Memorandum submitted by the Independent
Pensions Research Group (IPRG) and the Northern Pensions Resource
Group (NPRG) (PC 13)
1. The Independent Pensions Research Group
(IPRG) and the Northern Pensions Resource Group (NPRG) are groups
of member-trustees, trade union activists pension professionals
(including actuaries) and others with a strong interest in employer-provided
pensions. We welcome the opportunity to comment on the Government's
proposals on Pension Credit. We have followed the headings used
in the Press Notice calling for evidence.
2. The Government's pensions strategy relies
heavily on means-tested benefits to fill the gaps in state and
private pension provision. To summarise our views on this, we
consider that while the immediate effect of the proposed disregard
of 60 per cent of pension and savings income above the basic pension
level will be equivalent to a reduction of the tax rate on such
income from 100 per cent to 40 per cent, the number of people
affected will be hugely increased. People of working age will
have to take this into account in planning for their retirement,
and pension scheme providers and advisers will have to ensure
that their customers are informed of the implications.
3. There are major uncertainties regarding
future uprating of the pension credit. Added to existing uncertainties
about the future value of the basic pension, the state second
pension and money-purchase pension schemes, these will make pension
planning extremely hazardous. Many young people may conclude that
it is better to spend their money than to save it for such an
uncertain future. The low take-up of stakeholder pensions is in
part a sign of this.
4. A better strategy is to increase the
basic state pension in order to provide a secure floor on which
people can build their retirement savings. This would benefit
particularly the group the Government aims to help with the Pension
Creditthose above the current Minimum Income Guarantee
level because of modest savings or occupational pensions.
5. According to Baroness Hollis, speaking
for the Government in the House of Lords' Second Reading Debate
on the State Pension Credit Bill:
"The pension credit is essential to the
overall coherence of the pension system. It will form the third
piece of legislation and finally complete the jigsaw. It will
provide the mechanism for ensuring that we can tackle poverty
among today's pensioners without undermining the incentive for
future pensioners to save for their own retirement."
6. We would take issue with this. We consider
that the introduction of the pension credit reduces the Government's
strategy to incoherence.
7. To describe the credit as a reward for
saving is both misleading and confusing. When the scheme starts
in 2003 some 5 million pensioners will receive an additional weekly
income of up to £13.80 a week. The promise of a 60p "reward"
for every pound of savings income, however, will, at best, be
perceived as a 40 per cent "tax".
8. There is the additional important issue
of the treatment of Housing Benefit and Council Tax Benefit. The
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. . . ."
9. 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 policy intentions are not properly carried through,
then for a pensioner 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.
10. While a 40 per cent tax or even a 91
per cent tax would be less objectionable than the 100 per cent
tax that recipients of occupational pensions suffer under the
present rules; but the pension credit will extend this form of
taxation to some 3 million additional pensioner households. This
fact is crucially important for people of working age. Until now,
most people of middle age or younger could 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. In future, with the
means test extending further up the income scale, a much bigger
pension will be needed to avoid it. People of working age, deciding
how much to save for their retirement, will need to take into
account the very strong possibility of any additional retirement
income being taxed at 40 per cent. Moreover, as we shall see,
there is a serious risk of the 40 per cent tax rate being increased
as the cost of the pension credit rises; and if that does not
happen, the level of income up to which the tax will operate is
likely to rise substantially, bringing still more pensioners into
11. The Government's future intentions for
the pension credit are very unclear. The White Paper confirms
that the minimum income level will rise in line with earnings
during this Parliament, and we assume that this is the intention
for a longer period than that. However, the Bill leaves the "savings
credit threshold" to be prescribed, and subsequently amended,
by regulations. It could be either higher or lower than the basic
pension. Similarly, while it is clear (from the White Paper) that
the credit will initially be 60 per cent of income from pensions
and savings above the threshold, the Bill simply refers to "a
prescribed percentage" and we cannot assume that the prescribed
percentage will always be 60 per cent. Indeed, the November 2000
consultation paper referred (on page 19) to "an initial rate
of a 60p reward for every pound of savings income", implying
that the rate might change later.
