Work and Pensions Committee - Universal Credit implementation: meeting the needs of vulnerable claimantsWritten evidence submitted by the Social Market Foundation

1. About the Social Market Foundation

1.1 The Social Market Foundation (SMF) is a leading cross-party think tank, developing innovative ideas across a broad range of economic and social policy. SMF champions policy ideas which marry markets with social justice and take a pro-market rather than free-market approach.

1.2 In July 2012 SMF was named Prospect magazine’s Think Tank of the Year and Economic and Financial Policy Think Tank of the Year. SMF has written widely on welfare reform and welfare-to-work policy.

2. Summary and Evidence Base for this Submission

2.1 The evidence set out below is based on research SMF carried out during 2012 into the potential impact of Universal Credit on low income households. The research focused on assessing how changes to the payment of benefits and Tax Credits are likely to affect how households budget and are able to build and sustain their financial resilience. The research consisted of 30 in-depth interviews and three focus groups with low income households. The research, which will be published in September 2012, indicates that the Universal Credit could have significant consequences for many low income households.

2.2 The Work and Pensions Select Committee is conducting an inquiry into the Universal Credit and has called for written evidence on the implications of its implementations. Given the scope of SMF’s research, this submission considers the impact of the proposed arrangement for Universal Credit in relation to:

A monthly payment.

Payment monthly in arrears.

A single payment.

Payment to one person in the household.

3. Monthly Payment

The proposed change

3.1 Under the Universal Credit, the frequency of benefit payments will be altered to a uniform monthly payment. Currently, Tax Credits and other benefits such as Income Support and Jobseekers Allowance are paid at different intervals including weekly, fortnightly, four-weekly and monthly.

3.2 The aim is for the monthly payment to reflect the world of work, and to help smooth the transition into monthly paid work, “encourage claimants to take personal responsibility for their finances and to budget on a monthly basis which could save households money.”1

Implications of the change

3.3 SMF’s research looked in depth at how low income households budget. This indicated that the move to a monthly payment will be a significant change for a large number of households: some rely heavily on weekly or fortnightly benefit and tax credit payments, as well as wages, to frame their budgeting, to apportion money and to ration expenditure. On the basis of SMF’s research and previous evidence, it is likely that some households will be unable to cope and will run out of money before the end of the month, leaving them reliant on additional formal or informal credit.2

Low income households’ views on monthly payments

3.4 Our research showed a strong opposition towards the idea of a monthly payment amongst the majority of the participants. In many cases where the household was in favour of the change the budget was already managed on a monthly cycle. The majority budgeted on a shorter cycle—most commonly weekly.

3.5 Households objected to the idea of a monthly payment on the following grounds:

Some households feared they would spend their income before the end of the month. This would leave them at risk of further indebtedness.

Frequent benefit payments act as psychological boosts.

Many rely on the current frequency of payments to help them ration and allocate their expenditure.

Households were already expending considerable efforts to cope on a low income—a compulsory monthly payment was considered to exacerbate this problem.

Regulations and stated aims

3.6 In addition to these unintended and undesirable consequences, it is unclear that the Government will achieve its policy objectives of greater personal responsibility and smoothing the transition into work. First, as indicated above, our research demonstrates that households already devote significant energy to managing their household finances. It is doubtful that a standardised monthly payment will make them take greater responsibility.

3.7 Second, there is little compelling evidence that a standard monthly payment will necessarily prepare individuals for the world of work. There is some evidence that shifting from frequent payments to a monthly salary can prove difficult.3 However, it is unclear that the reform will smooth the passage to work for the population under consideration. As the Government’s own figures recognise, only half of those paid £10,000 or less receive a monthly wage;4 four in 10 of those in the bottom two earnings quintiles receive their earnings weekly. These figures should be set alongside the low earnings that out-of-work benefit claimants are likely to receive when they move into work.5

Ability to cope

3.8 Across our sample, households varied significantly in their ability to cope with the proposed monthly payment. The research identified three principal groups:6

those who are already Prepared;

Adaptors for whom monthly payments would be a challenge but who could respond confidently; and

the Exposed who felt they would be unable to cope and were at risk of running out of money and taking on additional debt due to a number of factors.

