Select Committee on Work and Pensions Minutes of Evidence


Memorandum submitted by Help the Aged (PC 15)

SUMMARY

  1.1  With a price tag of £2 billion a year, the Pension Credit proposals represent a welcome financial commitment from the Government to tackle the problem of pensioner poverty. However, Help the Aged believes there are more effective ways of spending £2 billion and that the best way to reward savings, protect pensioners against poverty, and maintain dignity and independence in older age is through a boosted State Pension.

  1.2  The place of the Pension Credit is to rationalise the anomalies thrown up by the MIG, which has left a tier of pensioners with small savings feeling cheated for their former attempts to be prudent and socially responsible. So to ameliorate the perverse incentives of the means-tested guarantee credit, it is now necessary to introduce another means-tested savings credit. This in turn will produce anomalies: wherever you draw the line means-testing of pensions is divisive, creating winners and losers.

  1.3  One of the most major concerns the Charity has with the proposals is that very large numbers of those entitled to the Credit will not receive it. All the evidence suggests that there are large numbers of pensioners who are resistant to means-testing. Help the Aged believes it is extremely foolhardy of the Government to embark on a major expansion of means-testing of pensioners, whilst it has no evidence that it has managed to substantially improve levels of take-up of existing means-tested benefits.

  1.4  The claims and assessment process will be hampered both by the large numbers of claimants to be processed and the complexity of the benefit. Improvements can be made by the DWP to make the claims process easier, but they can never remove the fundamental barriers to claiming inherent in any means-tested system. Help the Aged is very concerned that the Pension Credit could flounder under the heavy weight of its own administration.

  1.5  The levels of the Pension Credit will continue to be set at arbitrary levels dictated by financial and political expediency rather than any objective or independent assessment of what income pensioners need to avoid poverty. Nor will the process of uprating clarify the matter. This, coupled with low levels of take-up, means that the Pension Credit can never be a `guarantee' against pensioner poverty in the short or long term.

INTRODUCTION

  2.1  Help the Aged was set up in 1961 to respond to the needs of poor, frail and isolated older people at home and overseas. As a national organisation we campaign with and on behalf of older people, raise money to help pensioners in need and provide direct services where we have identified a gap in provision.

  2.2  Help the Aged welcomes the Work and Pensions Select Committee's timely inquiry into the Government's Pension Credit proposals and is very pleased to have the opportunity to contribute. The Charity also welcomes the specific list of issues that the Committee expects to include within its inquiry. This response aims both to address the detail of many of these issues and to consider the Pension Credit proposals in the wider context of the debate about the Government's broader agenda and pensions reform.

  2.3  Help the Aged welcomes the Government's recognition of criticism from the Charity and others, that the present benefit system for older people punishes those with small or moderate savings. These proposals for a Pension Credit can be seen as a necessary consequence of the Government's policy on raising the Minimum Income Guarantee (MIG) in line with earnings, whilst only raising the State Pension in line with prices.

  2.4  With a price tag of £2 billion a year, the Pension Credit proposals represent a welcome financial commitment from the Government to tackle the problem of pensioner poverty, and shows that pensions have rightly moved up the political and policy agenda. However, Help the Aged believes there are more effective ways of spending £2 billion to meet the Government's twin objectives of tackling pensioner poverty and rewarding saving.

  2.5  Help the Aged continues to believe that the best way to reward savings, protect pensioners against poverty, and maintain dignity and independence in older age is through a boosted State Pension funded by National Insurance contributions. The State Pension should be set at a minimum 'decency' level, determined by an independent Pensions Authority. This would provide a platform upon which occupational and private pensions and savings should be built to provide for anything beyond this minimum in retirement. The Pension Credit will bring welcome benefits to those who receive it, but will take the UK pension system further away from this model.

  2.6  Neither do these proposals appear grounded in the consultative and collaborative principles which the Government sought to achieve in its Better Government for Older People programme. Help the Aged believes that if the Government had asked older people themselves how best to spend £2 billion on pensions they would not have found many suggesting this sort of complex scheme.

