FUTURE UPRATING OF THE CREDIT
62. There are two monetary amounts within the Pension Credit which
will be uprated each year: the level of the guarantee credit and
the savings credit threshold. When the Pension Credit is introduced,
in October 2003, the Government anticipates that the guarantee
credit - the 'minimum income' level - will be £100 for a
single person and £154 for couples. (These are the levels
which the MIG will have reached in April 2003.[124])
The savings credit threshold - above which all second income is
'rewarded' - is expected to be £77 for a single person and
£123 for a couple. These levels are the projected full Basic
State Pension rates for, respectively, a single person and a couple,
where the woman receives the married woman's rate of pension.
63. The Government's aspirations for the MIG and the Basic State
Pension have been made clear. In introducing the MIG, the Government
said: "Over the longterm our aim is that it [the MIG]
should rise in line with earnings so that all pensioners can share
in the rising prosperity of the nation".[125]
Subsequently the Government committed itself to increasing the
MIG in line with earnings for the rest of this Parliament.[126]
In his preBudget report in November 2001, the Chancellor
of the Exchequer said that after above-inflation increases in
the Basic State Pension in 2001 and 2002, the Basic State Pension
would, in future years, be increased by 2.5% a year or price inflation
whichever was the higher.[127]
64. The State Pension Credit Bill, however, does not specify how
the guarantee credit and the savings credit are to be uprated
each year, leaving it to the government of the day to decide.
Thus, for example, the savings credit threshold is expected to
start at the level of the Basic State Pension (£77) but the
Bill does not require it to be 'pegged' at that level. The two
may, therefore, diverge in future, should the government at the
time so decide. Whether they do so or not has significant implications
for the incomes of pensioners, as examples presented later will
show (see table 5). The Government has repeatedly refused to reveal
its aspirations for how the Pension Credit should be uprated.
When specifically questioned on this matter, the Secretary of
State declined to provide any insight into the Government's thinking
on this issue: "There are some things that all governments
do at election time, they say: 'This is what we think we can do
in the next Parliament', but it would be very imprudent to start
making promises way out beyond that on these particular things."[128]
65. Much of the evidence we have received condemns the uncertainty
over how the Pension Credit will be uprated. The Industrial Society,
for example, expressed concern that this comes on top of other
uncertainties - lack of clarity about the future value of the
Basic State Pension, the State Second Pension and moneypurchase
pension schemes - which "makes pension planning extremely
risky. We fear that many young people may decide to spend their
money rather than to save it against this uncertainty".[129]
We have also received suggestions that the Pension Credit should
be a temporary scheme, pending maturity of the Government's other
pension reforms, and uprated in such a way that it can be gradually
phased out. The Association of Consulting Actuaries (ACA) said,
in its submission, that: "the Government needs to disclose
how the thresholds will increase in future and signal that it
is only a temporary measure aimed at today's pensioners and those
retiring in the near future".[130]
Tom Ross, former Chairman of the Pension Provision Group (PPG),
welcomed the fact that the Bill does not prescribe how the Pension
Credit is to be uprated saying: "this flexibility would give
future ministers the opportunity to make the Credit a transitory
scheme".[131]
66. Whether the Pension Credit should be a transitional scheme
depends on its role in the Government's longterm pension
strategy, an issue to which we return later. However, one point
is clear from the evidence we have received the future
cost of the Pension Credit, and the proportion of pensioners entitled
to it, will depend critically on how it is uprated. Although the
Government has, to date, declined to indicate how the Credit will
be uprated, in its publication, The Pension Credit: long-term
projections, the DWP outlined three possible uprating "scenarios".[132]
- Scenario one: the guarantee credit is linked
to increases in average earnings and the savings credit is linked
to prices. If the Basic State Pension goes up in line with prices,
this ties the savings credit threshold to the Basic State Pension.
Assuming earnings rise faster than prices, the gap between the
guarantee credit and the savings threshold would increase rapidly
under this scenario. The income level at which entitlement to
Pension Credit is exhausted would rise by more than average earnings
from £135 to over £390 by 2051 at today's prices.[133]
(See figure 3 below for an illustration of how the value of the
two elements would diverge in the future.)
- Scenario two: both the guarantee credit and
the savings credit threshold are linked to increases in earnings.
