Select Committee on Work and Pensions Second Report


PENSION CREDIT

ADMINISTRATION OF THE CREDIT

48. The Government has announced that, after initial assessment, pensioners will only need to re-apply for the Pension Credit every five years. It hopes that this will make the system less "intrusive and bureaucratic" than that currently in place for the MIG, which has been associated with long, complicated application forms and the requirement, in principle, for claimants to report changes in circumstances on a weekly basis.[93] From October 2003, pensioners will only be required to report significant changes in their situation, such as change of address, getting married or divorced, going into hospital, etc., which they would need to do for the Basic State Pension anyway. If a pensioner's income rises during the five-year period, they will not be required to report the fact until the next re-assessment date; but should their income drop they will be able to apply for an increase in their Pension Credit. Those who have submitted evidence to this inquiry, for example the National Federation of Post Office and BT Pensioners, have broadly welcomed this streamlining of the claims process.[94] Age Concern told us that the changes should help: "avoid the distress and administrative difficulties which are sometimes caused when , for example, someone does not realise they should have reported a small increase in income."[95]

49. Several witnesses cautioned, however, that, generally, pensioner incomes declined during retirement rather than increased.[96] It will, therefore, be incumbent upon the DWP to 'pick out' those who become entitled to the Credit, or to a greater amount, between assessment dates and encourage them to re-apply. We welcome the five-year assessment periods for the Pension Credit, which we believe will significantly improve the delivery and accessibility of the new benefit. The Department will have to be careful, however, that pensioners who between assessment dates become eligible for help, or more help, under the Credit do not lose out on valuable assistance.

50. The administration of the Pension Credit will build on the recent changes to the MIG application process, most notably through the increased use of telephones. The DWP, in its memorandum, told us that: "Many pensioners have said that they prefer using the telephone." From October 2003, pensioners will be able to phone one of the dedicated national call centres to apply for Pension Credit. Clients will be asked a series of questions to establish their eligibility and will then be sent a form setting out the details they have provided, which they will need to confirm as correct and then post back.[97] There will be 26 call centres nationally run by the Pension Service and the technology will allow calls to be diverted across the country to cope with demand patterns. There will be no centres in London and the South East, owing to the problems of recruiting and retaining staff.[98] Despite this increased reliance on the telephone, the Secretary of State stressed that the "public interface is important" and that the Department intends to "have a local service, which will mean that if somebody needs to talk to somebody about things, they can do".[99] This face-to-face service will be available nationally and will operate from "places that old people like to go, like libraries".[100]

51. In general, we welcome the plans for greater use of the telephone in allowing pensioners to claim the Credit, backed up by an extensive local, face-to-face service. However, we share a number of the specific concerns that were raised with us in evidence about the greater use of telephones. Richard Wilson, of Help the Aged, stressed the need for high calibre advisers at the call centres, who would be offering a service that is "quite interactive and involves understanding the needs of older people".[101] He feared that the advisers would be drawn from the "very lowest grade of administrative assistants" and may lack the necessary training to elicit the detailed, and personal, information from pensioners in an appropriate manner and to encourage them to apply for the Credit. The importance of training for DWP employees with direct contact with the public, and for a system of promotion which encouraged retention of high calibre staff at the 'front line', were issues we discussed in our recent report on the ONE Pilots.[102] In that situation we were describing personal advisers at Jobcentre Plus offices but the recommendation is equally valid here: DWP employees within the Pension Service who are dealing with the public regularly, either face-to-face or via the telephone, must receive the appropriate level of training and support if they are to inspire the confidence and trust of clients and carry out the job efficiently.

52. Pensioners will need re-assurance that they will not face large phone bills as a consequence of the long calls that will be needed. We recommend that the Department should investigate the cost and practicability of providing a free-phone number for claimants as it moves increasingly to the call centre model.

53. Gordon Lishman, of Age Concern, highlighted the "substantial groups" of pensioners who suffer from a degree of sensory impairment - sight or hearing loss - and the fact that older people are the largest group in the population without a telephone. The face-to-face service will be vital for such groups, and for those pensioners who feel uncomfortable discussing 'private' details over the phone.[103] It is imperative, therefore, that there are enough Pension Service staff to carry out home visits and to deal, face-to-face, with pensioners in all areas of the country. While call centres may bring many advantages to the Credit's administration, we remain convinced of the need for a significant number of local staff able to deal with pensioners on a face-to-face basis. This is also true, in particular, for pensioners from ethnic minorities, who often experience difficulties with call centres when English is not their first language. In this context, while we understand the reasons behind not having a call centre in the South East of England, the Department must work doubly hard to ensure people from London and the South East are not disadvantaged as a result. The decision not to have a centre in the South East should be subject to review in the light of experience. We feel the extensive ethnic diversity within London, where 300 different languages are now spoken, in particular, may create difficulties for call centres in other parts of the country to deal adequately with the growing number of ethnic minority pensioners in the capital claiming the Credit. It is unlikely that call centres situated a long way from many of the ethnic communities in London will be able to provide the diversity of interpreters necessary. It is not fair to disregard the right to privacy of ethnic minority pensioners by expecting a friend or relative to interpret for them. Adequate provision must be made at all call centres to cope with pensioners from ethnic minorities, for whom English is not their first language. All of these issues are, of course, inextricably linked to those of the Credit's take-up, which is discussed below (paragraphs 56-61).