The Government's Pensions Strategy

  3.1  The Government's pensions strategy was crystallised in the 1998 Green Paper: "work for those who can, security for those who cannot". Clearly emphasis was to be put on work, and though the rewards from work on personal pension formation and the development of savings for consumption in older age. Hence we have seen ISAs, Stakeholder Pensions and now the Pickering review of occupational pension schemes. All of these are optional, and there is a widely held belief that without a greater degree of compulsion the priority which employees accord to pensions is low, and falling. This must be addressed.

  3.2   MIG, S2P and now the Pension Credit represent a raft of remedies to underpin the second objective, to provide security. The one thing they all have in common is that they are not the basic State Pension, which has become almost an irrelevance, despite the mantra constantly recycled in Government publications and speeches that the State Pension is the cornerstone of its pensions policy.

  3.3  The place of the Pension Credit is to rationalise the anomalies thrown up by the MIG. Having with MIG (which it now, it seems, should be referred to as the guarantee credit), produced a significantly better deal for pensioners with no savings or personal provision beyond the State Pension, a tier of pensioners with small savings will feel traduced, even cheated, for their former attempts to be prudent and socially responsible. So to ameliorate the perverse incentives of the means-tested guarantee credit, it is now necessary to introduce another means-tested savings credit. This in turn will produce anomalies: to single out two areas, there is the treatment of people between 60 and 65, qualifying for one credit but not the other, and the treatment of capital marginally improved by the abolition of the upper capital limit but still very muddy. Further measures can be expected as these issues become more apparent and need redress. Wherever you draw the line, means-testing of pensions is divisive creating winners and losers

  3.4  The introduction of the new Credit is coinciding with the reform of the Pension Service and a large chunk of the Bill is concerned with establishing `light touch' five year Credit entitlements. The complexities and caveats embodied in these clauses belie their light touch intention, and add a further level of bureaucratic obfuscation to the torturous methods prescribed for calculating the credit in the first place. Help the Aged has serious doubts about the technological and human capacity of the DWP to deliver the service to which it is aspiring.

  3.5  Thus far, the evolution of the Government's pensions commitment "to provide security to those who cannot [save]" has been quite generous, but seems to entail successive strips of elastoplast rather than a coherent and principled policy. A question remains about the sustainability of these first aid measures over the medium and longer term, and whether today's employees would or should place any trust in this structure as part of their pension planning. Current pledges linking the guarantee credit to earnings and defining the savings credit as a derivative of the guarantee credit, will draw half the older population into this system in 2003, and increasing numbers in succeeding years. Future Chancellors will look sharply at this increasing expenditure, which, though it may be deserved, is enshrined in regulations (rather than in defined entitlements), so can be taken away as freely as it was given.

  3.6  In sum, given the points raised in these preceding paragraphs, Help the Aged is able to give only moderate enthusiasm to this measure. The Charity's preferred choice, to meet the Government's "provide for those who cannot" pledge, would be less of this interlocking web of arbitrarily determined means-tested benefits, and rather a cool, rational review of the National Insurance contributory scheme and the statutory entitlements flowing from the National Insurance Fund.

Levels of Take-Up

  4.1  Help the Aged welcomes the Select Committee's desire to focus on the likely levels of take-up of the Pension Credit, and believes that benefit take-up is extremely important issue for a number of reasons:

  • Older people are more likely to be living in poverty than people of working age. According to the latest Government figures 28% of pensioners live on incomes below the official poverty line. Older people differ from most other groups in that they have almost no other way of increasing their income—other than through state help.

  • Older people are less likely to be receiving the benefits they are entitled to than people of working age. This is particularly so for Income Support (MIG), where pensioners are much less likely to be claiming their entitlements than younger people.

  • Worse, the proportion of older people who are entitled but not claiming has been increasing in recent years. Older people are now less likely to be claiming their entitlements than they were when Labour came to power.

  • There is a matter of principle: older people should receive what is rightly theirs. The money to pay these benefits has been earmarked by Government and Parliament for older people and should reach those who are eligible.

      Older people living on incomes below the level of the minimum 'guarantee' and not claiming MIG, or in the future the Pension Credit, are by definition the very poorest pensioners in society.

