Intergenerational fairness Contents

4Universal pensioner benefits

69.‘Universal’ benefits are available to a whole section of the population as of right, without the imposition of a means test, national insurance contribution requirements or other restrictive criteria. Universality has largely disappeared from working age benefits. As part of the welfare reforms in the last Parliament, child benefit, which was the main universal cash benefit available to all families with dependent children, became subject to a high-income tax charge. 125 Pensioners, however, continue to benefit from a range of cash and in-kind universal benefits:

70.Free TV licenses for people aged 75 and over will cost the DWP £630 million this year—0.3 per cent of total welfare spending in Great Britain, and 0.6 per cent of DWP spend on pensioners. However, as part of the BBC’s latest funding settlement, this cost will begin to be passed from the DWP to the BBC from 2018–19, with the BBC taking on full responsibility in 2020–21. This leaves the Winter Fuel Payment as the main universal benefit that the DWP provides.

Political considerations

71.Lord Willetts and Steve Webb told us of the particular sensitivities around any proposal to reform pensioner entitlements, even in respect of relatively minor elements such as the 25p-a-week state pension addition for those aged 80 and over.129 Steve Webb said:

I did want to get rid of the 25p addition, because I used to get letters every week saying how absurd it was. I had two options. One was to level up and put another 25p on the under-80s pension, and the answer was, “We have no money. We are trying to save billions over here” and the other was to abolish it, which generates the headline, “Skinflint Minister takes pennies off elderly pensioners” and it just felt—like all my 27 predecessors—not worth the bother.130

72.Mr Webb added “what tends to happen with these things is they come in as a gimmick, they stay and get eroded and eroded.”131 The £10 Christmas bonus is a case in point. When first introduced in December 1972, it was worth more than a week’s basic state pension for an individual (£6.75) and almost as much as the married couple’s rate (£10.90).132 Since then the Christmas bonus payment has been frozen in cash terms at £10 and not uprated in line with inflation. As a result, its real annual cost to the Exchequer has fallen by nearly 90 per cent since its introduction (from £870m to £124m in 2016–17 prices), despite the number of pensioner recipients having increased by over 50 per cent over the same period.133

73.The preservation of universal pensioner benefits was a matter of cross-party consensus at the 2010 General Election. The 2010 Coalition Agreement pledged to protect them during the 2010–2015 Parliament at the same time as introducing restrictions to working-age benefits and tax credits. These pensioner benefits continue to be protected in this Parliament, in accordance with the Conservative manifesto pledge. Labour and the Liberal Democrats made similar pledges with the exception of proposals to withdraw Winter Fuel Payment from higher-rate taxpayers which would have affected only around 5 per cent of the eligible population.134

The Winter Fuel Payment

74.Winter Fuel Payment (WFP) is a tax-free, non-means tested annual payment paid to people aged over the female state pension age. Recipients are not obliged to spend it on fuel. The standard rates are £200 per eligible household where the oldest person is under 80 and £300 for households containing a person aged 80 or over.135 In 2015–16 it was paid to 12.2 million individuals in over 8.7 million households.136 It cost DWP £2.1 billion.137

The Winter Fuel Payment and fuel poverty

75.The substantial recent improvements in pensioner incomes relative to working-age households we saw in Chapter 2 have been accompanied by falls in the proportion of pensioner households living in fuel poverty, as shown in Figure 19. In households whose youngest member is aged 60 and over the fuel poverty rate in England has halved in a decade, from 12 per cent in 2004 to 6 per cent in 2014. There has been a particularly large decrease among the over-75s. In the same period the fuel poverty rate among non-pensioner households has remained broadly the same. Now is an appropriate moment to examine the effect of the WFP on intergenerational fairness and whether its retention is warranted.

