Select Committee on Social Security Appendices to the Minutes of Evidence


Further memorandum from Elaine Kempson (SF 46)


  As I indicated in my written submission to the committee, there is little doubt that the Social Fund plays an important role in enabling people in receipt of Income Support and income-related JSA to cope with unexpected expenditure. The recent changes to the way that need is assessed have been a big improvement, although there are still substantial difficulties relating to the fact that the budget is cash limited. This means that some people who are turned down for loans would have been successful if they had applied at a different time of the year. Cash limits are also the reason why repayment levels are set so high and why the calculation of loan entitlement is so complex. These are two of the major failings of the present scheme.

  Social Fund applicants are drawn from the most vulnerable of the people claiming IS or income-based JSA. Compared with non-applicants on these benefits, they have poorer health, greater family instability, less family support and have been living on benefit for longer periods of time (as spelt out in my earlier written submission). It is, therefore, questionable whether their needs should be met by loans at all—or whether grants would be more appropriate. Any grant budget would, however, also be cash limited and would, almost inevitably, mean a return to stringent tests of need at least for some of the awards. This would be a retrograde step.

  As I said in my oral evidence, in a Utopian world benefit levels would be increased so that many of the needs for Social Fund loans would simply not exist. Certainly, there is a strong case to be made for scale rates to be increased. We can, however, safely assume that for the time being there will continue to be a need for something akin to the Social Fund. This should build on its strengths but minimise its weaknesses, by a larger grant component and a self-financing loan scheme.

  Ideally, there should be a considerable increase in the grants budget to allow for a larger number of grants and a widening of the circumstances when they can be made. An obvious example is grants when people are setting up home or are re-housed at the instigation of their landlord or for specific emergencies, such as fire or flood. It would be relatively easy to identify the sorts of contingencies that should be covered—from existing research of applicants and from the experiences of claimant advocates.

  There is also a case for making six monthly grants to those who have been claiming benefit for a year or more—to assist those who live long-term on benefit. This would, undoubtedly be a cheaper option than raising scale rates across the board and a lump sum of, say, £100 would have a far greater effect on household finances than increasing scale rates by £2 a week. The size of the grant would, of course, be related to family circumstances. To remove any possible work disincentive effects, these "bonuses" could accrue and also be paid when people leave benefit and take up employment.

  A further possibility is that these six monthly loans could be paid into a newly opened account with a credit union or other savings and loans scheme such as New Horizons, run by Cambridge Housing Association and Cambridge Building Society. This would give people the added option of borrowing at low interest in the future, using their "savings" as collateral. Our research on credit union members who were eligible for Social Fund loans showed that they tended to be the least vulnerable, on benefit for relatively short periods of time and had less instability in their lives. At the same time, however, it showed that they usually viewed their credit union savings as collateral for future loans—not as a pot of money to be spent.

  If the grants budget were increased and eligibility widened, the Social Fund could then be established as a self-financing source of low-interest loans. This need not be administered by the BA, although it would only work if repayments could be deducted at source from income, as at present. Without this, levels of default would be too high. (In my report to the Social Security Advisory Committee in 1994 Outside the banking system, I set out a number of possibilities for outsourcing the Social Fund.) There is, in fact, much less interest rate sensitivity among people on low incomes than might have been expected. So, assuming that basic needs were met by grants, it would not be necessary for the loan element to be susbsidised, although it would need to be run on a not-for-profit basis. What people on low incomes most value is having access to a source of credit that is structured to meet their needs. That is:

    —  small loans;

    —  repaid in fixed affordable weekly amounts;

    —  payments collected by the creditor—and ideally deducted at source from their income; and

    —  rescheduling of the loan if occasional payments cannot be met.

  They recognise that meeting their needs could be more costly and are willing to pay a little extra for financial services that meet their needs. They do, however, resent the high profits that weekly collected credit companies make from the loans they provide but continue to use them because it is one of the very few sources of credit that is designed to meet their needs.An interest-bearing Social Fund could not only offer loans at a cheaper rate than these companies but, because it would not need to be cash limited, it could offer more affordable repayment levels than the current Social Fund. It would also allow individual credit limits and top-up loans to be determined in the same way as other sources of credit and so avoid the granting of reduced loans that is widespread at present.

  The acceptability of interest-bearing loans would clearly depend upon the Social Fund grant element being adequate to meet the most pressing needs faced by people in vulnerable situations. I would certainly not advocate it if many more grants were not available. Marketing of the interest-bearing loan scheme would also need careful consideration, to avoid deterring applications. Lessons could be learnt from credit unions that market their interest rates as "only 1 per cent a month".

  The combination of more grants and a low-interest self-financing loan fund would, I believe, be an improvement on the current system. If properly funded, it should provide help to people at times when they most need it; offer a regular lump sum to those on benefit long-term, and remove the need for the loan scheme to be cash limited. A further advantage of this approach is that the loan element could then be offered to a wider group of benefit recipients than is currently the case.

Professor Elaine Kempson

Personal Finance Research Centre, University of Bristol

26 March 2001

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