Examination of Witnesses (Questions 200-219)
MS ALISON
O'CONNELL AND
MR CHRIS
CURRY
24 NOVEMBER 2004
Q200 Ms Buck: It would be interesting
to pursue that but we do not have the time. We discussed a little
in the first session the potential impact in the earnings disregard.
I wonder if you could outline your view on the benefits of that.
Mr Curry: This is an area which
we have not looked at in detail, but just from the economic theory
and principle of it, the idea that if people worked they could
keep more of their earnings and so their income was slightly higher
seems to suggest it would encourage people to work. The last time
this Select Committee looked at Pension Credit the recommendation
made to Government was that there was an earnings disregard of
£40 and the Government's first response was an obvious one,
which was that it would cost money, they suggested it would cost
£180 million. I think the second response was not quite so
obvious and highlights some of the uncertainties about what Pension
Credit is for in that one of their arguments was that it would
only affect 70,000 people who are currently working. You may argue
that you are not looking to help the people who are currently
working, you are looking to encourage other people into work and
so that is the real number they should be looking at and there
was no discussion of that. It is something that if the Government
is going to reject they need to look at a bit more closely, but
it does seem to fit in much more with the ideas that have been
put forward in the last couple of years about more flexible retirement
and allowing people to work and take pensions and state benefits
all at the same time.
Q201 Rob Marris: Disincentives to save
includes various factors such as affordability, means-testing,
marginal deduction rates and so on. Have you got any evidence
as to the different weights that one should attach to those various
factors?
Ms O'Connell: Evidence is difficult.
I think we have heard very strongly from advisers and employers
about this reticence to sell pensions to or enrol members in pensions
when it is not known what the individual's future circumstance
is going to be vis-a"-vis means-testing in future. I think
the complexity is a big issue but perhaps what is more important
is the uncertainty.
Q202 Rob Marris: Would you agree with
Adair Turner that IFAs sell pensions rather than people buying
them?
Ms O'Connell: Yes.
Q203 Rob Marris: So IFAs are having uncertainty
and therefore are not so keen on selling them?
Ms O'Connell: Not just IFAs but
advisers that work for life insurance companies, too, and employers
are also saying that they are finding it hard to see why it would
be in low paid workers' best interests to be in an employer's
scheme if the current means-testing regime still exists in the
future. That is the big "if" that nobody knows and that
is the thing that is stopping people from being able to make decisions
with confidence.
Q204 Rob Marris: Is that evidence anecdotal
or survey evidence?
Ms O'Connell: It is anecdotal,
but I have to say I hear it everywhere, it is pretty strong.
Q205 Rob Marris: Is anybody doing any
survey stuff on that to see if the number of disincentives to
save has increased since Savings Credit was introduced?
Ms O'Connell: I think the Pensions
Credit analysis on the economic side is very important. In terms
of surveying people as to what prevents them from buying a pension,
there is less done on that, but what that tells you is that they
do not have the income to save, they would much rather not get
on to the subject of pensions altogether, it is too scary, it
is too far away, it is too much about being old and horrible things
like that. I think there is quite a lot on behaviour let alone
economic behaviour which is not understood but we are all familiar
with the isues in our every day discussions.
Q206 Rob Marris: Would it be fair to
say that in terms of prospective consumers, that is people who
might be saving for a pension, it is those factors you mentioned
which are important, ie it is too far away and it is all too complex
and no, I do not want to think about it, but that for the financial
advisers and so on that you referred to there is pretty strong
evidence now that Savings Credit has led to a disincentive to
sell these products?
Ms O'Connell: I think that is
right because the advisers have to go through the numbers to the
best of their ability and they are still left with an uncertainty
even when they have done the rational thing and gone through the
numbers.
Q207 Mr Goodman: I am about to ask you
some of the same questions that you heard me ask the Turner Commission
about the future of Pension Credit, though you may be less circumscribed
than they are. The new Secretary of State said that Pension Credit
will not continue indefinitely, it should remain until the problem
of abject pension poverty is solved. Where do you think the policy
is now going? What do you think is going to happen to Pension
Credit and how soon?
Ms O'Connell: I think there is
a thought process that goes like this. Pensioner poverty is not
going to go away by itself and it is not going to go away with
the current setup of Pension Credit unless take-up increases to
100%. I think there is a consensus that reform of the state pension
system broadly defined is needed. The big question is what that
reform is going to be. When we know what that reform is we can
calculate some good numbers on how much pensioner poverty would
be left and therefore understand how much means-testing for basic
income along the lines of Guarantee Credit would still be needed.
Let me take two examples. If the reform were to increase the basic
state pension there would still be some means-testing requirement
left through Pension Credit, Housing Benefit and Council Tax benefit
because the basic state pension will always lead to inequalities
because lower income people, women, do not get the full contribution
of the system. With a higher basic state pension means- testing
it could be less but still not go away altogether. The other example
is that with a Citizen's Pension that would be universal, perhaps
not 100% but something like 95% and that would mean that a much
smaller residual would need to be means-tested. Guarantee Credit
would still exist, so would Housing Benefit and Council Tax benefit
but to a much lesser extent.
