Select Committee on Work and Pensions Fourth Report



282. Evidence to the inquiry suggested there was widespread support for the Government's overall objectives for pensions reform. As regards the details, however, there was considerable concern about the degree of means-testing and complexity that would remain. These concerns were expressed by a wide range of individuals and organisations, including pensions experts,[373] employer representatives, the insurance industry and organisations working with or representing pensioners.[374]

283. As stated in the White Paper the introduction of the Minimum Income Guarantee and its replacement by Pension Credit has helped reduce the number of pensioners in relative income poverty by 1 million since 1997. A report in 2005 into the Pension Credit by the then Work and Pensions Select Committee said "we welcome the fact that the Pension Credit has increased the incomes of many pensioners."[375] The White Paper commits the Government to continuing to uprate the Guarantee Credit in line with earnings beyond 2008.[376] The Committee acknowledges the increase in pensioner incomes arising from the Pension Credit, and the contribution that this has made to reducing relative income poverty. It welcomes the commitment to continue to increase the Guarantee Credit in line with earnings beyond 2008.


284. A key motivation for the reforms set out in the White Paper is to reduce the spread of means-testing. "If current indexation arrangements continued, the proportion of pensioner households entitled to Pension Credit would increase from around 45% today to around 70% by 2050 […] The potential future spread of Pension Credit could reduce incentives to save for some people. However, it has never been the Government's intention to move over the long term towards a system where a significant majority of pensioners are entitled to Pension Credit".[377] This was re-iterated in the oral evidence given by the Secretary of State.[378]

285. The DWP has projected that under current indexation arrangements the percentage of pensioners eligible for Pension Credit would increase from around 46% in 2004/5 to around 70% in 2050. Under the White Paper arrangements, this is expected to fall to around 29% in 2050. [379]

286. The Pensions Policy Institute disputed these figures - its analysis suggested that eligibility would fall from 50% in 2005 to 45% in 2050. It commented that the White Paper "acknowledges that the number of older people eligible for Pension Credit will be uncertain, but only shows a point estimate calculated as the average of the midpoints of the ranges of outcomes from two different models used." [380]

287. The Committee asked for clarification on how the Department arrived at its projections for Pension Credit entitlement. In response, DWP explained that the starting point for its estimate was that eligibility in 2004/05 is in the range of 43-48%. The White Paper used the mid-point of this range i.e. around 46%. DWP adds that it is confident that "this is a robust estimate and that the reforms will substantially reduce the proportion of pensioners eligible for PC over time. But we need to keep in mind that we are projecting outcomes over 40 years into the future and there is necessarily a degree of uncertainty in the estimates." [381]

288. In a speech on 12 July 2006, James Purnell MP, Minister for Pensions Reform, referred to the fact that there were differing estimates of the impact on means-testing of the White Paper proposals:[382]

    "Far from wanting to ignore this debate, we want to engage with it. This is exactly the kind of issue where we need to address concerns if this policy is to succeed. We will therefore publish our analysis in the autumn, so that everyone can examine the assumptions underlying it."

289. Both projections suggest that the percentage of pensioners would rise under current indexation arrangements and would fall under the White Paper arrangements. The Committee welcomes the fact that under the White Paper proposals the percentage of pensioners likely to be eligible for means-tested support in retirement would be expected to decline rather than increase, while the support available via the non-means tested pension will increase. The Committee notes that there is necessarily a degree of uncertainty in longer-term projections and welcomes the fact that the Government intends to produce analysis of the extent to which its proposals should reduce means-testing in the future. We recommend that this include the range of numbers of pensioner households likely to be eligible for Pension Credit in the future and the assumptions on which the figures are based.

290. An earlier report into the Pension Credit from the then Work and Pensions Select Committee stated that "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 savings 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."[383]

291. As stated in the White Paper a key outcome of the reforms would be to ensure that "Anyone who has been in employment or caring throughout their working life could receive £135 a week in retirement in state pensions - which is £20 a week above the guaranteed income level".[384] Later in the White Paper it states that "These reforms would mean that most people will be able to plan for their retirement in the confidence that the foundation income they receive from the State will provide them with an income above the level of the Guarantee Credit, and will thus ensure that they achieve a higher effective rate of return on any additional private saving that they make".[385]

292. In additional information provided to the Committee, the Department explained that "a low earner or someone credited-in (i.e. always on the flat rate of S2P accrual) retiring in 2053 would need "25 years to clear the Guarantee Credit", and "40 years to clear Pension Credit altogether at the point of retirement". [386] It would appear, then, that people will need a fairly full record of caring or credits - 40 years - to be free of Pension Credit at the point of retirement. Furthermore, because S2P is linked to prices once in payment and the Guarantee Credit is linked to earnings, people may become entitled to Pension Credit in the course of their retirement.

293. The Committee welcomes the fact that individuals with a full contributions record will be able to expect a retirement income above that provided by the Pension Credit Guarantee. In order to aid individual decision-making it would be useful if further details were provided on the types of individuals who might expect to receive a non-means-tested income below that of the Guarantee Credit.

Impact of other benefits

294. As stated above it is clear from the analysis in the White Paper that the proposals are expected to lead to a reduction in the number of pensioners eligible for the Pension Credit. Evidence to the Committee from Sally West of Age Concern stressed the importance of considering the impact of other means-tested benefits - such as Housing Benefit and Council Tax Benefit - as well as the impact of the Pension Credit. [387]

295. The proposals in the White Paper should reduce reliance on other means-tested benefits such as Housing Benefit and Council Tax Benefit. The Committee welcomes this, and would like the DWP to publish figures on the extent to which the proportion of pensioners eligible for any means-tested benefit would be reduced by the White Paper proposals.

