House of Commons - Work and Pensions

Select Committee on Work and Pensions Third Report

10 The Future

194. When announcing its proposals for the Pension Credit the Government stated that 'The Pension Credit will ensure that we can both tackle poverty amongst today's pensioners, and boost the incentive for future pensioners to save for their own retirement.'[427]

195. The impact of the Pension Credit on incentives for future pensioners to save is likely to depend on what individuals expect the relative generosity of means-tested and non-means-tested benefits to be when they reach retirement. Present Government indexation policy implies that the means-tested Pension Credit is likely to become relatively more generous than the contributory Basic State Pension.[428] The recent Pension Commission report states that 'means-testing within the state system is already creating, and if current indexation approaches were continued indefinitely would increasingly create, disincentives to private saving, particularly for some low income savers.'[429] Other evidence to the Committee, for example from the Association of British Insurers, the National Pensioners Convention and the Pension Policy Institute, also echoed similar concerns.[430] PPI, for example, argued that a number of features of Pension Credit meant it did not act effectively as a reward for saving: it is complex and disconnected to the savings decision and its take-up is relatively low (see Chapter 6).[431]

196. In practice current working-age individuals are unlikely to understand the extent to which the interaction of the tax, tax credit, and benefit system strengthens or weakens their incentives to save for retirement. However, as stated in the oral evidence from the Pensions Commission to the Committee, there are at least two possible further reasons why greater reliance on means-tested support could lead to reduced pension saving. First, Adair Turner stated: "the point of view of the distribution channels and of the independent financial advisors and of the sales forces of the insurance companies and banks is actually as important as the point of view of the individual, because the vast majority of pension products … are sold not bought".[432] Second, greater targeting of support for pensioners inevitably involves greater complexity, "the findings of behavioural economics very clearly illustrate that people shy away from complexity and difficult decisions".[433] There is, however, a lack of empirical evidence on the extent to which individuals have changed their retirement saving as a result of the Pension Credit reform. Moreover, regarding the current tax incentives to save for pensions (totalling £14 billion of foregone tax revenue each year), the DWP has previously told us that "There has been considerable academic work on the impact of tax incentives on savings behaviour. Its conclusions can be very broadly summed up as follows: there is little evidence that tax incentives can significantly increase the overall level of saving; but they can significantly affect its allocation', and that broadly, though there is a degree of consensus in the research that there is little evidence of tax incentives increasing the level of savings.'[434] The Committee recommends that the Department, in conjunction with the Pensions Commission, attempts to quantify the relative importance of the tax, tax credit and benefit system in influencing individuals' retirement saving decisions.

197. In evidence to the Committee the Pensions Minister indicated that over the longer term the Pension Credit might not play an increasing role in providing support for pensioners: "in terms of its major impact, I do see Pension Credit as more of a short- to medium-term issue".[435] He added: "That is not to say that, just as there has been ever since the 1948 Act, there will not be a place for incomes-testing way into this century, but I hope it will be of diminishing importance".[436] The Secretary of State has said that in his view "the pension credit and means-testing should be there until we have solved the problem of abject pensioner poverty."[437] In terms of the timing of any reform, the Secretary of State has commented 'if we are looking at Turner, we are talking 15 to 25 years down the track.'[438]

198. What is less clear is at what stage changes to the current indexation strategy, or more fundamental reform of the system, might be deemed appropriate by the Government. The Pensions Policy Institute (PPI) argues that a growing complication to fundamental reform of the state pension system is the Saving Credit component of the Pension Credit. PPI point out that eligibility for Savings Credit is 'growing very fast'.[439] The number of beneficiaries increases from 3.4 million in 2004 to 5.1 million in 2015, a ten-year growth rate of 50%.[440] PPI concludes that 'it will be better to reform sooner rather than later.'[441] On the other hand, PPI also points out that if Guarantee Credit is to continue to be successful in tackling relative pensioner poverty it needs to continue to increase annually in line with national average earnings, so that a pensioner's minimum income keeps up with that in the rest of society.[442]

199. The Pensions Commission points out that while their primary focus is on the private funded pension system it is not possible to consider reforms to the private system without considering possible changes to the state system.[443] However they also point out that "the range of choices overall had to involve either accepting that there would be somewhat higher taxes, or higher average retirement ages, or higher levels of savings".[444] The Committee welcomes the Pensions Commission's joint consideration of the state and private pension systems, and acknowledges that difficult trade-offs will be involved in any further reform.

200. In the report on the future of UK pensions the Committee made a number of recommendations that "aim to create an environment in which people are encouraged to plan sensibly and confidently for their future private pensions in the knowledge that there is a sustainable and adequate Basic State Pension as a foundation".[445] The Committee repeated one of the conclusions from its first Pension Credit report:

"Looking at the Government's pensions strategy overall, we question how the Credit will interact with other policies already announced and whether it is, in fact too complicated a measure to have a significant impact upon future saving behaviour. We are especially concerned that the Pension Credit appears to leave little, if any, role for the State Second Pension. As it is currently proposed, a person could work all their life, contributing to their second pension, and when they retire still be in receipt of means-tested benefit, undermining earlier Government aspirations. We urge the DWP to clarify the role of the State Second Pension as soon as possible."[446]

201. On 2 February 2005, the Secretary of State said the Government would 'set out the principles on which we will base our pension reforms separately in the near future.'[447] The Committee recommends that, in order to help individuals plan ahead, the Government should provide details of the likely direction of future reform and some indication of when this might be possible, for example at what time the current primary focus of eradicating abject pensioner poverty might be sufficiently met.

427 DWP, The Pension Credit: the Government's proposals, November 2001, p 2 Back

428 The Government has announced that the Pension Credit will be increased in line with earnings until 2007-08, while the Basic State Pension is to be indexed by the greater of 2½% or inflation (as measured by the RPI). Since earnings typically grow by more than this the generosity of the Pension Credit should increase by more than the Basic State Pension. Back

429 Pensions Commission, Pensions: Challenges and Choices: The First Report of the Pensions Commission (Norwich: TSO, 2004) p xxx Back

430 Ev 136, Ev 173 and Ev 179. Back

431 Ev 178 Back

432 Q 165 Back

433 Q 166 Back

434 Work and Pensions Committee, Third Report of Session 2002/03, The Future of UK Pensions, HC 92-II, Ev 289 Back

435 Q 342 Back

436 Ibid. Back

437 HC Deb, 13 October 2004, col 309 Back

438 House of Commons, Minutes of Evidence taken before Work and Pensions Committee, Departmental Report. Wednesday 20 October 2004. HC 1171-I Q 31 Back