This would see the income level at which Pension Credit entitlement
runs out rise in line with earnings.
- Scenario three: the guarantee credit is linked
to earnings until 2006 and thereafter linked to prices. The savings
credit threshold is linked to prices. After 2006, the removal
of the link with earnings would mean that the system reverted
to the situation where state support for pensioners gives them
no share in rising economic prosperity.
The long-term cost implications of these three scenarios are set
out below.
Table 4: Cost of the Pension Credit reform package
under alternative policy scenarios, expressed in £ billion
(and as a proportion of GDP)[134]
Scenario | 2004
| 2010 | 2020
| 2030 | 2040
| 2050 |
1 | £2bn (0.2%)
| £4bn (0.4%) |
£8bn (0.6%) | £14bn (0.9%)
| £20bn (1.1%) |
£26bn (1.3%) |
2 | £2bn (0.2%)
| £3bn (0.3%) |
£4bn (0.3%) | £6bn (0.4%)
| £8bn (0.4%) |
£9bn (0.4%) |
3 | £2bn (0.2%)
| £3bn (0.3%) |
£3bn (0.3%) | £3bn (0.2%)
| £2bn (0.1%) |
£1bn (#) |
All figures rounded to the nearest £ billion / 0.1 per cent and are in 2001/2 prices.
# indicates less than 0.05 per cent. Real GDP assumed to grow at 1.5 per cent a year from 2001. Take-up assumed to be 67% in first year and 100% in subsequent ones.
|
67. The table below (table 5) illustrates how these three different
scenarios would affect the future levels of the guarantee credit,
the savings credit threshold, and the income level at which entitlement
to Pension Credit would run out. The figures given are for single
pensioners. The table also shows how a single pensioner with a
full Basic State Pension, and £10 a week from a second pension,
would fare, both in terms of Pension Credit entitlement and final
income level. It is worth bearing in mind that the figures assume
earnings will increase by 1.5% a year in real terms. Even on this
conservative estimate, it means that, over the period in question,
real earnings will double in value.
Table 5: Future entitlements to Pension Credit under
different uprating scenarios in 2003 prices
Scenario one | 2003
| 2006 | 2025
| 2050 |
guarantee credit | £100
| £105 | £139
| £201 |
savings credit threshold | £77
| £77 | £77
| £77 |
income at which entitlement exhausted | £135
| £146 | £231
| £387 |
PC entitlement for someone with full Basic State Pension and £10 of second tier pension
| £19 | £24
| £58 | £120
|
Final Income | £106
| £111 | £145
| £207 |
Scenario two |
guarantee credit | £100
| £105 | £139
| £201 |
savings credit threshold | £77
| £81 | £107
| £155 |
income at which entitlement exhausted | £135
| £141 | £187
| £271 |
PC entitlement for someone with full Basic State Pension and £10 of second tier pension
| £19 | £21
| £40 | £74
|
Final Income | £106
| £108 | £127
| £161 |
Scenario three |
guarantee credit | £100
| £105 | £105
| £105 |
savings credit threshold | £77
| £77 | £77
| £77 |
income at which entitlement exhausted | £135
| £146 | £146
| £146 |
PC entitlement for someone with full Basic State Pension and £10 of second tier pension
| £19 | £24
| £24 | £24
|
Final Income | £106
| £111 | £111
| £111 |
Assumes real earnings growth of 1.5% a year; Basic State Pension linked to prices.
|
68. The examples illustrate the difficulties a non-expert might
have in judging the alternative uprating options. For example,
one might think that linking both the guarantee credit and the
savings credit to earnings would be the most generous option (as
in scenario two), but this is not the case. In fact it is scenario
one, where the guarantee credit is linked to earnings but the
savings credit threshold to prices, which best maintains the value
of the pensioner's final income in relation to earnings and hence
to the standard of living of wider society.
69. Under scenario one, the guarantee credit keeps pace with real
earnings growth, but the savings credit threshold falls behind.
