at this and when you
come on to it and perhaps other questions that your colleagues
might put to me, this is a huge benefit to something like half
the pensioner households in this country. It is worth reflecting
on that, so that when people start criticising the thing, it is
a big, big social reform here. I would like to say a lot for the
future, but you would not expect me to be making promises that
I could not identify at this stage, though I do look at these
things every year, but I do think that if you look at the actual
equivalent interest rate, it is a lot less than people who are
campaigning for the 5 per cent figure will settle for, I suspect.
James Purnell
195. I have a quick supplementary on the entitlement
to the Basic State Pension. As you know, one of the groups that
do not build up an entitlement so easily are foster carers who
do not get home responsibilities protection and there are those
people who are taking time off work to look after their own children
who obtain Child Benefit and, therefore, automatically get home
responsibilities protection. Ian McCartney has written to a number
of us saying that he is in discussion with the local authorities
and others about whether the situation for foster carers can be
looked at so that they can have extended to them the same protection.
Is that something which you can look at through this Bill or is
that something which you are progressing on in another way?
(Mr Darling) That will not be in this Bill. Indeed
your predecessor Committee, I seem to remember, conducted an extremely
long inquiry and you arrived at the conclusion which was the same
which I think most of us felt that probably a blend of all these
things, contributory, means-tested, and the rest of it, is the
right way to go. One of the contributory purposes is that if you
do not contribute, you do not get anything out, other than a means-tested
entitlement at the end, so yes, we will look at it, but I do not
think it will be in this Bill.
Ms Buck
196. I am a big enthusiast for the Pension Credit
for today's pensioners, but I think one of the issues that we
need to be convinced about is the impact that it is going to have
on incentives for today's working population to save. You will
know of the criticisms of the Bill and of the Credit and they
tend to concentrate on the complexity of it and the difficulty
people might have in working out calculations, and of course whether
the amount itself is going to be sufficient to act as an incentive
to save. Age Concern's MORI poll supports some of these concerns,
saying that 70 per cent of people "had little or no confidence
about their income in retirement". In the memorandum, you
were a little bit less than robust in talking about the confidence
that people have in planning for their own retirement, saying,
"With the introduction of Pension Credit it will be possible
to make a reasonably positive statement that for most. . .people,
most of the time, they would be better off saving for retirement.
. ." I just wonder if that is going to be sufficient to get
a 36-year-old working at The Gap to think, "Blow me, this
Pension Credit fund is going to reward me for savings, so I had
better get myself down to start sorting out a pension"?
(Mr Darling) Well, you raise an important matter.
One of the big challenges for any government is how to persuade
a 26-year-old or a 36-year-old that they ought to part with their
money today for something they are going to get some time in the
future because if it comes to a choice between a Friday night
at the club or the pleasure of contributing to their pension fund,
most people will choose the evening in the club. Indeed if you
start to engage many people on pensions, it is one of the best
ways of clearing a room. When Beveridge talked about slaying the
five giants, with pensions you could add a sixth and that is sheer
boredom. Now, it is quite clearly in every government's interest
to encourage people to save. I am very robust on the Pension Credit,
as on everything else about pensions, and do not read too much
into it when these submissions are couched in more legalistic
terms and so on, but I am very robust about it because I think
that it makes a big difference. We can say to people, "Look,
if you save something, even if you save a small amount, then it
is worth your while to save". You actually raise quite a
fundamental point which I would like to address. There is around
a school of thought which says, "Because you have got the
Basic State Pension, because you have got the State Second Pension,
because you have got the Pension Credit, you have got company
schemes, you have got group personal pensions, you have got private
pensions, you have got Stakeholder Pensions, this is all terribly
complex, so would it not be much easier if you just had a very
simple system, which was the Basic State Pension and then you
are on your own after that?" Well, I think you need to be
aware of people who say that there is a simple solution to these
things. If someone tells you that, with pensions there is a simple
solution to these things, then you should start watching them
very carefully indeed. I do not subscribe to the view that the
only way to get people to save is essentially, in crude terms,
to almost starve them out, to say, as in Victorian times, "There
is absolutely nothing for you here, except the workhouse, so with
that in mind, that is the real driver to get you to save to improve
yourself". No government since the Second World War has accepted
that; Conservative governments and Labour governments have always
had a floor, whether it is called Income Support or whether it
is now the Minimum Income Guarantee, but they have always had
a floor and the Government has reached the view that that is the
floor, beneath which pensioners should not drop. Now, there is
an argument to say that the minute you do that, you have taken
away the incentive to save. Now, I do not accept that and I do
not think any government actually would accept that, no matter
what political colour that government happened to be. I do think
though, having installed the floor which the £100 Minimum
Income Guarantee does, you need on top of that to have something
like the Pension Credit, which is why we have introduced it, to
say: "When you do save a pound over that, you are not running
the risk of disqualifying yourself from all state help",
which is how the current social security system works, but instead:
"you save a pound and we will give you 60 pence", and
that incentive is then built into the system. So I do not subscribe
to the view that if you have stripped away everything else and
you had a simplistic approach with your basic minimum amount and
everybody defends themselves, I do not think that would work and
I do not think it would be fair. I think there is a broader question
of how you get people to save, full stop, and my view has always
been that a one-size-fits-all approach would never work and you
have to take people as they are. We should build on what does
work in this country, which is the funded system and the State
Second Pension as well, but I think over-simplistic approaches
to these things, they may be fine for an academic paper, but they
do not make much sense for people in this country or for pension
policy, for that matter.
