House of Commons - Work and Pensions

Select Committee on Work and Pensions Third Report

2 Background

The Government's Strategy to tackle pensioner poverty

7. In Opportunity for All, the Government notes that while, over the last 30 years, pensioners have generally seen their incomes grow faster than earnings, not all have shared in this. For example between 1979 and 1997, the richest fifth of pensioner couples saw their incomes rise in real terms by around 80 per cent. By contrast, the poorest fifth saw their incomes rise by only 34 per cent.[8] The priority, when the Government came to power in 1997, therefore, was to take rapid steps to tackle pensioner poverty.[9]

8. The Department for Work and Pensions (DWP) explains that initial steps to address this included the replacement of Income Support for people aged 60+ by the Minimum Income Guarantee (MIG) in April 1999.[10] In addition, above inflation increases in the level of the Basic State Pension were made in 2001 and 2002.[11] Households with a person aged 60 or over are entitled to an annual Winter Fuel Payment of £200 (up to £300 if a person is aged 80 or over). In addition, in 2004 there was a one-off payment of £100 for people aged 70 or over to help with living expenses, including Council Tax Bills.[12] The Government's aim was 'to get more money to all pensioners but most to the poorest pensioners, as quickly as possible.'[13]

Pension Credit

9. Pension Credit replaced MIG in October 2003. DWP explains that MIG, 'though effective, was only intended as a short-term measure pending more fundamental reform.'[14] Pension Credit was introduced in order to address some of the key concerns with MIG, and, in particular, the fact that it did not reward saving. Pensioners with incomes at or below the threshold level, lost 'a pound for every pound of second pension they built up'. Capital rules were seen to 'restrict entitlement to extra support' where people had built up 'small amounts of savings for retirement.' In addition, changes were made to the means-test, in an attempt to make it less intrusive.[15] The key objectives of Pension Credit are to:

tackle pensioner poverty;
reward instead of penalise past saving; and
make it easier for pensioners to take up their entitlement.[16]

10. Pension Credit is made up of a Guarantee Credit (almost identical to MIG) and a Savings Credit (which aims to ensure that those who have made some private provision for retirement will be better off than those who made no provision.) The Guarantee Credit, payable from age 60, brings weekly income up to £109.45 a week for a single person, £167.05 for a couple (2005/06 rates). Additional amounts are payable for additional needs such as severe disability (£45.50), for carers (£25.80) and for certain housing costs (such as mortgage interest payments, which are not met by Housing Benefit).

11. In addition, a Savings Credit of a maximum of £16.44 a week for a single person and £21.51 for a couple over 65 is payable to those with qualifying income above threshold level (set at the level of the Basic State Pension). For each £1 of income above this level but below the level of the 'guarantee' (calculated in the same way as the Guarantee Credit), the Savings Credit pays an additional benefit of 60p. If qualifying income exceeds the 'guarantee', the maximum Savings Credit is reduced by 40% of the additional income.[17] The current Government is committed to uprating the Guarantee Credit in line with earnings in the spending round to 2008. The Savings Credit threshold will be uprated so that it remains equal to the Basic State Pension (i.e. in line with the Retail Price Index for the previous September or 2.5% (whichever is higher).[18]

Pension Reform

12. The Pensions Commission was established in December 2002. Chaired by Mr Adair Turner, its remit is to keep under review the adequacy of private pension saving in the UK, and to advise on appropriate policy changes, including whether there is a need to "move beyond the voluntary approach."[19]

13. The Commission published its first report on 12 October 2004. It found that life expectancy was increasing rapidly and would continue to do so. Combined with a forecast low birth rate, it will produce a 'near doubling in the percentage of the population aged 65 and over between now and 2050, with a further increase thereafter.'[20] Faced with this demographic challenge, the Pensions Commission said that society and individuals must choose one or more of the following four options, namely:

pensioners will become poorer relative to the rest of society; or
taxes/National Insurance contributions devoted to pensions must rise; or
savings must rise; or
average retirement ages must rise.

14. Given that the option of poorer pensioners 'appears unattractive', and there are significant barriers to solving the problem through any one of the three options alone, 'some mix of higher taxes/National Insurance contributions, higher savings and later average retirement ages is required.'[21]

15. The 'specific design of the state pension system is not within the Pensions Commission's remit'[22], although options for reforming private pensions 'cannot be assessed without considering both the implications of the state system for private saving' and possible state system changes as an alternative or complement to private system reforms.[23] The Commission expects to publish its second report in Autumn 2005. This will include conclusions on the effectiveness of the existing UK pension system, in particular its private elements, and recommendations for change. It will present conclusions on whether there is a need to expand the role of compulsion beyond 'what is already implicit in the State Second Pension and the contracting-out options.'[24]

16. Following publication of the Pensions Commission's first report, Government ministers made statements about the future direction of pension reform and the role of Pension Credit. The Secretary of State for Work and Pensions said that there were no plans to continue with Pension Credit 'indefinitely'.[25] A paper outlining the principles on which the Government will base its pension reforms is expected in the near future.[26]

8 DWP, Opportunity for all: Sixth Annual Report 2004, Cm 6239, September 2004, p 58 Back

9 Ev 88 Back

10 Ev 88 Back

11 Work and Pensions Committee, Second Report of Session 2001-2002, Pension Credit, HC 638-1, p 7 Back

12 DWP, Opportunity For All: Sixth Annual Report, Cm 6239, September 2004, p 60-61 Back

13 Ev 88 Back

14 Ev 88 Back

15 Pension Service , The Pension Credit: A review of the campaign to May 2004, para 1.4, www.dwp.gov.uk Back

16 Pension Service, The new Pension Credit: A review of the campaign to May 2004, para 1.2 www.dwp.gov.uk Back

17 For more detailed explanation, see Child Poverty Action Group (2004), Welfare Benefits and Tax Credits Handbook 2004/2005, p 498 Back

18 HC Deb, 6 December 2004, col 908 Back

19 Pensions Commission, Pensions: Challenges and Choices: The First Report of the Pensions Commission (Norwich: The Stationery Office, 2004), p v Back