3.9 Characteristics that determined households’ ability to cope included: their level of forward planning; the length of their current budgeting cycle; their level of financial engagement; and the degree to which their financial management was structured around the current benefit system. Additional characteristics that may render households vulnerable include: lack of informal support from family or friends; lack of experience of changing in the past; low levels of confidence; high levels of indebtedness; being unbanked or being unready to use the full functionality of bank services.

3.10 The Government hopes to manage these problems through a “Payments exceptions policy” and through the availability of more appropriate financial products that can offer automated facilities.7 The Government’s payments exception policy would provide an alternative method of transfer (frequency or destination of payment) for individuals considered unable to cope with the change.

3.11 Financial products—such as “jam jar accounts”—are likely to be of significant help to those who are ready to engage with mainstream financial services. However, as the literature and our research show, a significant number choose not to use banking products currently—at least to their full potential. This represents a large proportion of the population: 1.54 million have no access to a transactional account and 0.95 million have only a basic bank account.8 Many more deliberately choose to deal in cash. Even assuming that a private market for such accounts is viable (and this seems doubtful), they will not help the whole claimant population, including many of the most vulnerable.

3.12 The Government has stated its readiness to develop an alternative payment structure for individuals who require specific support. The Draft Regulations state that screening will be carried out “so that only those claimants who have reasonable grounds for exceptional payment arrangements reach a human decision maker. To ensure exceptional payments are targeted towards those claimants who would benefit most from such an approach, we are considering using a criteria-based screening process.”9 SMF’s research suggests that developing such criteria will be extremely difficult given the very varied circumstances and characteristics of households that can determine vulnerability, as indicated in paragraph 3.9 above. The policy will be drawn either towards a narrow definition of vulnerability and therefore leave a large number of households financially exposed, or it will have to go to great expense to identify and then offer alternative arrangements to a very large proportion of claimants.

3.13 SMF’s research is exploring whether the Government could use a behavioural nudge to steer households towards a monthly payment whilst also offering an opt-out for those that would value a more frequent payment. Such a policy would recognise the importance that claimants place on “personalisation” in the new benefit system, as evidenced by recent Department for Work and Pensions (DWP) research.10 SMF’s own research found very strong support for the concept of choice in terms of frequency of payments, with claimants themselves volunteering the concept in the group discussions. Finally, such a policy would reduce significantly the negative impact of the Universal Credit reforms on the financial resilience of low income households with all the social and financial consequences that entails.

3.14 If such a system was adopted, policy-makers could also consider developing a portal through which claimants could personalise their payments further: such as third party payments.

3.15 The SMF would be pleased to present the evidence in more detail to the Work and Pensions Select Committee if invited to do so.

4. Payment of Universal Credit Monthly in Arrears

The proposed change

4.1 The Universal Credit will be paid monthly in arrears, with “earnings information collected by the end of the claimant’s assessment period.”11 The Claims and Payments Memorandum states that: “The assessment period for Universal Credit will run from the effective date of claim and each subsequent assessment period will begin on the same date of the month” and that the “assessment periods will always be one month in length”.12

4.2 This would allow the Government to calculate the earnings of a household every month—by accessing its PAYE (Pay as You Earn) records—and to adjust its Universal Credit payment up or down accordingly.

Implications of the change

4.3 There has been little discussion about the potential implications of the introduction of a rolling assessment and monthly payment in arrears. Theoretically, this could have four positive outcomes: households would have to complete fewer forms; earners would feel the benefit immediately of working more hours and would see that “work pays”; households whose income fluctuates seasonally over the year would see fewer peaks and troughs; and, the much-reported problem of overpayments and underpayments could be rectified.

4.4 However, there are likely to be significant unintended consequences, even on the most optimistic assumptions about the success of the Real Time Information (RTI) system. Households will have their earnings assessed every month, but they will also be paid monthly payment in arrears seven days after the end of the assessment period. Someone on a weekly wage who is subsequently made redundant could face over a month waiting for their revised Universal Credit payment. Many would have little alternative but to go into debt, with all the potential consequences that can entail. Considerable thought will have to be given so that all those who may find themselves in this predicament can access early financial support through DWP’s “Short-term Advances” and “Budgeting Advances”.

5. Single Payment

The proposed change

5.1 The aggregation of various in-work and out-of-work benefits and Tax Credits into one Universal Credit award will mean households receive a larger, single cash transfer from the government on a monthly basis.