54. Some of the evidence presented to us suggests that the new Pension Service will be unable to cope with the administrative burden that the Pension Credit poses. Help the Aged, in its memorandum, stated that it has "serious doubts about the technical and human capacity of the DWP to deliver the service to which it aspires".[104] It highlights that the Pension Service, which will only be a year and a half old when the Credit is launched, will already be facing problems arising from "divorce" from the former Benefits Agency (BA) - a very significant organisational and operational change - and the move to Automated Credit Transfer (ACT) as the preferred benefit payment method.[105] This concern is echoed by others who stress the enormous challenge that the Pension Credit would pose to any organisation, potentially involving, as it does, over half the pensioner population applying for a very complex benefit. Tony Lynes, of the NPC, put it bluntly: "no government has ever before tried to means-test over five million pensioners. The chances of that going smoothly seem to be extremely remote."[106]

55. The Secretary of State assured us that the Pension Service would "cope" with the challenges of the Pension Credit.[107] We are extremely concerned, however, that the Credit will be operated, for at least the first two years of its existence, using the Department's current computer systems, which the Secretary of State himself described as "very decrepit".[108] We have serious concerns over the ability of the fledgling Pension Service to cope with the huge administrative burden that the Pension Credit will impose, especially as it will be implemented using an old, "very decrepit", computer system. The Department for Work and Pensions must ensure that the Pension Service has the necessary resources and expertise to deal with the challenges that the Pension Credit poses. We shall pursue many of these issues further when we take oral evidence from the Chief Executive of the Pension Service in June.

TAKE-UP OF THE CREDIT

56. The extent to which the Pension Credit is taken up by those eligible for its help, is clearly central to any consideration of its effectiveness. However generous or well-designed the Credit may be, it will obviously fail to achieve its aims unless pensioners receive what they are entitled to. It is very difficult to predict how many pensioners will take up a benefit that is to be introduced in two years' time - as the Secretary of State acknowledged - but many of those submitting evidence have suggested that useful comparisons may be drawn with other income-related, or means-tested, benefits. The take-up figures for these benefits are shown below in Table 3, supplied by the IPPR, using DWP figures:

Table 3: Take-up of income-related benefits among pensioner households[109]

  
Pensioner households entitled but not receiving benefit
Median weekly amounts unclaimed
Mean weekly amounts unclaimed
Income Support
1998/99
1999/00 (MIG)
  
19-32%
22-36%
  
£10.60
£12.80
  
£19.00
£20.00
Housing Benefit
1998/99
1999/00
  
4-11%
7-15%
  
£22.30
£23.80
  
£22.60
£24.40
Council Tax Benefit
1998/99
1999/00
  
26-32%
30-36%
  
£5.90
£6.60
  
£6.30
£6.80

57. Much of the evidence draws particular attention to take-up rates for the MIG (a form of Income Support), which the Pension Credit, in many ways, succeeds. Since the MIG was introduced in 1999, the Government has run an extensive take-up campaign involving a national television commercial. Critics point out, however, that the latest figures available suggest that up to 750,000 pensioners, entitled to the MIG, were still not claiming it and that the take-up campaign had probably only reached around a quarter of this group. [110] As Richard Wilson, of Help the Aged, highlighted: "By definition, the people who do not claim are the very poorest pensioners in society."[111]

58. One factor that many believe will undoubtedly affect the take-up of the Pension Credit is its complexity. This concern has not only been raised during our inquiry but at all stages of the Credit's 'life', since it was first proposed. The Government believes that the Credit's complexity will have little, if any, adverse effect on take-up. Baroness Hollis stated in the House of Lords that: "the pensioner does not have to do the calculation. The skill is in helping pensioners to know that there is an entitlement for them to apply for."[112] The Secretary of State similarly told us that: "people will not concentrate on the wiring behind it [the Credit] but what it actually does".[113] While this is true to an extent - the Pension Credit will be judged by many pensioners on the basis of how it affects weekly incomes - we note what Mervyn Kohler of Help the Aged, told us: "People need to know roughly that they are going to be entitled to a benefit before they pick up a phone and ask whether they are".[114] Sally West, of Age Concern, also stressed that it was important for pensioners to understand, roughly, how the Credit was calculated as many older people worried about receiving too much benefit, and then being required to repay it.[115] We firmly believe that initial take up could be limited by the fact that many pensioners will find it hard to calculate their entitlement, and will, therefore, be deterred from applying. This places a particular responsibility upon the Government to promote take up.

