Memorandum submitted by National Pensioners
Convention (NPC) (PC 04)
SUMMARY
1. Pension Credit has so far failed in its
attempt to get money to a large number of pensioners living below
the poverty level, and encourage younger people to save for their
retirement. A serious barrier to the success of the Pension Credit
has been its unnecessary complexity.
2. Means-testing has a number of inherent
drawbacks which are a barrier to claiming and a disincentive to
saving. Even new take-up targets do not match the expected increase
in eligible households, which by 2008 will still leave well over
a million pensioners without their entitlement.
3. The legislation surrounding the introduction
and application of the Pension Credit has created a number of
anomalies which have undermined the credibility and effectiveness
of the benefit. Despite powerful evidence, the Government seems
unwilling to address these problems.
4. Under the present rules governing the
up-rating of the Pension Credit, by 2050 it is estimated that
71% of the pensioner population will be eligible. On these figures,
Pension Credit is neither administratively sustainable nor politically
desirable.
5. People of working age will seriously
consider whether or not they will be able to build up a substantial
pension fund (£75,000 at today's prices) to avoid means-testing
in retirement. Many young people may conclude that it is better
to spend their money than to save it for an uncertain future.
6. The Pension Credit should be replaced
with a basic state pension paid to all men and women of pensionable
age, set at least at the level of the existing Guarantee Credit
and linked to average earnings. This would make the Pension Credit
and its associated bureaucracy and confusion redundant.
1. INTRODUCTION
1.1 The Pension Credit was introduced on
6 October 2003 amid nationwide protests from pensioner organisations
claiming that it would fail to tackle the immediate hardship felt
by many of today's older people, as well as undermining the principle
of state pension provision for future generations. We believe
that evidence now exists to support this view.
1.2 In addition, most commentators accept
that the Pension Credit also represents some of the most complicated
and confusing legislation ever introduced on the subject of pensions.
This, in part, is one of the main reasons for a lower level of
take-up than the Government had originally anticipated.
1.3 The complex and at times convoluted
regulations governing the application of the Pension Credit have
also given rise to a number of serious anomalies surrounding the
areas of entitlement and level of payment. In particular, there
have been criticisms of denying the savings credit to those single
pensioners aged between 60 and 64, the application of savings
credit to income only above the level of the full basic state
pension, the anomalies surrounding the payment of Pension Credit
to those in residential care, the rules calculating the rate of
interest given to savings, and the sometimes detrimental effect
that receiving Pension Credit can have on the entitlement to other
benefits.
1.4 In this submission, we will therefore
address all the major criticisms of the Pension Credit, alongside
some examples of failure. Furthermore, we will conclude with a
series of recommendations on the future of state pension provision
in this country.
2. BACKGROUND
2.1 The November 2001 White Paper, The
Pension Credit: The Government's proposals, presented the
Pension Credit as the third stage of the Government's pension
reforms, the first two stages being (1) the Minimum Income Guarantee
(MIG) and other measures to provide more money mainly for the
poorest pensioners and (2) "long term reforms that will help
prevent poverty from arising in the future", including the
State Second Pension (S2P) and stakeholder pensions.
2.2 However, whilst the aim of the Pension
Credit was to target additional financial support at the poorest
pensioners, its failure to do so successfully has largely been
because of its reliance on widespread means-testing.
2.3 The attraction of means-testing for
the Government is that, even when the high costs of administration
are taken into account—estimated at £4 per claim each
week compared to just 60p for the administration of the basic
state pension—it is much cheaper than across-the-board increases
in benefits. But means-tests, especially when applied to pensioners,
have a number of inherent drawbacks:
— A large proportion of the population
find both the process and the idea of means-testing demeaning,
intrusive and impersonal.
— No Government has found an effective
long-term solution to the problem of low take-up.
— They discourage people from making
their own provision for retirement as the more you save, the less
you get from the state.
— People who do save for their retirement
resent the fact that they are little better off than those who
do not.
2.4 In its first year, the Pension Credit
has suffered from all these drawbacks and will continue to be
an impractical, undesirable and unpopular substitute for a proper
pensions' policy.
3. THE PENSION
CREDIT EXPERIENCE
Making a claim and take-up levels
3.1 Even before the Pension Credit was introduced,
the Government recognised that it would be impossible to reach
every pensioner who was eligible to receive either the Guarantee
or Savings Credit element of the Pension Credit. Ministers were
widely reported as hoping for a target figure of 73% take-up by
2006.