12. If the minimum guarantee does rise in
line with earnings while the savings credit threshold remains
tied to the basic pension and rises in line with prices, the band
of income on which the credit is based will steadily widen; the
value (and the cost) of the credit will increase; and the level
of income at which the credit expires (initially £134.50
for a single person) will rise faster than either prices or earnings,
greatly increasing the number of beneficiaries.
13. If the Government plans to prevent the
savings credit expanding in this way, it may have in mind:
a gradual reduction in the 60p "reward"
disconnecting the threshold from
the basic pension so that only part of the income above the level
of the basic pension would qualify for the credit.
14. In either case, Parliament needs to
be fully aware of these plans when it is legislating on the initial
shape of the Pension Credit, but, so far, the Government has not
even acknowledged that there is a problem.
15. Contrary to what has been said repeatedly
by the Government, offering some disregards for occupational pensions
and savings is not a new departure. "Disregards"limited
amounts of income or capital which people are allowed to have
without any reduction in the means-tested payments made to themhave
a long history, going back at least to the 1948 National Assistance
Regulations. Indeed, the 1948 disregards were by today's standards
surprisingly generous. Up to 20s of earnings and up to 10s6d of
superannuation payments (ie occupational pensions) were disregarded.
A pensioner receiving both part-time earnings and an occupational
pension could, therefore, have up to 30s6d of weekly income from
these sources in addition to the 24s minimum income received by
a single pensioner householder from the NAB.
16. The £50 capital disregarded under
the 1948 regulations, if raised in line with the minimum income
level, would have resulted in a capital disregard of £4,167
in 2003, so the £6,000 disregarded since April 2001 is an
improvement on this. To offset this, however, the rate of interest
used to calculate the assumed income from savings above the £6,000
limit will be twice as high as in 1948. The proposal is for a
reduction from the present assumed rate of 20.8 per cent to 10.4
per cent. It should in fact be halved again, if it is to come
close to the real rate of interest pensioners are likely to earn.
17.This history is important because over the
past half century, maintaining this system of protection of income
from occupational pensions and other sources has not been seen
as a priority. When benefits were uprated, the disregards generally
remained, at best, unchanged. The occupational pension disregard
was actually abolished in 1980, since when the receipt of an occupational
pension has resulted in a pound for pound reduction in income
support. There must be a suspicion that the Treasury, having invented
"disregards" in a new form, will allow them to wither
away over time.
18. The simplest and most satisfactory solution
would be to raise both the basic pension and the savings credit
in line with average earnings, so that the basic shape and dimensions
of the scheme would be preserved automatically without the need
for any other adjustment. We hope that the Select Committee will
explore this crucial aspect of the proposals in depth.
19. Means-testing half the pensioner population
will create strong disincentive effects for younger people taking
decisions about saving for retirement. Why save, people ask, if
the result will be a reduction in benefit entitlement? The Government
has listened to this argument, and to the complaints of those
who have saved but feel they are little or no better off as a
result. The pension credit attempts to solve the problem by offering
a reward for saving. "The more you save, the bigger your
reward" is the sales pitch. Unfortunately, the effect of
the pension credit on incentives to save is, on balance, more
likely to be negative than positive.
20. 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.
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.
21. The Government may be assuming that
only a small minority of financially well-informed people will
be aware of these facts and that the disincentive effect on saving
will therefore be small. It seems to us, however, that financial
advisers and providers of pension schemes will have a duty to
inform people about such a major factor affecting the outcome
of their investment decisions. Even if that were not so, we cannot
see that a policy which rests on the assumption that most of those
affected by it will be deliberately kept in ignorance of its implications
for their future wellbeing, is justifiable.
22. The 1948 Regulations discussed above
at least had the merit of simplicity, compared to the new proposals.