59. In the evidence, our attention has also been drawn to a number of specific groups who are less likely, on average, to claim. These include: older pensioners; those living alone; those living in isolated areas, or areas without a strong community; those living in households with non-pensioners, who do not wish to entangle their affairs with others; those who have not claimed benefits before in their working lives; those whose income falls during retirement and become eligible for the Credit between the five year assessment dates; and pensioners from ethnic minorities.[116] Richard Wilson, of Help the Aged, informed us that evidence suggested very few pensioners from the latter group, in particular, were taking advantage of the MIG: "A lot of the time, it is an issue of confidence in being able to assert your rights and your entitlements."[117]

60. Many of those who contributed evidence to our Report have dwelt heavily on the fact that the Credit is an extension of means-testing, to which they object on principle.[118] These objections were explored in two extensive Reports by the Social Security Committee in the last Parliament: The Contributory Principle and Pensioner Poverty.[119] We, therefore, entirely agree with those who have argued that, as a consequence of its policy decision to channel support for pensioners through a benefit for which individual pensioners must apply rather than through a universal benefit (such as Winter Fuel Payment) the Government must accept the burden of responsibility for ensuring that the Pension Credit is taken up, in high numbers, by those who are eligible.[120] We would like to see the Government develop a rolling take-up strategy, involving not only various forms of advertising but also the use of statutory agencies (health and social services), voluntary and community groups, including those aimed at carers.

61. In the light of the concerns on this issue, we were disappointed that the Department for Work and Pensions appears to have set no targets for the levels of take-up for Pension Credit. In its memorandum, the DWP stated that "assumed take-up" for the Pension Credit in 2004 (the first full year of its operation) was 67 per cent, which it described as "ambitious".[121] However, when asked what the targets for take-up were in subsequent years (2005, 2006, etc.), the Secretary of State replied that the figures were based upon "a sensible take-up assumption" but made no firm commitment to any particular levels of take-up.[122] We were not reassured, on this point.[123] We were concerned about the Department for Work and Pensions' inability to produce reasonable estimates for such an important figure as the take-up of a key Government benefit. We urge the Government to set out clear, and achievable, targets for levels of take-up of the Pension Credit.

FUTURE UPRATING OF THE CREDIT

62. There are two monetary amounts within the Pension Credit which will be uprated each year: the level of the guarantee credit and the savings credit threshold. When the Pension Credit is introduced, in October 2003, the Government anticipates that the guarantee credit - the 'minimum income' level - will be £100 for a single person and £154 for couples. (These are the levels which the MIG will have reached in April 2003.[124]) The savings credit threshold - above which all second income is 'rewarded' - is expected to be £77 for a single person and £123 for a couple. These levels are the projected full Basic State Pension rates for, respectively, a single person and a couple, where the woman receives the married woman's rate of pension.

63. The Government's aspirations for the MIG and the Basic State Pension have been made clear. In introducing the MIG, the Government said: "Over the long­term our aim is that it [the MIG] should rise in line with earnings so that all pensioners can share in the rising prosperity of the nation".[125] Subsequently the Government committed itself to increasing the MIG in line with earnings for the rest of this Parliament.[126] In his pre­Budget report in November 2001, the Chancellor of the Exchequer said that after above-inflation increases in the Basic State Pension in 2001 and 2002, the Basic State Pension would, in future years, be increased by 2.5% a year or price inflation whichever was the higher.[127]

64. The State Pension Credit Bill, however, does not specify how the guarantee credit and the savings credit are to be uprated each year, leaving it to the government of the day to decide. Thus, for example, the savings credit threshold is expected to start at the level of the Basic State Pension (£77) but the Bill does not require it to be 'pegged' at that level. The two may, therefore, diverge in future, should the government at the time so decide. Whether they do so or not has significant implications for the incomes of pensioners, as examples presented later will show (see table 5). The Government has repeatedly refused to reveal its aspirations for how the Pension Credit should be uprated. When specifically questioned on this matter, the Secretary of State declined to provide any insight into the Government's thinking on this issue: "There are some things that all governments do at election time, they say: 'This is what we think we can do in the next Parliament', but it would be very imprudent to start making promises way out beyond that on these particular things."[128]

65. Much of the evidence we have received condemns the uncertainty over how the Pension Credit will be uprated. The Industrial Society, for example, expressed concern that this comes on top of other uncertainties - lack of clarity about the future value of the Basic State Pension, the State Second Pension and money­purchase pension schemes - which "makes pension planning extremely risky. We fear that many young people may decide to spend their money rather than to save it against this uncertainty".[129] We have also received suggestions that the Pension Credit should be a temporary scheme, pending maturity of the Government's other pension reforms, and uprated in such a way that it can be gradually phased out. The Association of Consulting Actuaries (ACA) said, in its submission, that: "the Government needs to disclose how the thresholds will increase in future and signal that it is only a temporary measure aimed at today's pensioners and those retiring in the near future".[130] Tom Ross, former Chairman of the Pension Provision Group (PPG), welcomed the fact that the Bill does not prescribe how the Pension Credit is to be uprated saying: "this flexibility would give future ministers the opportunity to make the Credit a transitory scheme".[131]

