Select Committee on Work and Pensions Appendices to the Minutes of Evidence


Memorandum submitted by the Industrial Society (PC 09)

  1.  The Industrial Society welcomes the opportunity to contribute to the Work and Pension Committee's inquiry into the Government's proposals for the Pension Credit. We are a long-standing, independent organisation that exists to improve working life and have over 10,000 establishments in membership across all sectors of employment. We have become increasingly dismayed at the inadequacy of state pension provision and the complexity of the whole pension system.


  2.  In Spring 2001, the Industrial Society published its report Pension tension, measuring the UK's pension system against the basic principles of fairness, clarity, security and efficiency. We found severe drawbacks in the Pension Credit proposals that are not ameliorated by the DWP paper, The Pension Credit: the Government's proposals, published in November 2001. Indeed, we cannot see the logic behind the some of the detail in this paper.[15] Parts of the State Pension Credit Bill, notably Clause 3, defining how the Pension Credit will be calculated, are equally bewildering.[16] The Bill needs a straightforward explanation of the proposals.

  3.  A much better way to persuade people to save more for retirement would be to increase substantially the basic state pension to provide a genuine subsistence income and then re-link it to earnings in the future. This would then mean that people could save as much as they wanted, to give themselves an income above that level and have nothing taken off them. This was not only the original Beveridge approach; it is also the current approach in that bastion of the free market, the US. There, the Social Security pension is earnings-related, and offers benefits of between 25 per cent and 60 per cent of income up to a ceiling considerably higher than our Upper Earnings Limit. In answer to those who object that this is not "targeted" one can respond that:

    —  for the group of pensioners well enough off to be paying tax at the 40 per cent rate (currently fewer than 2 per cent of the total), the tax system will remove much of their gain; and

    —  this is a social insurance transfer payment paid for by National Insurance contributions and not a "handout"; if the Duke of Westminster has paid his NI contributions like everyone else, why should he not also receive an NI pension?

  4.  The Government also appears to have changed its views for the Pension Credit on the treatment of earnings. The November 2000 consultation paper made it clear that earnings were to qualify for the 60 per cent disregard. The Explanatory Notes on the State Pension Credit Bill, however, state the Government's intention that "qualifying income" (to be defined by regulations under clause 3(6) of the Bill) should, broadly, be income arising from national insurance contributions (eg retirement pension) and the claimant's own retirement provision (eg occupational or personal pension or income from capital). Earnings, it appears, will not be included. The White Paper merely notes the existence of "small earnings disregards in the Minimum Income Guarantee" and adds: "We are continuing to consider the treatment of earnings in the Pension Credit."

  5.  This appears to be in contradiction to other Government policies, which favour encouraging older workers to stay on and offering more flexibility about retirement, as set out in the Cabinet Office report Winning the Generation Game. The Government is keen to maintain or even improve the ratio of workers to pensioners, and one way of doing that is to and make it easier and more attractive for people to continue working for longer.[17] By discouraging part-time work after retirement, this seems to be an example of un-joined-up Government at its worst.

  6.  The way that the Government is seeking to establish equal treatment for men and women in these proposals will disadvantage women between 60 and 65 in the savings credit above the level of the guaranteed minimum income. The problem arises because the guarantee element will be payable to both men and women at 60, and the savings credit element will be payable to both men and women at 65.[18]


  7.  There are major uncertainties regarding future uprating of the pension credit. These add to existing uncertainties about the future value of the basic pension, the state second pension and money-purchase pension schemes, that will make pension planning extremely risky. We fear that many young people may decide to spend their money rather than to save it against this uncertainty.


  8.  The Government appears to regard the answer to pensioner poverty as lying in an extension of means-testing through the Pension Credit proposals. For every £1 of second pension, savings or earnings above the minimum income level, 40p of the pension credit will be deducted. The November White Paper states (section 4, page 6) that:

    "Any pensioner who receives the guarantee part of the Pension Credit will be entitled to full Housing Benefit and Council Tax Benefit. Nobody will lose Housing Benefit or Council Tax Benefit as a result of the Pension Credit."

    "We will achieve this by raising the level at which pensioners qualify for help in line with the Pension Credit, and also by mirroring the new rules on savings. . . ."