3.2 However, the experience of claiming
for some individuals, no doubt explains the Government's modest
assessment of likely take-up success:
Pensioner A from Hampshire first applied for
the Pension Credit in October 2003. She rang the claim line for
an application form, but nothing arrived. After one month she
rang again and was told she could complete an application over
the phone. Following this she was told she would receive a decision
within two weeks. This did not happen. She rang again only to
be told that there was no record of her application and she would
have to make yet another claim. Finally, she was awarded a Savings
Credit of 71p a week.
3.3 It is estimated that about 3,750,000
households are eligible for Pension Credit in 2004-05. About 200,000
are in care homes and of the remaining 3,550,000, about 2,350,000
are "guarantee households" with incomes, before Pension
Credit, of less than the guaranteed minimum (£105.45 a week
for an individual and £160.95 for a couple). The remaining
1,200,000 are therefore only entitled to the Savings Credit.
3.4 When the take-up campaign started in
April 2003, there were already 1,750,000 pensioner households
in receipt of the then Minimum Income Guarantee. The ability to
get the remaining 2,000,000 eligible households onto Pension Credit
is therefore the criteria against which the effectiveness of the
benefit can best be judged. To date, with well over a million
eligible households still yet to make a claim, the signs are not
promising.
3.5 Nevertheless, despite the obvious problems
with the current actual take-up level, the July 2004 Spending
Review set an even higher target, stating there was: "a commitment
to increase the number of pensioner households receiving Pension
Credit to at least 3.2 million by 2008." Yet despite this
commitment on paper, this new target would not even match the
expected increase in the number of eligible households which by
2008-09 is expected to be 4,050,000. On current assumptions, even
if the new target is reached, there will still be around a million
pensioners who are not receiving their entitlement in 2008.
3.6 In addition, an inescapable problem
with means-tested benefits is also the large number of unsuccessful
claims. Since the Pension Credit campaign started, about 300,000
applications have been turned down. The administrative costs involved
in dealing with unsuccessful claims are substantial. From the
claimants' point of view, the experience of having a claim refused
is demoralising and the effect on take-up is bound to be negative
because when one person's claim fails, several others may also
be discouraged from claiming. In view of the complexity of the
Pension Credit, the continuing high failure rate is not surprising,
but it remains a serious weakness of the Government's strategy
of mass means-testing.
3.7 To undermine the present arrangements
even further, a significant number of pensioners are receiving
a very limited benefit from the Pension Credit, compared to the
costs involved with administration. Nearly 1 million pensioners
in receipt of Pension Credit are getting less than £5 a week;
13,000 of which are getting less than 10p a week.
Publicising the Pension Credit
3.8 The Government's ability to reach all
eligible households has also been affected by the scale of their
advertising campaign. Between £12-£17 million has been
spent on the marketing campaign for the Pension Credit since October
2003, but one of the lessons of previous take-up campaigns for
means-tested benefits is that, while the short-term results may
be impressive, take-up rates gradually fall once the publicity
campaign has ended.
3.9 Continuing efforts will therefore be
needed to inform those reaching pension age each year of their
entitlement and to encourage them to claim. In the case of women,
they will also need to be told when they qualify for Savings Credit
at age 65.
3.10 In addition, because of the Government's
up-rating policy (see below), large numbers of people who do not
currently qualify at pension age are likely to become entitled
subsequently. In order to reach these people, the Government will
have to commit itself to an ongoing advertising programme for
as long as the Pension Credit exists.
Complexity
3.11 An important barrier to the successful
take-up of the benefit is that it is extremely difficult for most
pensioners to understand how it works, why it works in the way
it does and how much money they might be eligible for. For example,
the Pension Service booklet: "Pick it up. It's yours",
sent to millions of pensioners, does not even attempt to explain
how the Savings Credit element of the Pension Credit is calculated,
but merely indicates the levels of income at which individuals
with specified amounts of savings are more or less likely to be
entitled.
3.12 The Department for Work and Pensions
has admitted that the formula for applying the Savings Credit
is flawed, stating: "The current legislation . . . produces
some unexpected results for those pensioners with a range of income
levels who have some non-qualifying income. Some pensioners receive
a reward of £1.20 for every extra pound of qualifying income
instead of being rewarded by £0.60 for every extra pound
of qualifying income." The cases where this occurs are those
in which the claimant's total income is above the limit for Guarantee
Credit and includes some non-qualifying income (eg maintenance
payments from an ex-spouse).