  4.2  One of the most major concerns the Charity has with the proposals is that very large numbers of those entitled to the credit will not receive it. All the evidence suggests that there are large numbers of pensioners who are resistant to means-testing. The Government's own research on MIG entitled non-recipients (ENRs) found that even after they were told they were entitled to MIG 25% of ENRs still would not claim. Sixty per cent were categorised as having `attitudinal resistance'—ie resistance beyond simple inertia or lack of knowledge.[18] The Government has yet to present any evidence that DWP take-up campaigns have had any impact on these very resistant groups.

  4.3  The introduction of the Pension Credit will bring several million more pensioners into the means-tested system. Help the Aged sees no reason why this new group would be less resistant to claiming than those already entitled to the MIG. In fact, they may well prove to be more resistant. This new group will be more likely to have occupational and private pensions and therefore may be less likely to see themselves as the kind of people whom benefits are aimed at, or to assess themselves as eligible. Because wealth as a pensioner is strongly linked to wealth during one's working life, they are less likely to have had dealings with the social security system in the past. Negative perceptions and unfamiliarity with claiming and the claims process could therefore be higher in this new group.

  4.4  Figures for the Government's major take-up campaign indicate that while hundreds of thousands of people were prompted to claim only a relatively small proportion were successful in their claim. Many of those who will be eligible to the Pension Credit will be people who have previously applied unsuccessfully for the MIG. Given that one of the main reasons older people give for not applying for benefits is a dislike, or fear of being turned down, there is likely to be a tough job ahead in persuading those who have previously been refused to apply again. With the Pension Credit's rapidly extending eligibility, the problem of persuading previously unsuccessful applicants to reapply will be a continuous one. In addition, many of the newly entitled will only be eligible for a few pence per week help, and therefore may decide it is not worth the hassle.

  4.5  The present levels of take-up of means-tested benefits by pensioners are unacceptably poor. The Government's latest estimates of take-up suggest that between £930 million and £1,870 million worth of means-tested benefits went unclaimed by pensioners during 1999-2000. The numbers not claiming their entitlements are increasing. When the Government introduced the MIG in April 1999, bringing many pensioners into Income Support entitlement for the first time, the result was that the upper estimate of the numbers of ENRs leapt by 100,000, whilst the number of actual recipients fell by 20,000.[19] This suggests that the real effect of increasing entitlement to means-tested benefits, as will occur with the introduction of the Pension Credit, is not to increase the number of recipients, but merely the numbers of non-claimants.

  4.6  The Government says that the Pension Credit is supposed to bring £2 billion extra into the pockets of pensioners each year. However there is already almost £2 billion of means-tested benefit that is not claimed by pensioners each year. The reality is that much of this £2 billion worth of Pension Credit will never reach pensioners pockets, and will remain safely back at the Treasury. However, the administration costs both ongoing and of introducing the Pension Credit will undoubtedly be very high. In contrast, the administration costs of putting £2 billion on the State Pension would be negligible. If the Government does become really serious about increasing take-up of the Pension Credit, then this take-up work is also very likely to prove expensive. Again, this can be contrasted with the State Pension, for which take-up is not an issue.

  4.7  Help the Aged welcomes the real efforts that the Government has made to make it easier for pensioners to claim the MIG over the last few years, and has continued to welcome opportunities to positively contribute to the process of change at the DWP. However, the process is still at its very early stages and will require fundamental long-term changes in attitudes, structures and staff training before it is successful.

  4.8  Take-up must feature extremely prominently in any measure of success of the Pension Credit. Yet the Government has not made any commitment on levels of take-up of the Pension Credit. Help the Aged believes that a specific commitment to reach take-up levels of at least 90% within 2 years of the introduction of the Credit should be written in to the State Pension Credit Bill.