197. Sure, I understand, but you are really
asking people to fire at a very small and moving target, are you
not? On what evidence would you say that you bring about a behavioural
change on the basis of the principle of a savings increment? What
is the evidence for that?
(Mr Darling) Well, it is not introduced, so you cannot
point to it saying, "This will change people's behaviour".
I think a lot of these things are intuitive. What I am very clear
about is that if we maintain the present system, and it is fairly
widely known how the social security system works in general terms
and people understand that there is a floor and you qualify for
that provided you have got less money than whatever the total
happens to be at a particular time, that in itself is a disincentive
if we did not do anything about it because people say, "Well,
if I make an extra effort, I lose out on all that help".
We have all met people like that who say, "I have worked
hard all my life and I get nothing. The guy down the road was
feckless and drank all the money and he is getting all this help",
and so on. The Credit stops that from happening. Now, it takes
time for people to become aware of these things, but just as with
the Working Families Tax Credit, for example, which self-evidently
no one could have heard about five years ago because it was not
around then, it is starting to get around and the word on the
street is that there is extra help and if you go to work, you
are better off and you get help for doing it. These things take
time to build up though, Karen, particularly in pensions where,
as I said to you, engaging anyone on pensions is a difficult enough
task as it is, but I think basically most people currently understand
the contract. The state will do some things for you, but frankly
most people would be better off making that extra effort and doing
something for themselves as well.
198. Of course you are right and it does take
time to build up, but there is a very fundamental difference here
and that is what the Government is thinking about doing, not what
it will do. The Working Families Tax Credit is a take-up issue
and somebody is going to ask questions about take-up later. There
is a world of difference between promoting a benefit which people
can ring a hot-line and get, and promoting a message which says,
"In 20 years' time or 10 years' time, if you take this particular
path, then something will be here to act as an incentive for you".
That is an entirely different issue from take-up and, therefore,
you have got to keep control, I think, as the Government, of how
you educate people about taking steps which will lead them to
a particular outcome in 20 years' time.
(Mr Darling) Up to a point. Firstly, before you do
anything else, before you approach the population you have to
make sure that your basic structure is right, that the way in
which you save, the stakeholder and privately funded pensions,
are right to make sure that you have got the right incentives
and rewards built into the system, so you have to get that right
first of all and I think we are doing that. You then have to approach
the population and say, "This is what we have got and this
is what you ought to do". Now, you are right that somebody
in their 20s will not be receiving a pension, let alone the Pension
Credit, for many, many years. However, when the Pension Credit
starts to come in, the present generation of pensioners, about
half the pensioner householders in this country, will be affected
by it and they will know about it, they will talk about it, not
just amongst each other, but they will talk about it with the
younger generation as well, but it takes time to build these things
up. It is worth bearing in mind, and I am happy to give you this
piece of paper as well, and a lot of people will tell you that
the Basic State Pension is dead easy. Have you ever explained
to somebody how it is calculated? Let me just read the first page
of the manual which we give our staff: "You have to consider
for each week of employment whether class one National Insurance
contributions have been paid above the primary threshold of earnings
or whether they received above the lower earnings limit but below
the primary threshold or whether it did not exist because the
ones available are actively seeking work and capable of work or
caring for a child and in receipt of home responsibilities protection.
. ." and this goes on like this. It is not simple at all.
The wording behind the pension is quite complicated, but the basic
principle of there being a Basic State Pension floor plus a Pension
Credit, which is designed to reward people's savings, I think
it is a fairly straightforward one. If you ask me the broader
question, "How do we engage the 20-somethings and 30-somethings
to think about their pension?" I think you have to get the
structures right, so there are other things you need to do to
make sure that your incentives are right and to make sure that
the tax system works appropriately and you have got the right
products. I mentioned earlier ISAs. There are lots of people around
who were very critical when we introduced ISAs and said that we
would never sell them, but 12 million people have got £60
billion worth of assets in ISAs and it is worth bearing in mind
that quarter of the people who bought cash ISAs have earnings
of about £11,000 a year. It takes time, but I think there
is a growing financial literacy in this country for a variety
of reasons. Clearly trying to engage anyone of relatively young
years on the merits of pension planning is always going to be
a daunting task.
199. So we are going to harness an army of grandparent
mentors in order to promote this and given how quickly the 75p
got around, there is actually a lot to be said for engaging grandparents
in that process.
(Mr Darling) Well, I have very recent experience of
people telling me that people do not notice these things. I think
that they do notice these things and they do so very, very quickly,
but engaging young people, and I am not that old myself, in how
to save is a difficult task. Try explaining to your eleven-year-old
daughter that to spend money, you have to earn it in the first
place. It is a difficult concept.
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