The effect of Pension Credit on other benefits
3.13 One of the most adverse effects
caused by the complexity of the Pension Credit has been the impact
it has had on reducing the income of some individuals. Despite
the Government's intention in this regard, the credibility and
effectiveness of the benefit have been seriously undermined by
such experiences:
Pensioner B from Sussex asked
her daughter to complete an application form for Pension Credit
on her behalf and in August 2004 was informed that she would be
entitled to an additional £5.73 a week/£22.92 a month
Savings Credit. Less than a month later, her district council
informed her that as a result of this award her Housing Benefit
and Council Tax Benefit would be reduced by £4.60 and £2.28
a week respectively. As a result of qualifying for the Pension
Credit she is now £1.15 a week/£4.60 a month worse off.
3.14 Anomalies such as these clearly
highlight the fact that the declared objective of the Pension
Credit remains fundamentally flawed.
Women and the Pension Credit
3.15 Ministers have repeatedly stressed
that one of the advantages of the Pension Credit is its benefit
to 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 of their greater
lifespan. Two-thirds of those entitled to the Pension Credit are
women and half of these women are aged 75 and over.
3.16 However, whilst it is certainly true
that most poor pensioners are women, many of the poorest women
pensioners have gained little from the Pension Credit. For example,
the fact that they tend to have smaller occupational pensions
means that the Savings Credit has been of less value to them.
Moreover, the relative decline in their pension income (including
the basic state pension) as they get older will also result in
a similar relative decline in the value of their Savings Credit.
3.17 Another glaring gap in the Pension
Credit, 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 by 2020, the Savings Credit is not available
to those aged 60-64. This has meant that a woman claiming her
state pension and Pension Credit at 60 has to wait five years
to receive the promised reward for her savings. Unless this anomaly
is removed, the Pension Credit will do nothing to reduce poverty
among single women pensioners under 65.
3.18 Evidence suggests that a mere 12% of
existing women pensioners receive a full basic state pension in
their own right based on a complete National Insurance contributions'
record. The vast majority therefore have incomes below the full
basic state pension, but because the Savings Credit only applies
to income above this level, part of the income from any savings
that would normally attract the 60% "reward" is excluded
from the calculation of the Savings Credit. Many women pensioners
are therefore being denied the full benefit of their savings.
Residential Care and the Pension Credit
3.19 The Pension Credit has also raised
anomalies when applied to those in residential/nursing homes compared
to older people elsewhere. For example, supported residents whose
income is above the maximum Pension Credit threshold are eligible
for a flat rate £4.50 Savings Credit. However, self-funded
residents whose income is above this maximum threshold are not
eligible for the same flat-rate payment.
3.19.1 Furthermore, self-funded and supported
residents with an income up to the maximum threshold are also
not eligible for more than a flat rate £4.50 Savings Credit
regardless of their savings.
3.19.2 The current arrangements have therefore
created a situation whereby those who would not otherwise have
been entitled to any Savings Credit (supported residents with
incomes above the maximum threshold) will receive an extra £4.50
per week, whilst those residents who, if they lived outside of
a care home would qualify for more than £4.50 a week Savings
Credit based on their income, can only receive a maximum of £4.50.
3.19.3 As the Pension Credit is money awarded
nationally to pensioners with modest savings, it is difficult
to understand why it is necessary to introduce, what is effectively,
cross subsidization between one group of care homes residents
and another. Fairness dictates that all care home residents should
be awarded the full amount of Pension Credit to which they are
entitled, in the same way as all other pensioners of qualifying
age and income living outside a care home.
Interest Rates and the Pension Credit
3.19.4 Many pensioners who qualify for the
Savings Credit element of the Pension Credit have expressed concern
that the rate of interest used to calculate the assumed income
from savings above the £6,000 limit is 10.4% pa. This is
more than double the current high street rates of interest and
falsely assumes a higher income from saving than pensioners are
actually receiving.
3.19.5 It should be recognised that if the
interest rate figure for the Savings Credit was to be more realistic,
the number of people eligible for the Pension Credit would increase,
along with the cost. This is no doubt the Government's justification
for applying such an arbitrary condition.