  4.9  Help the Aged believes it is extremely foolhardy of the Government to embark on a major expansion of meanstesting of pensioners, in terms of expenditure and numbers of potential recipients, whilst it has no evidence that it has managed to substantially improve levels of take-up of existing means-tested benefits amongst the pensioner population. The Government has recently been full of good intentions when it comes to making plans to improve take-up of MIG (although there is a noticeable absence of any plans for other benefits). But it is yet to prove it has the correct approach or the financial or attitudinal commitment to successfully boost take-up. Persuading the very many newly entitled to the Pension Credit to claim will be the biggest benefit take-up challenge to date. All the evidence suggests that there is a significant group of entitled non-recipients who will resist all attempts to persuade them to make a claim for the MIG and Pension Credit. One of the major failings of the Pension Credit is that many of those who are entitled will never receive the benefit.

Claiming and Assessing Entitlement

  5.1  The claims and assessment process will be hampered both by the large numbers of claimants to be processed and the complexity of the benefit. Improvements can be made by the DWP to make the claims process easier, but they can never remove the fundamental barriers to claiming inherent in any means-tested system. The Charity believes there are many issues of detail about eligibility rules that need to be clarified by the Government, such as how to treat savings (see 5.4) and how the Credit should interact with other benefits and other state means-tests such as in social care (see 5.3). The Pension Credit will present a huge administrative challenge to the fledgling Pension Service, in terms of managing the assessment and reassessment process, as well as a challenge to many of the millions of pensioners who will have to deal with this administration.

  5.2  The DWP has taken a number of useful steps towards making it easier for pensioners to claim the MIG, such as changes to the forms, improved leaflets and the new MIG claim line, all of which Help the Aged has constructively supported. Ministers have now said they want the Pension Credit to be even easier to claim than the MIG, and the Charity welcomes this commitment from the Government to further improve the service it offers. But whatever changes are made in this way, many of the major barriers to claiming means-tested benefits can never be overcome, because they are an essential part of means-testing. Whatever improvements to the process are made, applying for the Pension Credit will still require older people to give over detailed personal and financial details to the Government and send off important private documents for verification. For instance, the changes to the MIG claim forms made them easier to understand by improving the layout and design. However, shortening the original forms simply led to the explanatory notes greatly expanding and extra `follow-up' forms being created to deal with sections that were left out of the original.[20] Creating a much shorter, less intrusive form overall was not possible because any thorough means-testing system must find out all about the claimant's financial and living arrangements.

  5.3  The real complexity of the Pension Credit could be in the way it relates to other important benefits such as Housing Benefit and Council Tax Benefit. Help the Aged is pleased that the Government appear to have agreed to the principle that recipients of these benefits should be able to gain from the savings credit without losing any other benefit entitlement. However, what also urgently needs consideration is the Pension Credits interrelation with the other big means-test facing older people: the charging system for residential and domiciliary care. The principle of rewarding saving must also apply to the very many older people who use care services (762,586 in England alone in 2001).[21] However, if recipients have to hand back their savings credit award in the form of care charges then this will make a mockery of the Government's objective of making means-testing fairer for all pensioners and rewarding saving. If the DWP doesn't work with the Department of Health to greatly improve the way social security charging works, then the Government will be guilty of the old charge of taking away with one hand what it gives with another.

  5.4  Help the Aged welcomes the Government's proposal to half the assumed rate of income from savings from 20% to 10%. However 10% is still well above any real returns pensioners can expect, and therefore assumes pensioners must draw down on their savings, whilst receiving the Pension Credit. This makes little sense for a benefit that is supposed to be about rewarding saving. Help the Aged therefore believes that the level should be set at an even more realistic level, such as 5%, which would better reflect peoples actual returns.

  5.5  Between now and 2004 there are an unprecedented number of large-scale delivery and organisational challenges that the Service will have to face. There is concern that the Pension Service may not be able to cope with all these changes, and that as a result services to pensioners could be hit, and the reputation of this brand new service and its new flagship benefit tarnished before it has even got off the ground. The main challenges are:

  • Organisational reform, with what could be a painful and complicated `divorce' between the Pension Service and the rest of the old DSS, and staff having to adapt to new styles and systems of working, and new organisational structures.

  • The switch to Automatic Credit Transfer with all the logistical problems involved in setting up the technology at post offices and in persuading large numbers of pensioners to set up new bank accounts.