Means-testing and incentives to save

296. In terms of the impact of means-testing on incentives to work and save Professor David Miles, Managing Director and Chief UK Economist at Morgan Stanley and visiting Professor of Financial Economics, Imperial College, University of London, stated:[388]

    "My main point of criticism of the Pensions Commission Report is that it does sign up too readily, I think, to this view that the more means-testing there is, the more distortions there are to economic decisions, the less saving will go on, the less incentive people will have to work and save, because that is absolutely not self-evident, and the most convincing piece of research on this says actually something quite different.".

297. The research that Professor Miles was citing is analysis by James Sefton, Justin van de Ven and Martin Weale of the National Institute of Social and Economic Research that was carried out for the DWP. This simulates the impact on individuals' decisions to work and save from moving from a system with a Basic State Pension and a higher Minimum Income Guarantee to a system with a Pension Credit, and to one where the Basic State Pension is increased to the level of the Minimum Income Guarantee. The analysis shows that while moving from a MIG style system to a non-means-tested system would increase both labour supply and saving by individuals in lower income households it would also reduce labour supply and saving by individuals in higher income households, and could have a negative impact on aggregate pension saving.[389]

298. Alison O'Connell of the Pensions Policy Institute characterised the effect of means-testing differently:[390]

    "It is not a mathematical argument, it is not that if you sit down and do your economically rational calculations you can work out exactly what your rate of return will be on Pension Credit and work out whether it is a good thing to save or not, because, of course, nobody does that. The problem is around the uncertainty of what you are going to get from the state in future and just the uncertainty of what the value of your saving will be. The more that Pension Credit extends up the income distribution the more people are in that zone of uncertainty."

299. The Government estimates that some 6% of pensioners will still be entitled to Guarantee Credit only, in 2010.[391] These pensioners will still face a 100% marginal deduction rate.

300. In order to get a fuller view of the impact of the White Paper proposals on incentives the Committee recommends that projections of the proportion of pensioners facing different withdrawal rates are published, and that the DWP commissions or carries out further research on the likely impact of the reforms on individual decisions to work and/or save.


301. The White Paper states that "from 2008 we will uprate the lower threshold of the Savings Credit by earnings. From 2015 the maximum Savings Credit will be frozen in real terms".[392] The objective of this reform is "To ensure that, before implementing the earnings link of the Basic State Pension, means-tested provision continues to be focused on those with small savings".[393]

302. Over the longer-term this change will gradually reduce the importance of the Savings Credit. Mervyn Kohler, Head of Public Affairs, Help the Aged, said "If we get to a position where the Basic State Pension or pensions are providing an income which is pretty close to the guaranteed credit, then clearly there is no logic for a Savings Credit at all; in fact that would be a good move."[394]

303. The Secretary of State agreed that the changes to focus Savings Credit more tightly on those on lower incomes could create a source of pressure on Government in the future:[395]

    "I think that is a question for all of us to address. I have just been pressed over here by someone suggesting that we should continue to restrict the spread of means-testing, and I agree, we should. This is what it means. This is how we do it. You cannot query the means but then desire the outcomes. There is no comfort blanket here, I am afraid."

304. The Pensions Policy Institute said the effect of the policy would be that "low-middle earners currently eligible for Savings Credit will receive less as a result. This will particularly affect older pensioners, who are less likely to have a full BSP and more likely to have low SERPS / S2P pensions; so will find less saving qualifying for Savings Credit. Some pensioners currently receiving Savings Credit will no longer be eligible when entitlement is re-calculated at the end of their assessed income period."[396] Age Concern argued that "care needs to be taken about the timing of the change. Early freezing of the Savings Credit could disadvantage those who have had limited opportunities for savings if they have not had time to start building up better non-means-tested state and private pensions."[397]

305. The Committee welcomes the Government's commitment to restricting the spread of means-testing over time through changes to the Savings Credit but recommends that care should be taken to avoid penalising those with modest savings who have not yet had a chance to build up a good base level of non-means-tested state pension. The mechanisms for achieving this should be placed in primary legislation to build confidence that they will be seen through.

373   Q1 [Alison O'Connell] Q132 [Howard Reed]. See also Q 91, Q 59 Back

374   Ev 253, para 1.7 Back

375   Work and Pensions Committee, Third Report of Session 2004-05, Pension Credit, HC 43-I, p 3 Back

376   White Paper, para 3.60 Back

377   White Paper, paras 1.34-5  Back

378   Q 305 Back

379   Ev 380 Back

380   Ev 406, para 13  Back

381   Ev 381 Back

382   Speech to IPPR, 12 July 2006, Back

383   Work and Pensions Committee, Second Report of Session 2001-02, Pension Credit, HC 638-I, para 86 Back

384   White Paper, p 20 Back

385   White Paper, Annex E, para E.10 Back

386   Ev 379 Back

387   Q 95 Back

388   Q 10 Back

389   Sefton J, van de Ven, J, and Weale M, (2005), The effects of means-testing pensions on savings and retirement, National Institute of Economic and Social Research (NIESR) ( Back

390   Q 40 Back

391   Q 307 [Secretary of State] Back

392   White Paper, para 3.64 Back

393   White Paper, para 3.62 Back

394   Q 100  Back

395   Q 348 Back

396   Ev 406, para 8 Back

397   Ev 318, para 5.2 Back

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