66. Whether the Pension Credit should be a transitional scheme depends on its role in the Government's long­term pension strategy, an issue to which we return later. However, one point is clear from the evidence we have received ­ the future cost of the Pension Credit, and the proportion of pensioners entitled to it, will depend critically on how it is uprated. Although the Government has, to date, declined to indicate how the Credit will be uprated, in its publication, The Pension Credit: long-term projections, the DWP outlined three possible uprating "scenarios".[132]

  • Scenario one: the guarantee credit is linked to increases in average earnings and the savings credit is linked to prices. If the Basic State Pension goes up in line with prices, this ties the savings credit threshold to the Basic State Pension. Assuming earnings rise faster than prices, the gap between the guarantee credit and the savings threshold would increase rapidly under this scenario. The income level at which entitlement to Pension Credit is exhausted would rise by more than average earnings ­ from £135 to over £390 by 2051 at today's prices.[133] (See figure 3 below for an illustration of how the value of the two elements would diverge in the future.)

  

  • Scenario two: both the guarantee credit and the savings credit threshold are linked to increases in earnings. This would see the income level at which Pension Credit entitlement runs out rise in line with earnings.

  

  • Scenario three: the guarantee credit is linked to earnings until 2006 and thereafter linked to prices. The savings credit threshold is linked to prices. After 2006, the removal of the link with earnings would mean that the system reverted to the situation where state support for pensioners gives them no share in rising economic prosperity.

The long-term cost implications of these three scenarios are set out below.

Table 4: Cost of the Pension Credit reform package under alternative policy scenarios, expressed in £ billion (and as a proportion of GDP)[134]

Scenario
2004
2010
2020
2030
2040
2050
1
£2bn (0.2%)
£4bn (0.4%)
£8bn (0.6%)
£14bn (0.9%)
£20bn (1.1%)
£26bn (1.3%)
2
£2bn (0.2%)
£3bn (0.3%)
£4bn (0.3%)
£6bn (0.4%)
£8bn (0.4%)
£9bn (0.4%)
3
£2bn (0.2%) 
£3bn (0.3%)
£3bn (0.3%)
£3bn (0.2%)
£2bn (0.1%)
£1bn (#)
All figures rounded to the nearest £ billion / 0.1 per cent and are in 2001/2 prices.
# indicates less than 0.05 per cent. Real GDP assumed to grow at 1.5 per cent a year from 2001. Take-up assumed to be 67% in first year and 100% in subsequent ones.

67. The table below (table 5) illustrates how these three different scenarios would affect the future levels of the guarantee credit, the savings credit threshold, and the income level at which entitlement to Pension Credit would run out. The figures given are for single pensioners. The table also shows how a single pensioner with a full Basic State Pension, and £10 a week from a second pension, would fare, both in terms of Pension Credit entitlement and final income level. It is worth bearing in mind that the figures assume earnings will increase by 1.5% a year in real terms. Even on this conservative estimate, it means that, over the period in question, real earnings will double in value.

Table 5: Future entitlements to Pension Credit under different uprating scenarios in 2003 prices

Scenario one
2003
2006
2025
2050
guarantee credit
£100
£105
£139
£201
savings credit threshold
£77
£77
£77
£77
income at which entitlement exhausted
£135
£146
£231
£387
PC entitlement for someone with full Basic State Pension and £10 of second tier pension
£19
£24
£58
£120
Final Income
£106
£111
£145
£207
Scenario two
guarantee credit
£100
£105
£139
£201
savings credit threshold
£77
£81
£107
£155
income at which entitlement exhausted
£135
£141
£187
£271
PC entitlement for someone with full Basic State Pension and £10 of second tier pension
£19
£21
£40
£74
Final Income
£106
£108
£127
£161
Scenario three
guarantee credit
£100
£105
£105
£105
savings credit threshold
£77
£77
£77
£77
income at which entitlement exhausted
£135
£146
£146
£146
PC entitlement for someone with full Basic State Pension and £10 of second tier pension
£19
£24
£24
£24
Final Income
£106
£111
£111
£111
Assumes real earnings growth of 1.5% a year; Basic State Pension linked to prices.


68. The examples illustrate the difficulties a non-expert might have in judging the alternative uprating options. For example, one might think that linking both the guarantee credit and the savings credit to earnings would be the most generous option (as in scenario two), but this is not the case. In fact it is scenario one, where the guarantee credit is linked to earnings but the savings credit threshold to prices, which best maintains the value of the pensioner's final income in relation to earnings and hence to the standard of living of wider society.

