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


Memorandum submitted by Norwich Union (PC 16)


  Norwich Union fully supports the Government's desire to ensure that everyone has a decent and secure income in retirement. We also acknowledge the work carried out by the Department for Work and Pensions (DWP) towards ensuring that the Pension Credit would reward saving.

  In summary, we remain concerned that the incentive to save is insufficient especially for those on moderate incomes. In addition, the complexity of the Pension Credit and the uncertainty surrounding its sustainability may cause advisers and pension providers to shy away from targeting those on low and modest incomes, for fear of criticism in the future. This would be to the detriment of the Government's "Pension for All" objectives.


  As the UK's largest provider of life, pensions and investment products and services, Norwich Union is pleased to offer this submission to the House of Commons Select Committee Inquiry.

  We welcome the launch of the Pension Credit which addresses the needs of today's pensioners and goes some way towards removing the disincentives for consumers to save for their retirement. In particular, we are pleased to note that the notional rate of income assumed under the Minimum Income Guarantee (MIG) has been replaced by a more realistic income assumption and that the upper capital limit under MIG has also been abolished.


(a)  the role of the new Credit in the Government's overall pension strategy

  As we see it, the Government's overall strategy is to

    —  address the needs of today's pensioners through State Pensions (including the changes to state second-tier pension provision) and the introduction of the Minimum Income Guarantee, and

    —  ensure that pensioners of the future who can save, do so through private provision such as stakeholder pensions.

  The Guarantee Credit element of the Pension Credit will provide an effective safety net for those who cannot afford to save and the Savings Credit will always provide at least some incentive to save for those on low and modest incomes. Norwich Union believes that, where possible, consumers should be encouraged to provide for themselves in retirement. Whilst some of the disincentives to save will have been removed by the introduction of the Pension Credit, we do feel that there still needs to be a clearer incentive for people to save. We submit two suggestions that aim to achieve this objective:

    (i)  Introduce the Pension Credit with the explicit understanding that the Guarantee Credit will be phased out in due course. This would have the benefit of helping those who have already saved and who are due to retire shortly, whilst giving others the incentive to save for the future with some certainty that they will get the benefit of their savings. The phasing out could be introduced, for instance, in 2015 to have taken place by 2020.

    (ii)  For individuals who have invested in an approved stakeholder scheme, personal pension or occupational pension, increase the Savings Credit of 60 pence for every pound saved, to £1 to ensure that those individuals receive the full benefit of their income from these sources.

(b)  the method of up-rating the Pension Credit and the long-term implications of the method chosen

  The Government have stated that the level of Guarantee Credit will rise in line with earnings during this parliament. This is appropriate for the short term but we have concerns that this could act as a disincentive to save if it were to continue in the longer term. The real value of the Guarantee Credit could outpace the real value of the Basic State Pension which increases in line with RPI. The danger is that the number of people entitled to the Guarantee Credit would increase steadily as the value of the Basic State Pension decreases. We would like the Government to make their longer term intentions clear, especially in the light of independent projections highlighting the future costs to Government. Of course, our suggestion in (a) (i) for the phasing out of the Guarantee Credit would mitigate this problem. We would also like clarification of the method of increasing thresholds for the Savings Credit.

  On the face of it, the £77 threshold for the Savings Credit seems unduly harsh for those people whose total income falls below this level. We would like further clarification of how such people would be treated as it is our understanding that they get no Savings Credit and this impacts on those with broken working patterns. We believe that the Government should at least confirm that they will be entitled to the Guarantee Credit.

(c)  the effect of increased means-testing on incentives to save

  We feel that increased means-testing could be seen as a conflicting message from Government. On the one hand individuals are encouraged to save through Stakeholder Pensions and on the other, State Provision is being increased through the State Second Pension and MIG/Pension Credit. We would like the Government to make their long-term plans clear ie whether the trend towards increasing means-testing will be halted in the future in order to encourage private provision.

(d)  the ability of people on low and modest incomes to make the correct decision regarding future pension provision, and

(e)  the impact of the Pension Credit on pensioner poverty

  Whilst the Pension Credit will ensure that it nearly always pays to save, its operation is generally complex and this creates uncertainty amongst consumers and advisers alike. For consumers we would like to see the Decision Trees updated as a priority to encourage saving and discourage any over-reliance on means tested state benefits which are subject to change or abolition by successive Governments.

  If the complexity remains and advisers become involved, any recommendation requires a careful analysis of the individual's circumstances and likely circumstances at retirement. This level of analysis and advice is inconsistent with the objectives of stakeholder pensions and with the limited advice that can be accommodated within the maximum 1 per cent charge cap. Those on low and modest incomes are unlikely to be able to pay fees for this advice.

  The Pensions Credit clearly goes some way to resolving the under-funding issues of the past and helps address current pensioner poverty. In order to seek to eradicate pensioner poverty in the future we believe that the importance of starting to save now should be stressed to those with significant periods to retirement. This should be done by updating of the Decision Trees which should seek to make it clear that, due to the introduction of the Pension Credit, "it will always pay to save".

  In particular, we are concerned that the future costs of the Pension Credit, which were highlighted by the recent projections from the ABI, raise doubts about its sustainability. Again, our proposal in (a) (i) for the phasing out of the Guarantee Credit would go some way to overcoming this issue.

  Finally, we believe that the Government should indicate how the Pension Credit will work for those who are not entitled to the full Basic State Pension.

(f)  the implications of the Pension Credit for the private pensions and insurance industries

  Many of the points we have already raised about the complexity of the Pension Credit affect Norwich Union's own advisers in the same way as independent advisers. In particular, our ability to distribute stakeholder pensions cost effectively. Without clarity and greater incentives, distribution to groups or through e-commerce and via direct offer advertisements, for example, is problematic. Financial advisers will also have a responsibility to consider the effect of The Pension Credit when providing ongoing advice as part of the review process. Again, this may not be viable within the maximum 1 per cent charge cap unless concerns over the sustainability of the Pension Credit are addressed.

(g)  the proposed methods for claiming /assessing entitlement to the Pension Credit, including the frequency of reassessment, and

(h)  the likely levels of take up.

  We welcome the Government's plans for The Pension Service and the simpler and more proactive approach that will be taken to encourage people to claim the Pension Credit. In particular we support the replacement of the weekly means test with a new five-year reassessment period which will make the operation of the Pension Credit less intrusive. We think that this approach will have a very positive effect on the levels of take up, which as we understand from figures released by the DWP, for MIG, are currently 25 per cent less than they could be.

11 January 2002

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