Figure 19: Households in fuel poverty, by age of youngest occupant, England, 2003–2014

Source: Workand Pensions Committee analysis of DECC Fuel Poverty Trends 2003–2014 Long term trends under the Low Income High Costs indicator

76.We heard concerns that abrupt reductions to the scope or value of universal pensioner benefits could undermine the substantial gains achieved in alleviating pensioner poverty. The Pensions Policy Institute pointed out:

Relatively small changes in pensioner incomes such as changes to universal benefits [ … ] can have significant impacts on poverty rates. There is a high concentration of 1.2 million older adults with incomes only just above the poverty level, the biggest group of people in the UK living on the brink of poverty.138

Other witnesses told us that the provision of universal benefits to pensioners helps to save money elsewhere in the system, notably in the NHS and social care budgets.139

77.Neil Duncan-Jordan of the National Pensioners’ Convention defended the WFP and other universal pensioner benefits as a means of making up the historically inadequate level of the state pension:

You have to look at why we’ve got a lot of these things in the first place. We’ve got a lot of these additional universal benefits because our state pension is widely regarded as inadequate. I mean, £115 a week after paying in 30 or 40 years’ national insurance is not a huge amount of money on the basic state pension.140

Age UK and Later Life Ambitions, a campaigning group, warned that many pensioner households on low incomes might not apply for a means tested WFP.141 Around one third of households entitled to mean tested Pension Credit do not claim it.142

78.The level of the WFP is not connected to fuel costs experienced by households. There is evidence, however, that its label as a fuel payment is effective in prompting households to use it to heat their homes. The IFS estimated that pensioner households spend 47% of their WFP on fuel compared to 3% if they treated the payment purely as cash.143

79.Ashley Seager told us, however, that affluent pensioners did not tend to spend the WFP on fuel:

I met a wealthy pensioner the other day, who said, ‘Me and my friends love it when the winter fuel allowance comes in. We book London’s top restaurant and go for a massive splash-up meal.’ Is that an appropriate use of public resources at a time when we are borrowing £80 billion or £90 billion a year [ … ]?144

Shiv Malik concurred, arguing that recent improvements in pensioner incomes meant that the universal WFP should have been one of the first targets for fiscal savings:

We have a very set image of what pensioners are like, which is that presumably they are all very poor and deprived. That used to be true. It just isn’t true now. [ … ] So why do they need £2.3 billion in winter fuel payments when [ … ] it does not go to fuel? People spend it on whatever they like, whether it be claret or something of far more necessity. [ … ] Why on earth then, if you are cutting, would you cut the education maintenance allowance or the future jobs fund before you cut winter fuel payment?145

80.The Winter Fuel Payment is a universal benefit that is not focused on those who need it most. It is a blunt instrument for alleviating fuel poverty among the least well-off pensioner households and gives a cash payment to many households who do not need it. As its value is fixed in cash terms its real value is set to dwindle gradually over time.

Policy options

81.The Intergenerational Foundation said the WFP should be means tested, arguing that its universality will “result in increasing unfairness and inefficiency as the wealthy members of the baby boomer generation retire.”146 We considered various options for restricting its payment [latest estimate of annual savings in brackets]:

82.These measures would at best only save just over 1 per cent of total social security expenditure on pensioners.151 The estimated savings do not take account of any increase in administrative costs or complexity that may arise from means testing or taxing the benefit. Ashley Seager argued that these factors should not be an obstacle to means testing:

the argument is lazy that it is too difficult and too expensive to means test for pensioners when we means test for every other sector of the population.152

83.Neil Duncan-Jordan told us that “means testing would be inefficient and expensive, and it probably would miss some of those who need the help most.”153 Steve Webb raised practical objections to making WFP taxable:

If you only try to get money off higher rate taxpaying pensioners on the winter fuel payment, there is a risk you will spend more money administering it than you will raise. There are just so few higher rate taxpaying pensioners. That may change over time, but you only get money if you tax all taxpayers, which is half of pensioners. Even then it is not as simple as it looks, because we pay winter fuel payments to households and we tax individuals.154

84.Steve Webb added that the Winter Fuel Payment as Governments have tended not to uprate it in cash terms its real value was progressively dwindling:

The winter fuel payment is £2 billion or whatever, that is not quite yet a rounding error in the DWP, but because it is never going to be increased it will become a rounding error. If we are going to focus on it, let us focus on the £100 billion we spend on the pension, not the bits on the side.155

Neil Duncan-Jordan told us that, when first introduced, the WFP was worth “about a third” of the average fuel bill. It has since fallen to “about an eighth”. He argued that “it was cut by the last Government. It hasn’t kept pace [with inflation] because it is not linked to anything”.156

85.Expenditure on the WFP is falling in real terms as its value is not uprated and the age of eligibility is rising in line with state pension age. In 2016–17 prices the amount spent on WFP has fallen from £2.3 billion in 2011–12 to £2.1 billion in 2016–17 and is forecast to fall further to £1.8 billion by 2020–21.157 Beyond 2021, the overall number of recipients will rise, as will the proportion of recipients who qualify for the higher rate of payment (for those aged 80 and over). However, as demonstrated by Figure 20, the absence of uprating is likely to prevent total expenditure rising in real terms in the long run.