69. Under scenario one, the guarantee credit keeps pace with real earnings growth, but the savings credit threshold falls behind. The result of this is that the income level at which a pensioner is no longer eligible for the Credit is three times higher in 2050 than in 2003. This is illustrated in the diagram below (figure 3) produced by the House of Commons' Library. Pension Credit entitlement for a single pensioner with just £10 a week of second tier pension is more than six times higher in 2050 than in 2030 but his/her final income only just keeps up with earnings. Under scenario two, where both the guarantee credit and the savings credit threshold are linked to earnings growth, there are more modest increases in both the income level at which entitlement to Pension Credit runs out and in entitlements. The final income of the pensioner lags considerably behind earnings, however, rising by only half as much, in today's prices, as under scenario one. Scenario three is similar to the situation which exists for the Basic State Pension. After 2006, all amounts remain at their current levels in terms of prices and so fall further and further behind earnings.

Figure 3: Future levels of Pension Credit and Basic State Pension (single pensioner)[135]


70. The most expensive uprating scenario is the first, as the Government's own projections show. Under scenario one, the cost of Pension Credit is projected to rise from £2 billion in 2004 to £26 billion in 2050 or by about one per cent of GDP. The cost rises more modestly under scenario two and falls under scenario three. PricewaterhouseCoopers (PwC) have also estimated the long­term cost of Pension Credit under scenario one and produced a similar estimate for the cost in 2050.[136]

71. The Government maintains that even the most expensive uprating scenario is affordable in the sense of adding only one percentage point over 50 years to the proportion of GDP spent on the scheme. The Secretary of State described the Pension Credit as "eminently affordable" and that even an extra £26 billion a year was a "small amount of spending".[137] On the other hand, we have received evidence that projections this far ahead are inevitably highly uncertain. According to Mr John Hawksworth of PwC, the future cost of the Pension Credit, "will depend on the detailed distribution of pensioner income at that time".[138] There is, therefore, a very real risk that unforeseen cost increases could jeopardise a policy based on scenario one, especially if public understanding of the implications of different uprating policies is poor. Help the Aged fear that: "the Pension Credit will continue to be set at arbitrary levels dictated by financial and political expediency".[139] The NPC has argued that: "It is most unlikely that the Government intends the savings credit to expand in this way [that is, as implied by scenario one]"; so Governments may be tempted to reduce the cost and coverage of the scheme in other ways, such as, "a gradual reduction in the 60p 'reward' or disconnecting the threshold from the basic pension so that only part of the income above the level of the Basic State Pension would qualify for the Credit".[140]

72. We did not receive compelling evidence in favour of one uprating method over another, taken in isolation from considerations relating to the Pension Credit's role in the Government's long­term strategy for pension provision. Nor did witnesses feel inclined to hazard a guess as to which method would be used, although Mr Hawksworth told us that scenario one "seemed to be the most plausible interpretation of Government pensions policy statements".[141] Many organisations voiced concern about the high proportion of pensioners who would be entitled to Pension Credit in future years under scenario one. PricewaterhouseCoopers put this proportion at around 60% of pensioners in 2025, and between 65 and 70% in 2050, while the IFS suggested this could rise to as much as 82% by 2050.[142]

73. We return to the question of uprating in considering the Pension Credit's role in the Government's overall strategy. However, we have much sympathy with the view of the London School of Economics' SAGE research group's view that: "[political] stability will only be assured ... if in the longer term decisions around indexation of all parts of the pension system ... were protected as far as possible from overly frequent political manipulation. Whilst it is not desirable to make decisions about indexation inviolable, an instrument that ensured automatic indexation of pension incomes would be preferable."[143] The Government has gone a long way toward specifying its intentions for indexing the MIG and the Basic State Pension. We urge them to do the same for the Pension Credit to aid Parliament in its consideration of the Bill and to provide more certainty to those involved in the long-term planning necessary for pension provision.

The role of the Pension Credit in the Government's overall pensions strategy

74. We have heard much evidence about the long­term nature of pension planning and the need for people to plan with a reasonable degree of certainty about the pensions landscape. We therefore think it appropriate to consider not just what the Pension Credit will do for today's pensioners, but also how it fits in with the Government's overall strategy for future pension provision. As the Secretary of State advised us: "you have got to look at pension policy in the round and cannot just look at one bit on its own."[144]

75. In 1998 the Government's stated objectives for pensions were:

1. "The pension system should reward work. It should also reward saving. People who work and people who save should know that they will see the benefit when they retire. People who work all their lives should not have to rely on means­tested benefits when they retire."
  