  • New computer systems being introduced, which are crucial to the success of the Pension Service and Pension Credit, when it is widely acknowledged the DSS/DWP has a poor record when it comes to successfully implementing new technology, as previous Select Committee reports have shown.

  With the introduction of the Pension Credit the Pension Service faces an unprecedented task in promoting take-up of the benefit, and with administering the new complex benefit with means-testing increasing from a third of all pensioners to a half.

  The evidence of the stress and financial hardship that pensioners can suffer from failures to implement new technology and administrative changes in the social security system is only too obvious when you consider the current problems in Housing Benefit administration and the NIRS2 computer system failure. Help the Aged is therefore very concerned that the Pension Credit could flounder under the heavy weight of its own administration.

Re-assessment and fixed awards

  5.6  Help the Aged welcomes the Select Committee's decision to look at the frequency of reassessments and Government's proposals to award the Credit for fixed periods. Any attempts to make the meanstest less intrusive and demanding on benefit recipients is welcome. But of course, to a certain extent abolishing the weekly means-test is a misnomer because the reality is that nobody fills out forms or is re-assessed every 7 days. Benefit awarded for fixed periods of up to 5 years could offer greater simplicity to the claims process and more security to the recipient. However there is concern about how changes of circumstances during the period of a fixed award would be treated. The analogy the Government makes with the tax system does not necessarily work as we are talking about people with different incomes: people on average or higher incomes can afford to pay extra tax one year, because they underpaid last year or in the knowledge they will get the excess back the following year. However, people existing on or just above income support levels cannot afford to be over or under paid their benefits. Even small reductions in income can cause great problems to those living on or near the breadline.

  5.7  Many older people fear being overpaid benefits as this will leave them with a debt that they are unable to pay off without severe hardship. There can also be a stigma attached to being overpaid, with people feeling they are in trouble for claiming what was not rightfully theirs, with the implication they have been greedy or `fraudulent'. The demand for the return of an overpayment can be a very stressful event for some older people. Therefore, Help the Aged believes that the fixed period awards should be implemented in a way that protects older people from these occurrences.

  5.8  However, in most cases the trend will be in the opposite direction, with people's incomes falling during the period of the award and therefore people becoming entitled to more Pension Credit than they are receiving. In fact, the proposed assumed rate of return on savings of 10% forces pensioners to draw down on their saving, thereby increasing their entitlements. Therefore, Pension Credit recipients need to be encouraged to put themselves forward for a reassessment whenever they believe that their income or savings have fallen significantly. Otherwise there will be widespread under-claiming, which although likely to be relatively small amounts in each individual case, across the millions of Pension Credit recipients would result in a significant amount of Pension Credit not being paid out each year. This would be another form of non-take-up, with many missing out on their full entitlements, and millions of pounds being retained at the Treasury.

The Longer Term

  6.1  The levels of the Pension Credit will continue to be set at arbitrary levels dictated by financial and political expediency rather than any objective or independent assessment of what income pensioners need to avoid poverty and maintain dignity and independence in older age. The various levels of the guarantee credit and its premiums although much boosted, remain divorced from any such assessment, whilst the levels of savings credit awards and the level of income at which entitlement begins or ends are merely products of a formula related to the level of the Guarantee and the full State Pension. Neither will the process of uprating clarify the matter. Whilst we have a commitment to increase the Credit in line with earnings for the next few years, this may or may not be the case afterwards. Indeed, it is unclear whether the Pension Credit will still be around, or be radically different in 10 years' time. This, coupled with low levels of take-up, means that the Pension Credit can never be a `guarantee' against pensioner poverty in the short or long term. This policy does nothing to create a contract between citizen and state on pensions or imbed a system of concrete entitlements. In short, the Pension Credit has not been designed with a view to the long-term.