4. PENSION CREDIT
AND THE
FUTURE
Up-rating policy and the impact on saving and
planning for retirement
4.1 In its April 2002 report on Pension
Credit, the Work and Pensions committee examined the implications
of three hypothetical uprating scenarios set out in the DWP publication,
The Pension Credit: Long-term projections, and urged the
Government to specify its intentions on this subject "to
aid Parliament in its consideration of the Bill and to provide
more certainty to those involved in the long-term planning necessary
for pension provision." Recent Government projections of
the numbers of pensioners eligible for Pension Credit in future
years have been based on the assumption that the Guarantee Credit
would be up-rated in line with average earnings and the Savings
Credit threshold in line with prices.
4.2 The long-term implications of this up-rating
policy are such that as well as increasing the cost of Pension
Credit, it would also substantially increase the proportion of
pensioners qualifying for it. According to the Institute for Fiscal
Studies, 64% of pensioners will be eligible for Pension Credit
in 20 years' time; rising to 71% by 2050. On these figures, the
Pension Credit is neither sustainable nor desirable and means-testing
on such a wide scale is a prospect that no Government should seriously
contemplate.
4.3 Furthermore, without a clear up-rating
policy, it is impossible for people of working age to predict
whether and to what extent they should take Pension Credit into
account in planning for their retirement. For anyone whose retirement
income falls within the scope of the Savings Credit, the value
of an additional £1 of income from pension or savings will
be reduced by at least 40p. Financial advisers need to be aware
of this and to advise their clients accordingly; but they cannot
be expected to offer reliable advice if there is no way of knowing
between what levels of income the 40% tax will bite or how the
Government will up-rate both pensions and means-tested benefits
in the future.
4.4 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
level of means-tested income support. In future, with the means
test extending further up the income scale, a much bigger pension
will be needed to avoid it. According to the actuary Mercer Human
Resource Consulting, people retiring today need a pension fund
of at least £75,000 to avoid means-testing.
4.5 In addition, because under the Pension
Credit the more private income an individual has, the lower the
reward from the state, people of working age, deciding how much
to save for their retirement, will need to take into account the
very real possibility of any additional retirement income being
taxed at 40%. Moreover, as we have seen, there is a serious risk
of the 40% 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.
5. CONCLUSION
5.1 The Government's pensions' strategy
relies on means-tested benefits to fill the gaps in state and
private pension provision. The Pension Credit has been an attempt
to provide additional help to the poorest pensioners and reward
those with modest incomes by counteracting the disincentive effect
on saving for retirement. However, existing evidence and future
predictions suggest that it has failed in its key objectives.
5.2 Money has not reached the poorest pensioners
because they remain among the large number of older people who
are entitled to Pension Credit, but have yet to make a claim because
of the complexity and opposition to means-testing.
5.3 The rules governing the introduction
of the Pension Credit have also produced a large number of serious
anomalies in the system, which whilst undermining the credibility
and effectiveness of the benefit, the Government appears incapable
or unwilling to address.
5.4 Unless there is a fundamental change
of direction in the Government's pensions' policy, the scale and
cost of means-testing increasing numbers of pensioners will become
administratively unsustainable and politically undesirable.
5.5 There are major uncertainties regarding
future up-rating of the Pension Credit, which, 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 hazardous. Many young people may
conclude that it is better to spend their money than to save it
for such an uncertain future.
6. RECOMMENDATIONS
6.1 The basic state pension should be immediately
increased to at least the level of the Guarantee Credit for all
men and women of pensionable age, currently £105.45 a week.
The Pension Credit and its associated bureaucracy and confusion
would then become redundant.
6.2 The basic state pension should be up-rated
annually in line with average earnings or inflation (Retail Price
Index), whichever is the greater, to enable pensioners to share
in the growing prosperity of the nation.
6.3 Over the next five years the basic state
pension should be incrementally increased to a level of one-third
average male earnings and paid to all men and women of pensionable
age, by extending National Insurance contribution credits to those
who have been unable to build up a full contributions' record
due to low pay, part-time working, caring and other domestic responsibilities.
6.4 The State Second Pension (S2P) should
remain earnings-related and based on the SERPS (State Earnings
Related Pension Scheme) re-valued earnings formula to ensure a
fair deal to those employees, particularly women, whose careers
do not conform to traditional work patterns.
National Pensioners Convention
1 October 2004
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