2."Those who can save have a responsibility to do so. The State should ensure that they have access to secure, good value pensions and the State should give particular support to those who cannot be expected to save."[145]

76. In pursuit of these objectives, the Green Paper paved the way for Stakeholder Pensions; the replacement of Income Support for pensioners with the more generous MIG; and the introduction of the State Second Pension in place of SERPS. It left open the possibility of reforming the MIG, to make it fairer to those who had saved but gained no benefit from their pension and other savings because of the MIG. The Government invited, "views on the most cost­effective way of tackling the issue".[146] The Pension Credit is the Government's solution to this problem. In the words of Baroness Hollis "The Pension Credit is essential to the overall coherence of the pension system. It will form the third piece of legislation and finally complete the jigsaw".[147]

77. Not everyone who submitted evidence to our inquiry shared this view of the Government's jigsaw. The Northern Pensions Resource Group, for example, stated that: "The Pension Credit reduces the Government's strategy to incoherence".[148] Help the Aged's view was similarly that: "the evolution of the Government's pensions commitment - 'to provide security for those who cannot [save]' - has been quite generous, but seems to entail successive strips of elastoplast rather than a coherent and principled policy".[149]

78. In our view, the main issue appears to be whether there is a role for the Pension Credit and the State Second Pension. Andrew Dilnot, of the IFS, told us: " it is very difficult to think of a coherent set of objectives which are met by the Pension Credit and the State Second Pension. You could think of a coherent set of objectives met by either of them and there is certainly a coherent set of objectives met by the Pension Credit, allied with a big increase in the MIG and a steady reduction in the Basic State Pension relative to earnings. Quite where the State Second Pension fits into that is hard to understand".[150] He went on to say: "the Pension Credit seems to be part of a world which could be made coherent but it is very hard to make it coherent with the State Second Pension there as well".[151]

79. At the heart of the matter is whether the State Second Pension will, as originally envisaged by the Government, prevent people who have worked all their lives having to rely on means­tested benefits in retirement. We note that there were concerned individuals and organisations who questioned whether the S2P would achieve this aim from its inception.[152] Increases in the MIG, and now the Pension Credit, make it even more unlikely. Peter Robinson, of the Institute for Public Policy Research, told us that: "Once the whole [pensions] system has matured, someone who works their entire life making contributions to accumulate rights to the State Second Pension will retire on a combined income from their S2P and basic pension, which is below the level of what we now call the MIG. They will automatically fall into means­testing from day one of retirement, which makes you question what the State Second Pension is for".[153]

80. We asked the Government Actuary if he could calculate for us how the S2P might be amended to ensure that someone retiring in 2051 with a full Basic State Pension and a full S2P would have an income above the level at which they would be entitled to help from: a) the guarantee credit; and b) the savings credit. In his reply, he confirmed that, as currently planned, the S2P would not generate enough income for a single person retiring in 2051, having earned £10,800 per annum throughout his or her life (the lower earnings threshold), to have an income in retirement above the guarantee credit. He told us: "Our understanding is that at the time the S2P parameters were set, it was expected that for [such] a person ... the pension at retirement would have been above the level of the MIG and would have remained above it for a number of years. This is not the case now, principally due to the increases that have been made to the level of the MIG in recent years, offset in part by the increases to the Basic State Pension".[154]

81. To restore the original intention, the calculation of S2P could be changed in one of two ways or with a combination of both. First, the rate at which rights to S2P are earned could be increased for those with incomes at the lower earnings threshold (or between the NI lower earnings limit and the lower earnings threshold). Secondly, the lower earnings threshold itself could be increased. The Government Actuary calculated for us that, for a single person who has worked all his or her life earning at the current lower earnings threshold, to retire in 2051 with a combined Basic and State Second Pension at the level of the guarantee credit, would require the 'accrual factor' (which determines the rate at which rights to S2P are built up) to be increased from 40% to 42.5%.[155] Alternatively the lower earnings threshold could be increased to £11,200 to achieve the same effect.[156] However, if the savings credit is also brought into the equation, his calculations suggest that it would not be possible to amend the S2P in any sensible way to provide an income above the level at which entitlement to the savings credit is exhausted; that is, it would require accrual factors of over 100% or a lower earnings threshold above the National Insurance upper earnings limit.

82. The calculations above are designed to ensure that a person is at least above the guarantee credit limit level at the point of retirement. The Government Actuary also calculated the effect of amending the State Second Pension to ensure that someone, who had earned at or below the lower earnings threshold and who retired with a full basic pension and the S2P could be kept off the guarantee credit for five or ten years after retirement. He calculated, for example, that to keep a such a person off the guarantee credit for five years after retirement the accrual factor would need to be increased to 47.7% or the lower earnings threshold increased to £12,300.[157]

83. Even if these amendments were made to the State Second Pension, however, the Government Actuary pointed out that other factors were likely to erode the role of S2P. He told us that because of the tight contribution conditions (it takes 49 years of contributions, or credits, to earn a full State Second Pension) in reality few people are likely to retire with a full S2P. Moreover, not only is it the case that people retiring before 2051 will have state pension rights below the guarantee credit level, so too will those retiring after 2051, if the guarantee credit continues to increase with earnings.