Clause 3 of the State Pension Credit Bill sets out in eight bewildering
subsections the way in which the savings credit is to be calculated,
and is almost incomprehensible. So far as we understand it, as
drafted it not only rewards pensions and other income from savings
("qualifying income" as defined by regulations under
clause 3(6)) but also income above (but not below) the MIG level
derived from other sources, which does not seem to be the Government's
23. We would also like to draw the Committee's
attention to the effect on earnings. Currently, pensioners can
earn only £5 a week (or £10 for a couple) before every
additional £1 of earnings is deducted from their income support.
The November 2000 consultation paper made it clear that earnings
were to qualify for the 60 per cent disregard. The Explanatory
Notes on the 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."
24. 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
By discouraging part-time work after retirement, this seems to
be an example of un-joined-up Government at its worst.
25. The present £5 earnings disregard
is plainly much too small to constitute an incentive to seek or
accept part-time employment. One way of dealing with this is to
retain this separate disregard, but raise it to a level (say £40)
which, in most cases, would allow at least half a day's work per
week without any loss of benefit. In this way, part-time earnings
could have a significant impact on pensioner poverty, as well
as supporting the Government's aim of persuading older people
to continue in the labour market.
26. The Pension Credit will, initially at
least, provide a relatively small but welcome increase in the
incomes of some 5 million pensioners. Of these, 1.2 million have
incomes below the new minimum guarantee levels of about £100
for a single person and £154 for a couple.
The credit will raise their incomes above the minimum, thus undoubtedly
reducing pensioner poverty. However, a straight increase in the
MIG would be more effective. It would give equal amounts to all
those on the minimum, rather than discriminating in favour of
those with income from savings or second pensions.
27. The majority of those benefiting from
the credit will be pensioners with incomes above the MIG level
who will qualify for the savings credit. Unlike those with income
below the MIG line, this group would benefit fully from an increase
in the basic state pension. They could therefore be helped without
extending the complexities and disincentive effects of means-testing
to half the pensioner population.
28. The White Paper (page 6) claims particular
advantages from the pension credit for women, who tend to have
smaller occupational pensions than men and are "at greater
risk from the relative decline in their pension income over their
retirement because they tend to live longer than men. Two-thirds
of those entitled to the Pension Credit will be women, half of
them aged 75 and over." However, many of the poorest women
pensioners will gain little from the pension credit. With their
smaller occupational pensions, the savings credit will be of less
value to them. Moreover, the relative decline in their pension
income (including the basic state pension) as they get older will
result in a similar relative decline in the value of their savings
29. A particular problem is that anyone
with less than a full basic pension will not benefit from a Pension
Credit for that part of their income between their basic pension
amount and the full amount. This group is very largely female.
30. On the other hand, there are now increasing
numbers of couples where each has a basic pension in their own
right. They too will lose out, since the Pension Credit for couples
is based on the assumption of a wife having a category B pension
at 60 per cent of the full rate. This is a return to the pre-1978
situation, where wives were effectively discouraged from paying
the full NI contribution towards their own basic pension. Family-based
assessment also introduces well-known problems where there are
women in couples whose savings may not be rewarded. As Pension
Credits draw a growing proportion of households into means-testing,
resources will increasingly be routed through one person in couples,
and that person is more likely to be the man. This will have regrettable
consequences for fairness and equity within households.
31. However, the most glaring gap in the
Government's proposals, so far as women are concerned, is the
fact that, although the state pension age for women is still 60
and will remain so until 2010, rising to 65 between 2010 and 2020,
the savings credit will not be available to those aged 60-64.
The White Paper (page 6) says: "In order to comply with our
legal obligations on equal treatment, the guarantee element will
be payable to both men and women at age 60, and the savings credit
element will be payable to both men and women at age 65."
The November 2000 consultation paper said nothing about this difference
in starting ages, giving the impression that all pensioners with
incomes at the appropriate levels would benefit from both parts
of the credit.
32. The Government has now decided that
men under 65 should not receive the savings credit and, therefore,
nor should women. Presumably the reason for that decision is that
most men under 65 are not pensioners. In fact, however, many men
have to retire at 60 or earlier on relatively small occupational
pensions, on which they have to manage until they are 65. We do
not see why they should be denied the benefit of the savings credit.