The result of this is that the income level at which a pensioner
is no longer eligible for the Credit is three times higher in
2050 than in 2003. This is illustrated in the diagram below (figure
3) produced by the House of Commons' Library. Pension Credit entitlement
for a single pensioner with just £10 a week of second tier
pension is more than six times higher in 2050 than in 2030 but
his/her final income only just keeps up with earnings. Under scenario
two, where both the guarantee credit and the savings credit threshold
are linked to earnings growth, there are more modest increases
in both the income level at which entitlement to Pension Credit
runs out and in entitlements. The final income of the pensioner
lags considerably behind earnings, however, rising by only half
as much, in today's prices, as under scenario one. Scenario three
is similar to the situation which exists for the Basic State Pension.
After 2006, all amounts remain at their current levels in terms
of prices and so fall further and further behind earnings.
Figure 3: Future levels of Pension Credit and Basic
State Pension (single pensioner)[135]

70. The most expensive uprating scenario is the first, as the
Government's own projections show. Under scenario one, the cost
of Pension Credit is projected to rise from £2 billion in
2004 to £26 billion in 2050 or by about one per cent of GDP.
The cost rises more modestly under scenario two and falls under
scenario three. PricewaterhouseCoopers (PwC) have also estimated
the longterm cost of Pension Credit under scenario one and
produced a similar estimate for the cost in 2050.[136]
71. The Government maintains that even the most expensive uprating
scenario is affordable in the sense of adding only one percentage
point over 50 years to the proportion of GDP spent on the scheme.
The Secretary of State described the Pension Credit as "eminently
affordable" and that even an extra £26 billion a year
was a "small amount of spending".[137]
On the other hand, we have received evidence that projections
this far ahead are inevitably highly uncertain. According to Mr
John Hawksworth of PwC, the future cost of the Pension Credit,
"will depend on the detailed distribution of pensioner income
at that time".[138]
There is, therefore, a very real risk that unforeseen cost increases
could jeopardise a policy based on scenario one, especially if
public understanding of the implications of different uprating
policies is poor. Help the Aged fear that: "the Pension Credit
will continue to be set at arbitrary levels dictated by financial
and political expediency".[139]
The NPC has argued that: "It is most unlikely that the Government
intends the savings credit to expand in this way [that is, as
implied by scenario one]"; so Governments may be tempted
to reduce the cost and coverage of the scheme in other ways, such
as, "a gradual reduction in the 60p 'reward' or disconnecting
the threshold from the basic pension so that only part of the
income above the level of the Basic State Pension would qualify
for the Credit".[140]
72. We did not receive compelling evidence in favour of one uprating
method over another, taken in isolation from considerations relating
to the Pension Credit's role in the Government's longterm
strategy for pension provision. Nor did witnesses feel inclined
to hazard a guess as to which method would be used, although Mr
Hawksworth told us that scenario one "seemed to be
the most plausible interpretation of Government pensions policy
statements".[141]
Many organisations voiced concern about the high proportion of
pensioners who would be entitled to Pension Credit in future years
under scenario one. PricewaterhouseCoopers put this proportion
at around 60% of pensioners in 2025, and between 65 and 70% in
2050, while the IFS suggested this could rise to as much as 82%
by 2050.[142]
73. We return to the question of uprating in considering the Pension
Credit's role in the Government's overall strategy. However, we
have much sympathy with the view of the London School of Economics'
SAGE research group's view that: "[political] stability will
only be assured ... if in the longer term decisions around indexation
of all parts of the pension system ... were protected as far as
possible from overly frequent political manipulation. Whilst it
is not desirable to make decisions about indexation inviolable,
an instrument that ensured automatic indexation of pension incomes
would be preferable."[143]
The Government has gone a long way toward specifying its intentions
for indexing the MIG and the Basic State Pension. We urge them
to do the same for the Pension Credit to aid Parliament in its
consideration of the Bill and to provide more certainty to those
involved in the long-term planning necessary for pension provision.
The role of the Pension Credit in the Government's
overall pensions strategy
74. We have heard much evidence about the longterm nature
of pension planning and the need for people to plan with a reasonable
degree of certainty about the pensions landscape. We therefore
think it appropriate to consider not just what the Pension Credit
will do for today's pensioners, but also how it fits in with the
Government's overall strategy for future pension provision. As
the Secretary of State advised us: "you have got to look
at pension policy in the round and cannot just look at one bit
on its own."[144]
75. In 1998 the Government's stated objectives for pensions were: