Memorandum submitted by Mr James Nelson
The author of this submission is an actuary
born and educated in Scotland, a long term Australian resident,
and a Vice-President of the British Australian Pensioner Association.
However, the submission is being made as an individual and not
on behalf of any body.
1.1 The Pension Credit is an attempt to
counter the poverty suffered by many pensioners.
1.2 Pensioner poverty is the result of failure
by the state to provide adequate retirement incomes through the
existing mechanisms. In part it is a failure to ensure that existing
benefits keep up with pensioner expectations, and in part it is
a failure to provide contributors with the means to save for additional
pensions beyond the basic subsistence pension envisaged in the
1.3 The Pension Credit scheme must therefore
be designed in such a way that the need for means tested benefit
will eventually disappear.
2.1 It is commonly accepted that the foundation
of the Social Security System was laid down in the Beveridge Report,
which proposed a universal pension benefit sufficient for sustenance
but not so great as to discourage individual thrift. It was an
important principle that so far as was possible benefits should
not be subject to a means test.
2.2 Over the years, successive governments
seem to have lost sight of these fundamentals, and made many attempts
to patch the system at minimum cost to the taxpayer. These attempts
have not been successful.
2.3 In any consideration of proposed benefits
which will be subject to a means test, attention needs to be paid
to the interaction of all means tested benefits. This is especially
so when the benefit is described and promoted in such a way that
it conceals the effective "means test" underlying the
2.4 Special attention needs to be paid to
the manner and frequency of re-assessment, so as to reduce the
level of intrusion into private affairs, and to ensure that no
pensioner feels discouraged from applying.
2.5 It is also important for the credibility
of the system that any benefit which is conferred as of right
should not be taken away because of a rule which selectively denies
the benefit to any group of pensioners.
3. THE BEVERIDGE
3.1 Relevant extracts from the report, together
with comment thereon are given in the appendix. The following
extracts are particularly important.
Paragraph 10 says: . . . It is, first and foremost,
a plan of insuranceof giving in return for contributions,
benefits up to subsistence level, as of right and without means
test, so that individuals may build freely upon it.
Paragraph 16 says: . . . Briefly, the proposal
is to introduce for all citizens adequate pensions without means
test by stages over a transition period of twenty years, while
providing immediate assistance pensions for persons requiring
them. . . to solve the. . . problem of passage from pensions based
on need to pensions paid as of right to all citizens in virtue
3.2 The need to provide benefits free of
means test is referred to several times in the Beveridge Report.
18 (x) For the limited number of cases of need
not covered by social insurance, national assistance subject to
a uniform means test will be available.
3.3 He also referred in paragraph 21 to:
. . . the strength of popular objection to any
kind of means test. This objection springs not so much from a
desire to get everything for nothing, as from resentment at a
provision which appears to penalise what people have come to regard
as the duty and pleasure of thrift, of putting pennies away for
a rainy day. Management of one's income is an essential element
of a citizen's freedom. Payment of a substantial part of the cost
of benefit as a contribution irrespective of the means of the
contributor is the firm basis of a claim to benefit irrespective
3.4 For most people, the state age pension
was to be supplemented by private means, either through occupational
and private pensions, or through individual thrift.
4. THE ROLE
4.1 It was to be expected that during the
long maturity period of the National Insurance Scheme many citizens
would have prospective pensions less than the standard rate. Now
that the scheme has existed for more than 50 years, one would
have expected that nobody would have an inadequate basic pension.
4.2 The best pensions strategy must be one
which minimises the role of means tested benefits. For that reason
it must be planned that eventually the Pension Credit will be
phased out. It must be designed for and restricted to those who
through improvidence or misfortune have been unable to provide
a sufficient level of pension for themselves.
4.3 To the extent that past governments
have failed to increase basic pensions to reflect the level of
prices and of prosperity, all pensioners have been short-changed
4.4 It would be instructive to examine an
age profile of impoverished pensioners. It might be found that
the poorest group was composed mainly of older pensioners, who
did not have a sufficiently long membership to benefit from the
supplementary pensions under the graduated retirement Benefit
scheme and the State Earnings Related Pension Scheme. If this
is not so, then the efforts of past and present governments have
been ineffective in addressing pensioner poverty.
5. THE IMPACT
5.1 The credit will undoubtedly help to
relieve pensioner poverty. But it will still be means tested,
albeit on a less stringent basis than the Minium Income Guarantee.
5.2 Unless the basic pension is incremented
regularly to keep pace with current living standards there will
always be a need for supplementation of the pension with strategies
such as are now being proposed. To solve the problem of pensioner
poverty in the long term it will be necessary to devise a strategy
which does not depend on means testing.
6.1 For ye have the poor always with you
(Matthew 26:11). And no doubt much poverty is due to improvidence.
But it is an incurable disease!
7. THE ABILITY
7.1 People on low and modest incomes suffer
from disadvantages compared with other people.
7.2 Firstly, of course, the level of their
income might preclude them from saving for the future. There is
always a tendency, maybe even a need, to spend what comes to hand
and let tomorrow look after itself.
7.3 Secondly, people on low and modest incomes
often lack the expertise to make correct decisions (whatever "correct"
might mean). Those on higher incomes may, if they lack the expertise,
be able to buy the services of people who have. But for people
on low incomes the price of good advice plus the administrative
costs of investment management make severe inroads into the savings
7.4 A third disadvantage is the impracticality
of splitting small volumes of savings to obtain safety in diversification.
For a person with a small nest egg the failure of one financial
institution can mean disaster.
8. THE IMPLICATIONS
8.1 Among the impediments preventing the
private sector pensions industry from providing the surplus benefits
that Beveridge considered desirable are the structures of pension
schemes, which by their very nature are unable to cope with severe
8.2 Some schemes are described as "Defined
Contribution" schemes. The contributions are defined in relation
to salary or some other measure. The contributed money is invested
on behalf of the member, to provide a benefit of whatever good
investment management can provide. With the passage of years,
the ravages of inflation frequently make the ultimate benefit
insufficient to provide a meaningful enhancement to the social
8.3 Other schemes are described as "Defined
Benefit" schemes, the most common type being some variation
on "Final Salary" schemes. While such schemes provide
well for those who spend a lifetime working for a single employer,
they do not provide adequate preserved benefits for members who
change employers in mid working life. Preserved benefits are not
upgraded each year to cope with inflation. Indeed, someone who
changes employers frequently could find himself ultimately with
no better a benefit than could have been earned under a defined
8.4 Those who do well out of private pension
schemes, particularly the final salary type, are people who climb
the career ladder and who therefore have a final salary pattern
exceeding the average salary earned during their working career.
Another group to benefit are those who are head-hunted and given
an extra benefit in recognition of service with previous employers.
8.5 All private sector pension schemes face
the problem of indexing of pensions to cope with inflation. This
problem should not be left to private schemes to solve, since
inflation is a problem caused by society itself, not just by pensioners.
8.6 One possible approach would be to impose
a limit on the level of income taken into account for the state
run supplementary schemes, and to discourage contracting out.
The role of the private sector pension provider could then be
limited to providing supplementary pensions for those who enjoy
the highest level of earnings. The requirement to provide for
indexation could then be relaxed or removed. Wealthier individuals
could enter into whatever arrangements they could afford while
all citizens, rich or poor, could be sure that the state pensionbasic
plus supplementarywould not be just at a minimum subsistence
9. ATTEMPTS TO
9.1 Governments have attempted to remedy
these shortcomings in various ways. Among these are the Graduated
Retirement Benefit and the State Earnings Related Pension Scheme.
Both of these have proved expensive to the taxpayer, largely because
the benefit is upgraded to cope with inflation, both before and
after retirement. In addition, both have a long period to maturity,
and many pensioners will retire with a contribution record inadequate
to purchase a decent retirement income.
9.2 If society is going to provide adequately
for old age, then society must be prepared to pay the price.
9.3 The question then arises as to whether
state provided age pensions should be paid universally, or should
be subject to a means test.
10. WHEN IS
10.1 It is easy to disguise a means test
so that to the unwary, or perhaps to the innumerate, it appears
not to be so.
10.2 It should be clear, however, that the
proposed Pension Credit is a means tested benefit. To see why
this is so, it is necessary to consider the Minimum Income Guarantee
and the Pension Credit in tandem. Let us take the three examples
given by the government in its consultation paper.
John is aged 70 and single. He has a basic state
pension of £77 a week. He also gets a weekly wage of £20
for some part-time work. The Pension Credit would top his income
up to the guaranteed minimum income of £100 a week and give
him a further savings top-up of 60p for every £1 he gets
from his employeran additional £12 a week. So his
total Pension Credit would be £15.00 and his total income
would be £112.00.
The Pension Credit here is made up of £3
under the MIG (100-77-20) plus £12 reward for his "other"
income of £20.
10.3 A simple case:
Mary is 85-years-old and widowed. Her basic state
pension is £77 a week and she gets £23 a week in pension
from her former employer. That's a total of £100 a week.
The Pension Credit would reward her with a Credit of £13.80
a week to give an overall income of £113.80 a week.
There is no MIG element here, because her two
pensions amount to £100 a week. But she gets £13.80,
which is 60p for every £ of "other income"
10.4 It is the third example which shows
up the true nature of the Pension Credit.
Ivy is aged 66 and single. She has a basic state
pension of £77 a week and SERPS of £40 a weeka
total of £117. The Pension Credit will lift her income to
the £100 guaranteed minimum income level plus 60p for every
pound of her SERPSthat is, by £24 a week. So her final
income will be £124 a week, and her Pension Credit will be
£7 a weekthe difference between £124 and her
total basic state pension and SERPS (£117 a week).
In this case the pensioner has a total income
which exceeds the £100 MIG. Consequently her Pension Credit
is much less than 60p per pound of SERPS pension. Her total income
after MIG and PC is just £7 more than it would be without
the PC. She is in effect providing £17 of the PC out of her
own income. It is as if the MIG served to reduce her income to
10.5 For a pensioner with the basic pension
of £77 plus other income of £55, the PC reduces to one
pound per week. At higher levels it disappears altogether.
10.6 Another way of seeing the Pension Credit
is as a means tested pension of £23 per week, reduced by
40p for every £1 of income other than the basic state pension.
10.7 A third, and equally valid, way of
viewing the proposals is an increase in basic pension from £77
per week to £100 per week, with weekly income between £100
and £157.50 being "taxed" at 40p in the pound.
The words are different and the mechanism is different, so the
perception may well be different; but the economic impact is the
10.8 In other words, a means tested benefit
with a fade-out of benefit at 40p in the pound has the same effect
on the pocket as a benefit taxed at 40p in the pound.
10.9 Whether the credit is presented as
a useful supplement to private pensions, or as a means tested
benefit, or as a taxed addition to the basic pension, will depend
on what the commentator is trying to achieve. It may even depend
on whether the commentator is in government or opposition.
11. THE PROPOSED
11.1 One of the failures of the existing
system is that pensioners and prospective pensioners are expected
to find out for themselves what rights and options they have.
In recent correspondence regarding Voluntary (Class 3) Contributions
the department wrote to one enquirer:
"You were not previously advised that you
could pay voluntary contributions, as the Department's policy
then was only to supply the information if the customer asked
11.2 In the investigation into the Inherited
SERPS debacle, the National Audit Office severely criticised the
department for failing to keep people informed, for failing to
be pro-active in serving contributors' interests. The culture
of concealment must end.
11.3 The Department should be able from
its own records to determine whether a pensioner has a state pension
income high enough to disqualify him from the Pension Credit.
It may also, from its records, be able to determine whether a
pensioner has private or occupational pensions sufficient for
disqualification . What it will not be able to do is to determine
whether a pensioner has other income from casual and part time
work that would lift total income beyond the threshold for Pension
11.4 Perhaps with the integration of tax
and pensions systems it may be possible for the department to
have access to taxation records, but there are important privacy
considerations which must be addressed.
11.5 Rather than wait for pensioners to
apply, the department must take the initiative in approaching
pensioners who seem, prima facie, to qualify for the Pension Credit.
11.6 The system could be set up on the basis
that everyone, or alternatively everyone with a total pension
up to some practical limit, is paid the Pension Credit. By carefully
integrating the pension and taxation system it should be possible
to ensure that the Pension Credit does not exceed what is properly
11.7 An alternative, which would not cost
much in the whole scheme of things, and would attract less criticism
from those affected, would be to base the Credit payment on the
known "regular" income from state and other pensions,
and to declare amnesty on small amounts of income derived from
casual and part time work. For larger amounts of irregular income
the overpaid credit (above some practical threshold) could be
deducted from payments for the following year.
11.8 One of these approaches would enable
the department to take a pro-active role in the provision of benefit.
The cost of Credits overpaid could well be less than the cost
of a cumbersome assessment system.
12. THE LIKELY
12.1 The levels of take up will be greatly
improved, and pensioner poverty therefore mitigated, if the department
takes a pro-active stance, and seeks out pensioners who might
be eligible for a credit payment. The forms of application need
to be simple and unintrusive, otherwise some pensioners will give
up in frustration.
13.1 Some consideration needs to be given
to the combined effects of means testing and taxation. Without
detailed knowledge of the UK system, the present author can only
offer some warnings based on the Australian system.
13.2 In Australia, the whole basic pension
is means tested, with a reduction of 40c in the $ for all income
above a threshold. This reduction is at the same rate as is proposed
for Pension Credit. But no part of the Australian age pension
escapes the means test.
13.3 There is a further reduction in total
income brought about by the taxation system. The first band of
income tax is 17 per cent for incomes above $6,000. For elderly
citizens there is a special tax offset which can extinguish income
tax on lower incomes. When it was introduced the government announced
that for elderly citizens there would be an income tax threshold
13.4 Unfortunately this turned out to be
untrue. The tax offset is reduced by 12.5 cents for every $ above
$16,306. The effective tax rate over this income band is 29.5
per cent, made up of 17 per cent tax and 12.5 per cent reduction
in the tax offset. Over certain bands the effective reduction
in "other" income can be as high as 57.7 per cent, made
up of 40 per cent reduction in pension because of the means test,
plus 29.5 per cent of the balance.
13.5 This example from Australia illustrates
the need to consider the whole effect of income tax, means testing
of pension and means testing of other benefits.
13.6 Without detailed knowledge of the means
testing of other benefits accruing to UK pensioners we will leave
14. THE EFFECT
14.1 The existing MIG system works on a
pound for pound means test reduction. It is proposed that the
Pension Credit will have a 40p in the pound means test. This seems
to be a reduction, rather than an increase, in means testing.
14.2 It is doubtful whether the level of
means testing will affect the incentive to save. Retirement is
a long way away in the future, and who knows how many changes
will be made in the system before retirement.
14.3 Wealthier people, and especially those
who have a strong propensity to save, are not going to take means
testing into account when making savings decisions. They aim to
have a total retirement income well above the levels at which
Pension Credit will have any meaning.
15. THE METHOD
15.1 The various systems used in the past
50+ years have failed to eliminate pensioner poverty. It should
not be expected that the new system will fare any better.
15.2 If pensioners are to share in the increasing
prosperity of the society in which they have lived and worked
and contributed, then the level of total pension must be set at
a level which provides a dignified standard of living. Means testing
of benefits must always be an interim solutiona band aid
applied to cover (but not cure) the insufficiencies of the system.
16.1 Poverty can be caused by the matters
considered above. There is, however, another cause of pensioner
poverty, a cause which was never envisaged in the Beveridge Report,
and which denies the principle of a benefit earned by right and
based on contribution history.
16.2 Consider the case of JW. He was born
in 1917, and when he was nearing age 65 decided to emigrate to
Australia for understandable family reasons. Having learned that
the UK state pension is "frozen" for expatriates residing
in Australia, he applied to the European Commission of Human Rights
for a directive that the freezing of pensions be terminated.
16.3 JW was under the impression that when
he attained age 70 in 1987, he would be entitled to an Australian
pension free of means test.
16.4 The Commission, accepting his evidence
without further investigation, concluded that JW would only suffer
minor, temporary inconvenience and dismissed his appeal, thereby
setting a precedent from which subsequent appellants have been
unable to escape.
16.5 Unfortunately JW had been completely
mistaken. The pension free of means test had been introduced by
the Whitlam administration in the mid 1970's, but already by the
time JW made his application the first steps had been taken in
dismantling this pension. By the time JW reached age 70 (in 1987)
the special means test free pensions for pensioners of 70 and
over had been abolished.
16.6 The UK basic pension granted to JW
on his 65th birthday in 1982 would be £32.85 per week, and
if he is alive it will still be frozen at this level. Compared
with the current level of basic pension of £72.50 this means
that his pension is nearly 55 per cent below that enjoyed by pensioners
who live in the UK or in the United States of America.
16.7 In the case of Application. 5489/72
Muller v Austria, the Commission observed that . . . a substantial
reduction of the amount of the pension could be regarded as affecting
the very substance of the right to retain the benefit of the old
age insurance system. However, in the present case, this problem
does not arise because the difference of which the applicant complains
amounts to 97.70 schillings, that is to say approximately 3 per
cent of his pension.
16.8 Surely a reduction of 55 per cent in
the amount of pension does by any standard affect the very substance
of the right to retain the benefit of the old age insurance system.
JW will be relying on a means tested benefit to a far greater
extent than a pensioner resident in the UK of the same age and
with the same contribution history.
16.9 Here is the justification offered by
an Appeals Officer of the Department in recent correspondence.
The Human Rights Act 1998
I submit that Article 14 of the Human Rights
Act 1998 provides: The enjoyment of the rights and freedoms set
forth in this convention shall be secured without discrimination
on any ground such as sex, race, colour, language, religion, political
or other opinion, national or social origin, association with
a national minority, birth or other status. I further submit that
the ambit of right states that in order to establish a violation
of Article 14 read in conjunction with another substantive article
of the Convention , the facts in issue must be shown to fall within
the ambit of the latter. If they do not, Article 14 does not and
A person cannot therefore allege a breach of
their human rights on discrimination alone. However, you have
also stated that the Department is in breach of Article 1 of Protocol
No 1 of the Human Rights Act 1998. I submit that Article 1 of
Protocol No 1 (protection of property), like many of the Articles,
are qualified rights and not absolute rights. Article 1 of Protocol
1 provides: Every natural or legal person is entitled to the peaceful
enjoyment of his possessions. No one shall be deprived of his
possessions except in the public interest and subject to the conditions
provided for by law and by the general principles of international
law. This provision will not, however, in any way impair the right
of a state to enforce such laws as it deems necessary to control
the use of property in accordance with the general interest or
to secure the payment of taxes or other contributions or penalties.
I submit that the Social Security legislation
does not allow for the payment of any annual increase whilst you
are living in Australia.
I also submit that case law states that for a
claim to constitute a "possession" within the meaning
of Article 1 of Protocol No 1, the appellant must show a legal
entitlement to the economic benefit at issue, or a legitimate
expectation that the entitlement will materialise. In most cases
this involves establishing an entitlement in domestic law, unless
that law runs counter to the object and purpose of Article 1 of
Protocol No 1. Thus, a procedural device, such as a statute bar,
which extinguishes a domestic law entitlement, may have the concurrent
effect of extinguishing any "possession" under Article
1 of Protocol No 1. (Case law quoted in the Sweet and Maxwell
publication of Human Rights Practice, compiled by Jessica Simor
and Ben Emmerson Q.C. (paragraph 15.010))
Domestic law therefore prevents the payment of
annual cost of living increase whilst you are living in Australia.
The Department maintains that this statute bar does not run contrary
to the purpose of Article 1 of Protocol No 1 and therefore the
statute bar also extinguishes your entitlement to annual increases
under Article 1 of Protocol No 1.
16.10 From this response, it would seem
(i) The state pension is a possession, based
on the legal right or legitimate expectation of receiving a benefit
based on contribution history. This right has accrued to residents
in Her Majesty's dominions since 1929, and to all contributors
world wide since 1955.
(ii) The annual cost of living increase is
also a possession, based on the legal right or legitimate expectation
of receiving an annual increment.
(iii) A pensioner who emigrates to certain
countries is dispossessed of this right or expectation, and the
annual increment is no longer a possession.
(iv) However, if the pensioner decides to
move from a "frozen" country to a non-frozen country,
then the right or expectation again becomes a possession until
and unless he moves again. And if the "frozen" pensioner
makes a short term visit to the UK, then the increment once more
becomes a possession, but only for a limited time.
16.11 This iniquitous practice destroys
the credibility of the UK state pensions scheme. The legislation
must be struck down if the social security system is to be regarded
truly as complying with the provisions of the Human Rights Act
and the European Convention on Human Rights. It is moreover essential
that this issue be taken into consideration now when reviewing
the Pension Credit proposals since the new Bill relies on that
existing cankered legislation whose legitimacy has been called
into question by the granting of leave to seek Judicial Review.
(Request for Judicial Review (Granted) Reference Number: CO-2704-2001,
Ruling of 16 October 2001 Mr. Justice Elias Litigant: Anette Carson)
3 January 2002