84. In calling for evidence on the Pension Credit's role in overall pension strategy, we were not surprised to receive suggestions for alternative strategies, some very familiar to us, others newer. Pensioner groups continue to call for a boosted Basic State Pension, linked to average earnings.[158] The Government's claim that: "The Basic State Pension is, and will remain, the foundation for income in retirement," has been questioned by others.[159] Peter Robinson, for example, said: "If you continue to price-index the Basic State Pension, it continues to fall in relation to average earnings down to seven per cent or less by the middle of the century. It is hard to see how one can then continue to regard that as the bedrock on which pension provision is made". [160] His preferred strategy would be to scrap the Pension Credit and the S2P, increase the Basic State Pension to the level of the MIG and raise the state pension age to 67 in order to pay for it.[161]

85. We have taken the view that it is unlikely that Parliament will decide, during the course of the State Pension Credit Bill, to abolish the State Second Pension and increase the retirement age to 67. We recognise also that some of the perceived problems of the Pension Credit are the result of inevitable trade­offs. The Government itself recognised the potentially conflicting objectives of the Pension Credit in setting out its proposals, saying: "There is an inevitable tension between the need to ensure there is a level below which pensioner incomes do not fall, and the need to ensure that today's workers have a clear incentive to save for their own retirement.".[162] Conflicting objectives were recurring themes in the evidence to our inquiry. Mr Dilnot said "there is an inevitable trade­off. You do best on pensioner poverty if you enhance means-testing and enhancing means-testing inevitably is less favourable towards increasing incentives to save and a greater reliance on universal non means­tested provision".[163] Peter Robinson said of IPPR's own proposals: "Like every other pension strategy it is not perfect; no strategy is perfect, all of them involve trade­offs".[164]

86. We share the concerns, expressed by many, about whether the State Second Pension has a viable future once the Pension Credit is introduced. We look forward to the Government clarifying the role of the State Second Pension in its overall pensions strategy.

87. As it is more than likely that the Pension Credit and the S2P will run in tandem for some time to come, there seem to us to be two possible alternatives for rationalising the co­existence of the Pension Credit and S2P. The first is to view the Pension Credit as a temporary measure for today's pensioners and those retiring in the near future who will not have been able to benefit much from the State Second Pension or Stakeholder Pensions. This option has been proposed to us by the Association of Consulting Actuaries based on an idea we understand to have been suggested originally by the Pension Provision Group (PPG).[165] Under this option, the savings credit threshold would gradually be increased so that eventually the savings credit would be phased out and the Pension Credit would consist solely of the guarantee credit. At the same time, the S2P would have to be enhanced so that it really did ensure that most people retired with state pension rights, or private sector equivalents, of at least the level of the guarantee credit level. Without knowing its cost, it is difficult to judge the merits of this option. We urge the Government to publish estimates of the cost of increasing the accrual rate and/or lower earnings threshold for the State Second Pension along the lines described by the Government Actuary.

88. The second rationalisation of the co­existence of the Pension Credit and the S2P sees the Pension Credit as a long­term feature of state pension provision. Based on what John Hawksworth said - that scenario one was the "most plausible" uprating scenario - it seems certain that all but a relatively small minority of pensioners would be subject to means­testing by 2050.[166] However, the form of the means­testing will, arguably, be fairer and on balance less detrimental to incentives to save than the current system. The State Second Pension, while not providing a guarantee against means­testing as originally intended, could be seen as a mechanism for compelling employees to make some second tier provision and for allowing some of this provision to be through private funded pension schemes. This is one interpretation of what the Secretary of State had in mind when, in response to being asked whether the S2P would last much beyond the introduction of the Pension Credit, he said: "If you remove the State Second Pension two things would happen. One is you would remove at a stroke the underpinning of the company pensions because they are funded, as you know, on the contracted out rebates...The other thing is that if do you not have one [S2P] there then when someone might be advised that their private pension is not quite right for them, where do they go if you do not have it? I do think you need both."[167]

89. This second interpretation of how the Pension Credit and State Second Pension could co-exist, provides another, albeit post hoc, explanation for the Government's policy. It does not, however, remove the need for improvements in the detailed workings of the Pension Credit, which we have already identified.

Conclusion

90. The Government has set two distinct aims for the Pension Credit: to help fight pensioner poverty and to increase the incentives to save. The evidence we have received during the course of this inquiry leads us to conclude that it has the potential to go some considerable way toward achieving these aims. Most notably through providing £2 billion pounds of extra spending per year targeted at poorer pensioners and by ensuring that most of those who have saved for their retirement are rewarded for having so done. Whether the Credit achieves its potential will depend, crucially, on the new Pension Service and its ability to administer effectively such a complex and far-reaching benefit, which could involve over five million pensioners. Most importantly, it will need to ensure that the levels of take-up for the Credit increase dramatically from those currently seen with the MIG, and that the poorest pensioners benefit in full from its provisions. However, the Pension Credit unquestionably adds further complexity to an already byzantine system of retirement provision, which is causing confusion for pensioners, pension providers and those saving for their old age. In particular, the Credit throws the role, and indeed future, of the State Second Pension into serious question. The proposals for the fourth stage of the Government's pension reform plan, which the Secretary of State indicated would be announced later this year, must address the wider impact of the system's complexity and the issues raised in this Report. We await his response with considerable interest.


