Select Committee on Work and Pensions Minutes of Evidence

Supplementary memorandum submitted by PricewaterhouseCoopers (PC 06A)


  1.  The Committee asked if we could provide estimates of the percentage of the total pensioner population that would be eligible for the pension credit under the DWP's Policy Scenario one (ie with the MIG indexed to earnings and the lower income threshold for the savings credit indexed to prices) in 2025 and 2050. Our model estimates, which are subject to significant uncertainties given the long timescales involved, suggest the following eligibility levels:

    —  2025: around 60 per cent of pensioner households.

    —  2050: around 65-70 per cent of pensioner households.

  2.  Within these totals, we would expect that eligibility for the pension credit would be higher for single pensioners than for pensioner couples and would tend to rise with age. For example, for single pensioners over 75, our model suggests that around 75-80 per cent could be eligible for the pension credit by 2050 in DWP Policy Scenario 1.


  3.  The DWP paper, "The pension credit: long-term projections" (January 2002), concludes that "Taking the EPC projections as a baseline, under the high cost Pension Credit scenario, the percentage of GDP spent on pensions in the UK would remain broadly around its current level in the long-term" (paragraph 17, p 8). This is because the 1.3 per cent of GDP projected incremental cost of the pension credit reform package by 2050 (in Policy Scenario one with 100 per cent take-up) is largely offset by the projected fall in other UK state pension spending from 5.5 per cent of GDP in 2000 to 4.4 per cent of GDP in 2050, as set out in the EPC report.

  4.  The European Commission Economic Policy Committee (EPC) projections referred to were taken from an HM Treasury (HMT) paper,[54] prepared for the EPC based on certain agreed macroeconomic and demographic assumptions, based on the legislated state pension regime in each country in Summer 2000. As this Treasury paper makes clear, however:

    —  "state pension spending" was defined as total National Insurance Fund (NIF) spending, plus spending on the MIG; however, total NIF spending includes non-pension items such as incapacity benefit and the jobseekers' allowance; as the Treasury paper notes (p 27), these non-pension items are projected to fall particularly rapidly in the long run, accounting for around half of the 1.1 per cent fall in total UK "state pension" spending quoted in the EPC report to which the DWP paper refers; the projected fall in state pension spending alone is therefore only around 0.6 per cent of GDP between 2000 and 2050; and

    —  in addition, the EPC-HMT figures did not include the significant increases in the basic state pension and the MIG announced in the November 2000 Pre-Budget Report (totalling around £2.6 billion in a full year); as such, using the EPC-HMT figures as a baseline underestimates total state pension spending by around 0.3 per cent of GDP from 2003 onwards, since these BSP-MIG increases would be expected to persist over time.

  5.  If we adjust the EPC-HMT baseline figures for these two effects, we find that the actual projected long-term decrease in UK state pension spending, excluding the pension credit reform package, would only be around 0.3 per cent of GDP between 2000 and 2050. After adding the incremental cost of the pension credit reform package of around 1.3 per cent of GDP in Policy Scenario one, this leaves total state pension spending rising by around 1 per cent of GDP between 2000 and 2050, once the EPC/HMT baseline is defined on a more appropriate basis. This 1 per cent of GDP increase is similar to estimates for the base case Government policy option contained in the PwC modelling paper commissioned by IPPR.[55]


  6.  PricewaterhouseCoopers was responsible for modelling the costs of the pensions policy options considered by IPPR in their recent report.[56] We would note that:

    —  our estimates suggest that the IPPR proposals would have broadly similar long-term costs to the Government's proposed regime with the pension credit, assuming that DWP Policy Scenario one applies; in both cases, total spending on state pensions and related benefits and rebates would rise by around 1 per cent of GDP between 2000 and 2050;

    —  as discussed above, our estimates of costs of the Government's proposed regime under Policy Scenario one are also similar to those published by the DWP, using an adjusted EPC/HMT baseline; and

    —  if the Government's proposals (under Policy Scenario one) are affordable in the long run as the Government has argued, then it follows from our analysis that the IPPR's proposals should also be affordable.

  7.  We note also that our modelling of the IPPR proposal is relatively conservative in that it does not allow for the potential increase in income tax revenue due to higher basic state pension payments relative to the Government policy option.[57] We estimate that these additional revenues in the IPPR option might, on plausible assumptions,[58] rise steadily from around 0.1 per cent of GDP per annum in 2010 to around 0.3 per cent of GDP per annum by 2050.

John Hawksworth

Head of Macroeconomics

7 March 2002

54   "Country fiche on pensions projections, UK, Draft 17 October 2001" as published on the European Commission website together with the October 2001 version of the EPC report. The paper states that the social security spending estimates were based on information from the DSS (as was) and the GAD. Back

55   "UK state pensions policy at the crossroads: a review of the potential long-term costs and benefits of alternative options" (PwC, February 2002). An advance copy of this paper was sent to the Committee for reference on 11 February. As discussed in the Annex to that paper, total pensions spending definitions are not entirely comparable with the DWP paper, but the broad trends over time in total pension spending are broadly comparable. Any such long-term projections are, of course, subject to many uncertainties. Back

56   "A New Contract for Retirement" (IPPR, March 2002). Back

57   Note that other differences between the two options would largely affect non-taxable income. Back

58   Specifically, we assume here that 30 per cent of the additional basic state pension payments in the IPPR option would be taxable at an average income tax rate of, say, 25 per cent for the pensioners concerned. These assumptions are subject to significant uncertainty, but they illustrate the broad order of magnitude of this effect. Back

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