Incentives to save

  6.2  Help the Aged would challenge one of the key assumptions behind the Pension Credit: the idea that pensioners can really feel the reward for their savings by claiming a benefit. Getting income from your pensions and other savings is a right, which does not have to be claimed—by justifying your entitlement. In this way, savings lead to independence, empowerment and dignity in old age. Instead, pensioners are now being told that to gain benefit from their savings they need to fill in a DWP form to prove they are eligible for a benefit. Most recipients will have no idea how the benefit works, what it will be worth in the longer term, or indeed whether it will be in existence in 10 years time. Pensioners can never feel the same degree of ownership or security about a benefit as they can for their own savings and pensions. In terms of promoting independence and dignity in older age, Help the Aged would argue that the Pension Credit is no substitute for a pension, that has been earned through contributions to a state, occupational or private scheme.

Uprating the Credit

  6.3    The maximum savings credit award (£13.80 for a single pensioner in 2003) is to be paid out to someone with an income equal to the MIG (£100 for a single pensioner in 2003), which will be uprated with earnings. However the `lower weekly income limit' of the savings credit has been set at the level of the full State Pension (£77 for a single pensioners in 2003) which will be increased with prices. The formula of a 40p reduction in benefit for every £1 of savings above full State Pension level means that the maximum savings credit award will shoot up by 60p for every £1 the MIG increases ahead of the State Pension. The `upper weekly income limit' of the savings credit (the point below which entitlement to the savings credit begins) will be £134.50 for a single pensioner in 2003. The formula means that for every £1 the MIG increases ahead of the State Pension the upper income limit will increase by £2.50. This means the upper income limit will increase at a much faster rate than earnings.

  6.4  Assuming the Retail Price Index increases by 2.5% each year (the Bank of England's target), and average earnings increase by 1.5% in real terms each year from 2003 (in line with long-term projections by the Government Actuary), then it is possible to estimate increases in the State Pension, MIG and Pension Credit over the next few years:


Levels for a single pensioner:       2003    2013     % increase

2003-2013

Full State Pension         £77     £99    29%

MIG             £100     £148    48%

Max savings credit award         £13.80     £29.40    113%

Income below which PC entitlement begins     £134.50     £221.50    65%

Income below which PC entitlement begins as %
average earnings

29%    32%    3%

Average earnings           £464.98     £688.28    48%

  Note:

  Earnings inflation projected to 2002 according to the Treasury's average of independent forecasts and then from 2002 on the Government Actuaries long-term projections. These methods based on ones used by the House of Commons Library.

  Source:

  New Earnings Survey 2000, HM Treasury Forecasts for the UK Economy, October 2000.

  6.5  These estimates, based on Government projections, clearly show that the Pension Credit will grow massively both in the respect of the numbers entitled, and in terms of the amount that recipients can receive. The maximum savings credit award will double in less than 10 years, whilst the upper income limit of the savings credit (below which entitlement begins) will leap by £87 to £221.50, an increase of 65%.

  6.6  If people of working age today are to plan responsibly for retirement and make adequate savings they need to know the ground rules of what state help they will receive when they retire. It is difficult to be sure the Government knows where the Pension Credit is going and what it means for the state benefit and pension system in 10 or 20 years time. The State Second Pension, which was only unveiled in the last few years is already looking irrelevant when compared to the Pension Credit. It is therefore impossible for people working and saving today to know what help they can and cannot expect. Only with proper information can people be expected to plan effectively and confidently. This should mean a system of regular communication with people of working age about their projected entitlements.

Richard J Wilson, Incomes Policy Officer

Mervyn Kohler, Head of Public Affairs

January 2002








18   DSS Research Report 105, 1999. Back

19   Income Related Benefits Estimates of Take-Up in 1999-2000, September 2001. The accompanying National Statistics press release (27 Sept) read "There is evidence that the percentage of entitled pensioners taking up Income Support fell between 1998-99 and 1999-2000. This was associated with an increase in benefit rates in April 1999 which brought additional pensioners into entitlement." Back

20   These forms begin with the phrases such as "Thank you for your claim for the Minimum Guarantee. We need some more information to deal with your claim", and asked for detail about issues such as lodgers or insurance policies: Questions that used to be in the main claim form. Back

21   Figure from Department of Health: Community Care Statistics 2001, and Referrals, Assessments & Packages of Care Statistics 2001Back


 
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