Q208 Mr Goodman: Is that what you think
the Government should do?
Ms O'Connell: We think what the
Government should do is have a good long think about these issues
and use the work that we and others have already done to have
a long-term policy so that what appears to be the short-term policy
of Pension Credit does have a coherent future. I think the Government
and all parties are engaged in this and I think it is right that
that should happen.
Q209 Mr Goodman: You say there is a risk
that spending on Pension Credit may increase faster in the future
than the Government suggests. Is that mainly to do with projected
savings levels?
Mr Curry: I think there are two
main reasons why we think the Government might be potentially
under-estimating how much Pension Credit might cost in the future.
One is take-up in that the projections going forward assume that
take-up stays at 75% right the way through over the next 50 years.
As we have already talked about, that does not seem a particularly
ambitious target and you might hope that if the system was around
for that long it could be improved in such a way that take-up
could be higher. The other was the amount of income that people
have from other sources which determines how much Pension Credit
they are entitled to. Savings income is one component of this
but there is also income from other sources, for example other
savings or earnings rather than just pensions. As I think
John Hills said earlier, The Pension Commission use the existing
current projections for Pension Credit expenditure, but some of
the other analysis in the report undermined quite severely the
assumptions that the Government had used to do that. You mentioned
earlier that the Government had assumed the amount of income that
comes from savings goes up in line with earnings, but it assumes
something more than that, it assumes that the average per pensioner
goes up in line with earnings. If you take into account a large
increase in the number of pensioners between now and 2050, then
the proportion of GDP that is being paid to pensioners through
savings is much higher, it is about 50% higher and I am not aware
of any projections which were in the Pensions Commission report
which supported that. It seems as if there is likely to be less
income per pensioner coming from savings in the future. We know
that the amount that the State is providing outside of Pension
Credit is reducing quite significantly per pensioner. The other
uncertainty in all of this is how much income pensioners are going
to get from earnings, but no one has done any work to show how
much more pensioners need to earn in order for the overall amount
to be in line with Government projections. We think there is a
large funnel of doubt surrounding the projections of Pension Credit
and at the very least there needs to be work done on how wide
that funnel of doubt could be. The projections at the moment show
one extreme of the funnel of doubt. We have done some other work
which might show the upside of the funnel of doubt which means
that expenditure could be somewhere between 2 and 3% of GDP higher,
although the likely answer could be somewhere in between, but
I think this needs to be investigated much more.
Q210 Mr Goodman: Let me just take you
back to take-up at the moment. Do you think there is any reason
to think that take-up could get up significantly above the level
that the Government is planning for?
Mr Curry: It could do. One scenario
is that if the amount of income that people get from other sources
goes down and Pension Credit becomes even more important to people
entitled to higher amounts of Pension Credit, then I think it
is in people's interest to claim it and if they are dependent
on it more, because it is a large proportion of their income,
then I think that would increase take-up.
Q211 Miss Begg: I have read your proposals
with regard to the Citizen's Pension and obviously you see that
as a means of addressing some of the anomalies with regard to
women and pensions. One of the problems where it has been proposed
is that many people are proposing it comes in at the level of
the guaranteed element of the Pension Credit. I suspect what would
make the Government baulk at that is the fact that it is very
expensive. Is there a way round that?
Ms O'Connell: If the Citizen's
Pension replaces both the basic state pension and the state second
pension, which in terms of amount is not drastic, that would be
more or less at the same level for most people, then contracting
out would cease and therefore the amount spent on contracting
out rebates is logically added to the amount of Government spend
that is available. The Citizen's Pension could be afforded next
year or this year immediately within that spend provided the transition
is managed in certain ways to preserve accrued rights in the current
system which you would obviously want to do and in other ways
which we talked about in our reports—and we have one coming
out very shortly. As we go into the future with the Citizen's
Pension obviously the cost increases because there are more pensioners
living longer. The cost of that we think would still be within
this funnel of doubt that we talked about for the cost of the
current system. What that means is that while inevitably we will
have to face the fact that either we find that money from somewhere
else outside of pensions or we raise taxes or National Insurance
contributions or we raise the State Pension Age, we probably will
have to do that under the current system or any other pension
reform option as well as with the Citizen's Pension and that is
just something we will have to face because of the demographics.
Q212 Miss Begg: One of the criticisms
from the point of view of women of the way that the Basic State
Pension is formulated is that it is on a dependency model, that
women's pensions still depend on the fact that they are married
and they have a husband or a partner. You have taken the New Zealand
model which perpetuates that whole dependency and, as I understand
it, it is not an individualised pension. Are you talking about
an individualised pension?
Ms O'Connell: No. The New Zealand
model and the model that we have worked to gives an individual
right to every individual, whether you are single or married.
Q213 Miss Begg: That is still a household
gets less than—
Ms O'Connell: The New Zealand
model gives less to people living in a household than if they
were single people. In the model that we have costed for the UK
we have looked at either option, and obviously there is a cost
implication, but what I have just been talking about has been
with both individuals getting the full amount either singly or
living together.