Figure 20: Winter Fuel Payment expenditure, Great Britain

Source: Work and Pensions Committee analysis based on DWP Benefit Expenditure and Caseload Tables March 2016 (outturns and forecasts covering period to 2020–21 inclusive). Projection from 2021 onwards based on: increasing caseload in line with latest ONS projections of State Pension age population in Great Britain (on current legislated SPA timetable); average amount received per claimant weighted to reflect the rising caseload share that qualifies for the higher rate of payment: long-term CPI assumed to be constant 2%

If the WFP were to remain frozen in cash terms in perpetuity, its real-terms value will be eroded by a third over the next 20 years and by a half over the next 35 years.158

86.Successive Governments from both main parties have introduced universal benefits for pensioners, who have a high propensity to vote, for reasons of short-term expediency. As these benefits are not subject to indexation promises their value withers away in real terms, but their symbolic and political importance is more durable. Such measures lead to ill-targeted support, further complicate the benefits system and are far harder to put right than to introduce in the first place. Given the welcome improvements in pensioner incomes and reductions in pensioner poverty seen in recent years, there is no case for future governments to contemplate any increase in the value or range of universal pensioner benefits.

87.The longer universal pension benefits remain protected, the more they may come to be viewed as integral entitlements. Their relatively recent introduction, however, means they should not be seen as sacrosanct elements of the welfare settlement that beneficiaries have paid for during their working lives. Universal pensioner benefits should not be off limits when spending priorities are set in future Parliaments.

125 Local Government Association (IGF0039)

126 HC Deb 14 November 1972 vol 846 c53W [Retirement Pensioner (Bonus)]. The Christmas Bonus is effectively universal for pensioners as it payable to all State Pensions and recipients of Pension Credit guarantee credit.

127 Prescriptions are free of charge to everyone in Scotland, Wales and Northern Ireland. Free eye examinations are available to UK citizens of all ages in Scotland.

129 aQq 36- 8

130 Q37 [Steve Webb]

131 Q38 [Steve Webb]

134 Labour 2015 General Election manifesto, p. 49; Liberal Democrat 2015 General Election manifesto, para 3.4. In 2015 it was estimated that around 600,000 people of WFP qualifying age were higher-rate taxpayers (source: HL Deb 26 Jan 2015 Written question HL4131), around 5% of the relevant age group.

135 For full details of rates and eligibility see

138 Pensions Policy Institute (IGF0055)

139 For example, Age UK (IGF0044), National Pensioners Convention (IGF0034), Independent Age (IGF0048) and For Richer, For Poorer? A review of the evidence on universal pensioner benefits, Independent Age/ Strategic Society Centre research report, 2015

140 Q101 [Neil Duncan-Jordan]

141 Age UK (IGF0044) para 22 and Later Life Ambitions (IGF0043), para 8

143 Beatty et al, “Cash by any other name? Evidence on labeling from the UK Winter Fuel Payment,” Journal of Public Economics, Volume 118, October 2014, pp. 86–96, cited in Institute for Fiscal Studies (IGF0023)

144 Q100 [Ashley Seager]

145 Q252 [Shiv Malik]

146 Intergenerational Foundation (IGF0010)

148 Intergenerational Foundation (IGF0010)

151 Based on total GB pension-age expenditure of £115.6 billion in 2016–17, from DWPBenefit expenditure and caseload tables2016

152 Q99 [Ashley Seager]

153 Q104 [Neil Duncan-Jordan]

154 Q42 [Steve Webb]

155 Q88 [Steve Webb]

156 Q103 [Neil Duncan-Jordan]

158 Based on CPI inflation of 2 per cent per annum.

© Parliamentary copyright 2015

4 November 2016