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


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 Credit—those 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:[24]

    "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.[25]

  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 its scope.


  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" or

    —  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 them—have 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.[26] 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 intention.


  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 longer.[27] 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.[28] 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 credit.

  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 aimed—those 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 of itself.

  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 Timmins:

    "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 apiece."[29]

  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.[30]


  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 interim—but 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[31] 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 recent—the campaign to encourage take-up of the MIG—is said to have resulted in "over 120,000 more pensioners receiving an extra £20 a week".[32] 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 its operation.

  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.

Sue Ward


11 January 2002

24   House of Lords Hansard 18 Dec 2001: Columns 140-1. Back

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

26   Means-testing, position paper from Institute/ Faculty of Actuaries Pension Provision Task Force, Feb 2001 available from Back

27   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

28   White Paper, p 7. Back

29   "Compulsory pensions draw closer", Financial Times, 9 January 2002. Back

30   Partnership in Pensions; an Assessment, Richard Disney, Carl Emmerson, Sarah Tanner, Institute for Fiscal Studies, 1999. Back

31   House of Lords Hansard 18 Dec 2001 : Columns 150-1. Back

32   Hansard, 10.12.01, col 600W. Back

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