5.2 The logic of a single payment is that it will increase take-up by making benefits simpler for claimants to understand and by auto-enrolling a claimant on the full suite of benefits to which they are entitled, whilst reducing administrative costs. The Government has forecast that the Universal Credit will reduce administrative costs by £500 million a year through reduction of duplication and greater efficiency.13

Implications of the reform

5.3 The majority of interviewees were positive about the introduction of a single payment and believed it would reduce time on exhausting and complex form-filling as well as interaction with different government departments, which they welcomed, especially as many felt that they were constantly passed around different departments and that staff were insensitive and impersonal.

5.4 However, as was noted by some interviewees, the single payment, whilst reducing complexity, would also aggregate the risks of system failure. At least in the case of multiple income streams, if one part of the system fails, claimants are not exposed to so much financial risk.14

5.5 A move towards a single payment with no breakdown of the different components reduces the potential for the positive effect of labelling. Evidence shows that the labelling of benefits leads to positive behavioural responses. For example, analysis by the Institute for Fiscal Studies has revealed that the labelling of Winter Fuel Payment led to a significant expenditure on fuel from that cash transfer.15

5.6 Due to this reliance on the existing payment schedule, our research suggests that the single payment may be disruptive to some households. Its negative impact is likely to be mitigated in part by the fact that Child Benefit was the transfer our interviewees hypothecated most often, and this will remain outside the Universal Credit. However, this does not mean that the Government should abandon considering how it can “nudge” households towards socially-desirable expenditure and help them apportion by providing information on the components of their benefit payment.

6. Claims to Universal Credit by Joint Claimants

The proposed change

6.1 Where two people claim Universal Credit as a couple, the Universal Credit Regulations propose that the couple make a claim jointly.

Implications of the regulations

6.2 The reforms are likely to lead to a significant change to which partner in a couple household receives benefits and Tax Credits. Different benefits and Tax Credits can currently go to different members of the household. Data from HMRC and DWP shows that: in 85% of couple households who receive the transfer, Child Tax Credit is transferred to a female payee;16 in 87% of couple households who receive the transfer, JSA (Jobseekers Allowance) is claimed by the man.17

6.3 Our research and existing academic studies indicate that the single household claim could be problematic for a minority of households. A small number of households expressed real concerns about how the benefit money would be distributed in their house if the money was no longer allocated to specific members of the household as it currently is. Aside from violent domestic abuse, these concerns are likely to arise in the following circumstances:

Where financial affairs are separately managed within the household, as is the case with many new and cohabiting couples, with little sharing of information on income and expenditure.

Where there is a lack of certainty about who would end up wanting or being able to lead the household finances and budgeting process.

Where there is mistrust of one partner’s ability to spend money in the interests of the whole household.

Where there is concern that the single claim could be used to exert power and control within the household.

6.4 Economic abuse and financial imbalance within the household can lead to a partner and, where the partner is the principal carer, dependents receiving less or even insufficient income to live adequately. The Universal Credit draft Regulations include a number of welcome safeguards. First, both members of a couple will have to sign the Universal Credit claim.18 Second, there is provision in the regulations for the Secretary of State to pay the Universal Credit to someone other than the claimant or to split the payment between the partners in a couple. This is likely to be feasible in instances of criminal domestic abuse. However, in cases of economic abuse or severe financial imbalance—where a member of the household is denied access to income or where the benefit payment is used as a lever for exerting control—it is unclear what evidence base the Secretary of State would wish to see this exception invoked.

6.5 The academic literature suggests there could be more subtle implications from a single claim. First, the Government has confirmed that “particularly in low-income households…men sometimes benefit at the expense of women from shared household income”. 19 A single claimant could exacerbate this. Second, there is a wealth of evidence from the UK and abroad to suggest that when women receive benefits, this is more likely to lead to higher expenditure on children. A single claimant could thus undermine expenditure on children. Third, it could also reduce the exposure of some people to financial management, which could have negative consequences in the case of separation or bereavement.20

6.6 In addition to the powers residing with the Secretary of State, there may be a case for claimants to be given a choice to split payments if they feel this would help their budgeting and financial arrangements.

17 August 2012