Q214 Miss Begg: In the short-term, is
there a way around the problems that are in the present system
with regard to National Insurance contributions? The contributory
principle has been around for a long time and there is a lot of
attachment to that whole principle. Is there a way of keeping
the National Insurance contributions as the basis but making sure
that more women are included, actually crediting a lot more things
that they do on the caring side than is presently the case?
Ms O'Connell: Firstly, you can
certainly keep National Insurance contributions as the way of
paying for pensions, you do not have to go to paying out through
general taxation, just to make that clear. Your question is about
using National Insurance contributions or credits into the National
Insurance system for eligibility. In theory, it is possible to
extend the list of situations in which you get credits but, in
practice, inevitably that will be very complicated because you
are making yet more judgments about how many hours of caring you
credit in or not: do you get a credit for looking after a child
of six or eight or 16 or 17, those kinds of judgments. The complexity
increases, the amount of record keeping increases, and inevitably
it would only reduce the potential for women to be disadvantaged,
not eradicate it. It is hard to see how that could be retrospective
because somebody would have to prove suddenly that they were doing
25 hours of caring in 1972 or something. It is very hard to see
how it could be retrospective. In terms of what we can do immediately
within a National Insurance system, we are very limited. Any change
would be only partial and would take a generation or two to work
through. As I know you discussed in your previous session, I think
the preference would be to do something around the Pension Credit
rules but then, again, that is the means-testing part of the system,
not the contributory part.
Q215 Miss Begg: Is there anything in
the short-term that you could suggest?
Ms O'Connell: No.
Q216 Miss Begg: In those terms, the Pension
Credit, whose avowed aim was to address some of the pensioners
who were living in abject poverty who were predominantly women
and in the short-term would lift that group of pensioners up to
a minimum level of income, is actually working and it is delivering
on that particular promise.
Ms O'Connell: As a short-term
measure you can see why it was the thing to do. Is it working
or not depends on whether or not you think 75% is the right take-up.
Apart from moving to a Citizen's Pension or trying to replicate
the residency eligibility of a Citizen's Pension within the National
Insurance contribution system, which you could do and you might
stand a better chance of doing retrospectively than the credits
on all the different caring and so on, that might work, but by
the time you have done all that you are back to saying that having
a Citizen's Pension on the basis of something like 10 years' residency
is a more pragmatic solution to be inclusive.
Q217 Miss Begg: One of the questions
we were going to ask was how easy do you think it would be to
define exactly who should qualify for a Citizen's Pension? I think
we have got the figures and I was surprised in our papers today
that there are more than a million rich pensioners who are receiving
the Basic State Pension but living abroad. How do you cover all
of those different aspects of a moving population without pinning
them down and saying, "I am sorry but you have got to live
here for x amount of time" and who qualifies?
Ms O'Connell: We were commissioned
by the NAPF to do a very detailed report on all the aspects of
transitioning to a Citizen's Pension which will be published in
the first week of December, which obviously we would be delighted
to send to the Committee. Very briefly, we think it is absolutely
possible to have a residency entitlement similar to a Category
D pension that exists in the UK at the moment and that the existing
Social Security agreements, which operate with other countries
for people who either live outside the UK after State Pension
age or have been in the UK earlier on in their working life and
then retire outside, would work with a Citizen's Pension with
residency as its entitlement rather than National Insurance.
Q218 Miss Begg: At the level you are
suggesting for the Citizen's Pension, that is not going to get
people out of means-tested benefit, we will still have Housing
Benefit, Council Tax Benefit and a range of various premiums.
The problems that we have or that exist with regard to the take-up
and the disincentives of means-tested benefit will still exist
under your system, so what makes you so sure that a Citizen's
Pension is going to be any more acceptable to the pensioner groups
we have talked to who say they want no means-testing at all and
do not think pensioners should be subject to any kinds of means-test?
Ms O'Connell: A Citizen's Pension
of £105 a week would eradicate means-testing in a way that
guaranteed credit means-test—Sorry, that is not quite right.
Not eradicate, there would still be a residual 2 or 3%, much,
much less than the projections of half to two-thirds of pensioners
who will be on it. There will still be some residual means-tested
benefits through Council Tax and Housing Benefit. The higher you
take the Citizen's Pension, the less of that there will be. Those
types of benefit generally have higher take-up rates and they
are for specific amounts, so are different from being means-tested
for basic income, have less of a disincentive effect because they
tend to be for people in the lower income groups who are not saving
anyway. The issue with Pension Credit is that it is extended up
the income scale, so it is into Middle Britain, it is into the
income groups who are being urged to save if they can, and most
of them can in that sense.
Q219 Chairman: Is there anything that
you think we have missed this morning? Your written evidence is
very comprehensive. We look forward to your future work being
published and it would be useful to have that too.
Ms O'Connell: We have not talked
about the creep aspect which is in our written evidence. I think
that is worthy of attention, the fact that people may not be eligible
on day one of their retirement but are more than likely to be
later on.
Chairman: The point is well made. Thank
you very much for your attendance this morning.
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