  Without further information, it is difficult to know exactly what this means, or whether the changes will be effective. It is important, therefore, that Parliament sees at least draft Housing Benefit regulations during the passage of the Bill, in order to ensure that it is dealing with the full picture. If the proposals in section 4 are not properly carried through, then if a pensioner is also claiming Housing Benefit or Council Tax Benefit, a further 51p in the £ of income from these sources could be lost, leading to an effective marginal tax rate of 91 per cent.[19]

  9.  These credits, planned to start in 2003, will bring half the pensioner population within the ambit of means tests. This is a U-turn from the Government's stance in the Pensions Green Paper, where they gave as one of the reasons for change that, "By 2025, without reform, well over half those reaching retirement age could have to rely on income-related benefits in their retirement".[20]

  Currently, around a third of pensioners, according to DWP estimates, do not claim the means-tested benefits to which they would be entitled.[21] Even expensive take-up campaigns, like those, last year, for the Minimum Income guarantee, have low rates of success.[22] The Government appears to believe that such take-up problems can be solved by simplifying claim forms and using the tax system rather than the Benefits Agency to pay—despite the fact that only a third of pensioners pay tax.


  10.  Those designing this new arrangement are taking a contradictory and illogical position. Up until they retire, low-paid workers are assumed to act on imperfect knowledge of the benefit system and to take financial decisions which are irrational, since they will be foregoing current consumption in order to make investments on which they will make low or negative rates of returns.[23] As soon as they reach retirement age, however, the same people are expected to have perfect knowledge of the benefit system and take financial decisions that are rational in claiming all benefits.


  11.  One effect of the proposals will be to increase the numbers of pensioners within the scope of paying tax at the 40 per cent rate. This has important implications for people of working age, saving for a pension, financial advisers and sellers of pension products. Many people of middle age or younger have been able to assume that, by paying regularly into a good second pension scheme for the rest of their working life, they would stand a good chance of retiring with an income above the means-tested minimum. Mostly people are unlikely to be aware that, to counter this effect of the pension credit proposals, they will have to put more aside.


  12.  We have seen nothing in the Government's proposals as currently presented to change our views that the Pension Credit, involving a huge increase in means-testing, is not the way to tackle pensioner poverty; and that as currently planned, it will be seriously flawed in its operation.

Yvonne Bennion

Policy Specialist

10 January 2002

15   For example, the reason why the savings credit for a single pensioner increases by 60p for each £1 of income between £77 and £100 and reduces by 40p for every £1 of income over £100 (The Pension Credit: the Government's proposals, Annex A). Back

16   As drafted, this clause appears to have the effect of not only rewarding pensions and other income from savings ("qualifying income" to be defined by regulations under clause 3(6)) but also income above (but not below) the MIG level derived from other sources. We understand the Government's intention to be to reward only "qualifying income". This needs clarifying and we also support suggestions put to us for a major simplification of the Bill to dispense with the proposed separate "guarantee" and "savings" credits in order to achieve one benefit, the pension credit, which would replace the Minimum Income Guarantee. Back

17   See Re-centring the debate on pensions-part 1, Euro Area Weekly no 2, 2000, CSFB, quoted in "Age shall not weary them", Martin Woolf, Financial Times, 7 February 2001, and also Age of Retirement and Longevity, Institute/Faculty of Actuaries Pension Provision Taskforce, 28 February 2001. Back

18   While women under 65 will benefit from the reduced notional interest rate on their savings, the notional rate will still be over 10 per cent and this will be only of limited help. Back

19   "Recent pension policy and the pension credit", IFS press release, 21 February 2001. Back

20   Pensions Green Paper, p 14. Back

21   Income-related benefits; estimates of take-up in 1998-99, 2000, available from DWP website: Back

22   Touchbase. Issue 22, DWP 2001, p 3. For information about take-up issues, and the experience at local level, see Benefits take-up initiative-a good practice guide for local authorities-it's a right . . . not a lottery, Local Government Association, July 1998, available on website: http:/ Back

23   Means-testing, position paper from Institute/Faculty of Actuaries Pension Provision Task Force, February 2001 available from: Back

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