33. We consider that the effect of the Pension
Credit will be to undermine an industry in which people are already
losing confidence. One of the most worrying recent trends in pension
provision, both state and private, is the increasing unpredictability
of retirement incomes. There must always be a degree of uncertainty
about the value of pensions payable in the distant future, but
it should be a central aim of pensions policy to reduce that uncertainty
to a minimum. This aim was achieved for a short time, with the
1975 legislation which linked the basic state pension to average
earnings, introduced the earnings-related component of the state
pension (SERPS), and offered guaranteed minimum benefits for members
of contracted-out occupational pension schemes.
34. We now see a huge programme of reform
going on in both State and non-State pensions. SERPS is about
to be replaced by the state second pension, whose future value
is even more uncertain. Initially, it will inherit nearly all
the existing features of SERPS, except that it will give a much
better return to contributors with very low earnings. But the
Government's stated intention is to transform it gradually into
a flat-rate pension scheme, starting with younger contributors
in about 2006-07, assuming that stakeholder pension schemes are
firmly established. It is far from clear how stakeholder schemes
are going to succeed in reaching the market at which they are
aimedthose earning less than about £20,000 p.a. and
not covered by occupational pension schemes. It remains uncertain,
therefore, whether stage will take place in 2006-07, later than
that or not at all.
35. In the non-State sector, there is a
growing prevalence of money-purchase pension schemes, where the
value of the pension depends on long-term investment yields and
both long- and short-term fluctuations in annuity rates. Few people
realise just how vulnerable these schemes are to changes in both
the real economy and financial markets, but a few well-publicised
failures could soon undermine confidence in them.
36. To these multiple uncertainties must
now be added the major uncertainties we have noted above regarding
the uprating of the pension credit. It is impossible to predict
either the levels of retirement income likely to be affected by
the credit or the rate at which it will be reduced as income rises.
Planning for retirement will become even more hazardous and many
people are likely to conclude that it is more sensible to spend
their money while they are young and let the future take care
37. As explained above, the pension credit
will have important implications for the choices that people of
working age have to make about provision for retirement. The 40
per cent "tax" on income from pensions and savings will
have to be taken into account and it will be incumbent on pension
providers and financial advisers to explain its implications.
Failure to do so may result in mis-selling of pensions on a very
large scale. However, the major uncertainties regarding future
uprating of the pension credit, added to existing uncertainties
about the future value of the basic pension, the state second
pension and money-purchase pension schemes, will make pension
planning extremely risky.
38. There have always been problems of this
sort at the lower end of the income spectrum, but these will now
extend up into the middle bands. 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. Where people are aware that, to counter
this effect of the pension credit proposals, they will have to
put more aside, they may not be able to do so. Many, however,
will not be aware and so will effectively be wasting their money.
39. In effect, the Government has been "laboratory-testing"
the effects of uncertainty and a high level of pensioner "tax"
by launching its Stakeholder pensions in advance of the Pensions
Credit. To quote a recent article by pensions journalist Nicholas
"it is true that 570,000 stakeholder pensions
have been sold in the first eight months. . . But about 40 per
cent of these are thought to be transfers from other forms of
pension. Another chunk has been sold to . . . better-off people
using them to put up to £3,600 a year into pensions for their
spouses, children and grandchildren. . . It is true, too, that
300,000 employers. . . have signed up to make stakeholder pensions
available to their employees. But the figures suggest that, on
a crude average, they have sold pensions to only one employee
40. As Timmins goes on to point out, if
employers agree to put money into an individual's stakeholder
pension, take-up is high. "If the employer says, "this
is so good I'm putting money into it", the staff will join.
If he doesn't, they won't."
41. This is, we suggest, an entirely rational
approach by employees. For the lower-paid, the gap between what
people need to pay to obtain a pension which will take them above
means-tested levels, and the amount they will able to pay given
the other calls on their income is daunting. At a guess, most
people can probably afford say, 5 per cent of earnings as a contribution
even in the years of maximum strain on their income when children
are young. That should be sufficient, to build up a good pension
if the employer is paying the rest. But how many couples with
two children, high child-care costs, and perhaps student loans
to pay off will be able to afford to put in the 15 per cent or
so contribution (for each of them) which is needed if nothing
is coming from their employers? The evidence is that the bulk
of the "unpensioned" are not paying in because of other
urgent calls on their money, not because they do not want to pay.