93   Ev 103, para 30. Back

94   Ev 31, para 8.4; Ev 138, para 38; and Ev 149, para 1.3. Back

95   Ev 16, para 11.7. Back

96   Ev 16, para 11.8. Back

97   Ev 103, para 30. Back

98   Q. 230. Back

99   Q. 229. Back

100   Q. 231. Back

101   Q. 59. Back

102   'ONE' Pilots: Lessons for Jobcentre Plus, First Report of the Work and Pensions Committee, Session 2001-02, HC 426, paras 91-94. Back

103   Q. 57. Back

104   Ev 22, para 5.3. Back

105   Ev 22, para 5.5. Back

106   Q. 51. Back

107   Q. 218. Back

108   QQ. 208 and 224.  Back

109   Ev 66, table 2.1. Source: Income-related Benefits, Estimates of Take-up in 1999, DSS. Back

110   Ev 14, para 8.7. See also: Ev 21, paras 4.4-5; Ev 137, paras 23 and 30; and Ev 146. Back

111   Q. 36. Back

112   Lords Official Report, 18 December 2001, column 144. Back

113   Q. 253. Back

114   Q. 45. Back

115   Q. 45. Back

116   Ev 10; Ev 19; Q. 38; and Q. 87. Back

117   Q. 38. Back

118   Ev 126, paras 2 and 4; Ev 132; Ev 137, paras 27-29; Ev 144; Ev 146; Ev 13, para 8; Ev 151; Ev 24, para 6.2; Ev 41; Ev 167; Ev 174; and Ev 64, para 1.5. Back

119   The Contributory Principle, Fifth Report of the Social Security Committee, Session 1999-2000, HC 56-I and Pensioner Poverty, Seventh Report of the Social Security Committee, Session 1999-2000, HC 606. Back

120   See, for example: Q. 46 and Q. 49. Back

121   Ev 104, para 37. Back

122   Q. 243. Back

123   Q. 233. Back

124   Commons Official Report, 27 November 2001, column 836. Back

125   A new contract in welfare: partnership in pensions, DSS, December 1998, Cm 4179, p. 34. Back

126   Budget 2000, HM Treasury, HC 346, para 5.42. Back

127   Pre-Budget Report, HM Treasury, Cm 5318, p. 89. Back

128   Q. 210, Q. 213 and Q. 243. Back

129   Ev 147, para 7. Back

130   Ev 158. Back

131   Ev 166. Back

132   The Pension Credit; long-term projections, DWP, January 2002, para. 10. Back

133   Ev 170, para 6. Back

134   The Pension Credit: long-term projections, DWP, January 2002, tables 1 and 2. Back

135   The State Pension Credit Bill [HL], Research Paper 02/04, 15 January 2002, p. 36.  Back

136   Ev 140, table 2. Back

137   Q. 213. Also see: The Pension Credit: long-term projections, DWP, January 2002, para 17. Back

138   UK State Pensions Policy at the Crossroads, PricewaterhouseCoopers, February 2002.  Back

139   Ev 19, para 1.5. Back

140   Ev 28, para 4.5. Back

141   Q. 143. Back

142   Ev 96, para 1 and Ev 62. Back

143   Ev 151, para 3.2. The SAGE research group at the LSE is funded by the Economic and Social Research Council (ESRC) to "examine social policy in a ageing society". See: www.lse.ac.uk/depts/sage for further details.  Back

144   Q. 184. Back

145   A new contract in welfare: partnership in pensions, DSS, December 1998, Cm 4179, p. 29. Back

146   Ibid., p. 37. Back

147   Lords Official Report, 18 December 2002, column 141. Also see: Q. 184. Back

148   Ev 153, para 6. Back

149   Ev 20, para 3.5. Back

150   Q. 118. Back

151   Q. 120. Back

152   See: Pensioner Poverty, Seventh Report of the Social Security Committee, Session 1999-2000, HC 606, para. 71. Back

153   Q. 136. Back

154   Ev 172. Back

155   This assumes that the Basic State Pension remains linked to prices and real earnings grows by 1.5% a year.  Back

156   Ev 172. Back

157   IbidBack

158   See, for example: Ev 127, para 2; Ev 137, para 30; and Ev 162. Back

159   Ev 100. Back

160   Q. 137. Back

161   See: Ev 63, for further details. Back

162   The Pension Credit: the Government's proposals, DWP, November 2001, p. 3. Back

163   Q. 112. Back

164   Q. 149. Back

165   Ev 158, para 1. See also: Pension Provision Group: a commentary on the Pension Credit proposals, PPG, March 2001. Back

166   Q. 142. Back

167   Q. 255. Back


 
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