42. A particular problem for the pensions
industry, highlighted by Baroness Barker in the House of Lords'
Second Reading Debate, is the treatment of pension increases with
the proposed 5-yearly reassessment. As she explained:
"While most pensioners' circumstances remain
fairly constant for long periods, that is not so for all. The
Bill assumes that the Government will know what will happen to
a person's pension in the interimbut will they? The Government
will probably assume that any income from a private or occupational
pension will rise with inflation. However, many people will have
worked for several employers and will have retired with a number
of small pensions. Each pension scheme may have a
different provision. Some will rise with inflation; some will
have limited price indexation; some may not rise at all if the
fund's trustees so decide. How will the Government identify changes
to income? Will there be any restriction on how often an individual
or a couple can ask for a reassessment? If at the time of reassessment
it is evident that a pensioner has been underpaid, will there
be any facility for backdating entitlement?"
43. It will be important for the DWP to
consult the industry, before the regulations are finalised, to
ensure that the procedures to be used are workable and do not
create an unnecessary burden on schemes.
44. We are convinced that the policy of
relying increasingly on means-tested benefits to meet the needs
of pensioners is misguided. Regardless of the numbers involved,
however, it is obviously right that everything possible should
be done to ensure that those entitled to such benefits receive
them. We therefore welcome the emphasis placed on this aspect.
Past attempts to promote the take-up of means-tested benefits,
however, have produced disappointing results. The most recentthe
campaign to encourage take-up of the MIGis said to have
resulted in "over 120,000 more pensioners receiving an extra
£20 a week".
However, official take-up statistics suggest that the number of
entitled non-claimants before the campaign started may have been
around 500,000. So even that very considerable effort led to only
a quarter of those potentially entitled being reached.
45. Before they can receive income support,
pensioners have to be persuaded to make a claim, providing full
information about their financial situation, and the same procedure
will apply to the pension credit. The length and complexity of
the income support claim form is known to have discouraged claims
in the past. The recent introduction of a new and shorter form
should encourage more claims; but the amount of information required
remains essentially the same. The development of the telephone
claims service may have a bigger impact, but many people who have
difficulty with form-filling may find it equally difficult to
provide detailed financial information on the telephone.
46. The proposal to award the pension credit
for periods of five years will provide greater stability once
the initial award has been made, but will not in itself increase
the rate of take-up.
47. We doubt, therefore, whether the measures
set out in the White Paper will raise the take-up rate for the
pension credit to anywhere near 100 per cent. With more than twice
as many pensioners qualifying, the number of non-claimants will
increase substantially, even if the Government manages to reduce
their proportion. It would certainly be unwise to assume that
the take-up problem is about to be solved.
48. We can therefore see nothing to change
our previous 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
49. A much better way of both
providing pensioners of today with
a comfortable retirement; and
giving pensioners of tomorrow an
incentive to save for their 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, to give themselves
an income above that level and have nothing taken off them. Not
only was this the original Beveridge approach; it is also the
current approach in that bastion of the free market the US, where
their 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.
11 January 2002
24 House of Lords Hansard 18 Dec 2001: Columns 140-1. Back
"Recent pension policy and the pension credit", IFS
press release, 21 February 2001. Back
Means-testing, position paper from Institute/ Faculty of Actuaries
Pension Provision Task Force, Feb 2001 available from www.actuaries.org.uk. Back
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
White Paper, p 7. Back
"Compulsory pensions draw closer", Financial Times,
9 January 2002. Back
Partnership in Pensions; an Assessment, Richard Disney, Carl
Emmerson, Sarah Tanner, Institute for Fiscal Studies, 1999. Back
House of Lords Hansard 18 Dec 2001 : Columns 150-1. Back
Hansard, 10.12.01, col 600W. Back