Select Committee on Work and Pensions Appendices to the Minutes of Evidence


APPENDIX 4

Memorandum submitted by the National Federation of Post Office and BT Pensioners, National Association of British Steel Pensioners and the Civil Service Pensioners' Alliance (PC 04)

EXECUTIVE SUMMARY

  1.  Overall a Pension Credit designed to remove the anomaly that those who saved all their lives but were no better off than those who had saved nothing, must be welcomed. Nearly all our members had to save for their retirement, as it was compulsory to join their pension schemes. Very many are certainly aggrieved when they just miss out on other benefits because of their small occupational pensions.

  2.  Combining the Pension Credit with the MIG is a sensible proposal since it is essential to keep the system as simple as possible.

  3.  We are pleased, to be able to agree with the Government's aims and objectives in attempting to rectify the disparities inherent in the pension system. However, we note, with some concern, that key elements of the Bill are likely to have a deleterious effect on the application of the credit in the wider world and seek to draw the Committee's attention to these problem areas. We believe that unless amended, the State Pension Credit will not meet the Government's own stated aims and objectives for the following reasons:

    (a)  The proposals are too complex for most people to understand. We had hoped to see a much more straightforward approach designed with the applicant in mind.

    (b)  The Savings Credit discriminates against those who do not have the full basic state pension (BSP).[1] This will actively discriminate against women as 51 per cent do not qualify for the full BSP. Furthermore, the state pension age for women is to rise from 60 to 65 by 2020 and so this problem is likely to be exacerbated as more qualifying years will be required for women to qualify for the full BSP.

    (c)  The operation of the Savings Credit may be a disincentive for people to save if they will not qualify for the full BSP.

    (d)  Experience from the relatively poor take-up of the MIG will show that a substantial number of people will not apply for the State Pension Credit and so, potentially, will lose out on two benefits instead of one.

  4.  We believe that the State Pension Credit proposals will not resolve the conflict between rewarding those who have saved and encouraging people to save.

  5.  Any proposal to increase means-testing for older people will fail to achieve its aims of relieving pensioner poverty.

  6.  It is our strong belief that the way to tackle pensioner poverty is to maintain the value of the state pension (and SERPS) to prevent the real decline in pensioner incomes over time.

  7.  Our current view of the Savings Credit is that it will not reach all those it is intended to help. We hope that, through this inquiry, the Government will reconsider aspects of the Bill, and address these vital issues.

INTRODUCTION

  8.  We are pleased that the Work and Pensions Select Committee has instigated an inquiry into the Government's proposals contained in the State Pension Credit Bill (the Bill). We welcome the opportunity to make a submission to the inquiry.

  9.  The National Federation of Post Office and BT Pensioners, Civil Service Pensioners' Alliance and National Association of British Steel Pensioners have a combined membership of some 200,000 pensioners nationwide. This represents nearly 2 per cent of all UK pensioners. About half of our members are over 75 and approximately 60 per cent of our members receive small occupational pensions.[2] Given the similarity of the membership of our three organisations, and not wishing to duplicate responses, we have decided to make a joint submission. A substantial number of our members will qualify for the Minimum Income Guarantee (MIG) and/or the Pension Credit. We therefore have a unique insight into the problems the Bill is seeking to address. We will be jointly available to give oral evidence to the Committee if required.

  10.  Much has changed since the Government published its Green Paper "A new contract for pensions: Partnership in Pensions".[3] The MIG has been introduced and is assisting around 2 million pensioners. We welcome this achievement. However, the Government has signally failed to reach the estimated 500,000 people thought to be eligible for MIG but who have not applied, despite an expensive advertising campaign. (This failure was forecast in our submission to the Pensioner Poverty inquiry.)

  11.  Many pensioners have benefited from the significant increase in the capital limit for eligibility and we welcome the Government's decision to increase MIG by average earnings. It has also been simplified by removing the three age related levels of entitlement and replacing them with a single payment. Simplification is welcomed but this change could have the perverse effect of ignoring the increased needs of "older" pensioners, as noted by the Social Security Committee in their Report into Pensioner Poverty,[4] and in our submission to the Pensioner Poverty inquiry.

  12.  Companies are closing their Defined Benefit pension schemes (DB) in favour of Defined Contribution schemes (DC), or are relying only on the Stakeholder Pension. We believe strongly that this has the potential to generate significant pensioner poverty in future years. This, in turn, could lead to increased numbers having to seek assistance from the State Pension Credit.

  13.  Inflation and interest rates are at historically low levels. Low inflation benefits those on fixed pension incomes. On the other hand, low interest rates, low returns on investments (indeed negative returns on equity investments for the past two years) and low annuity rates mean that many people retiring with personal pensions or DC occupational pensions in the next few years will have significantly smaller incomes than they expected and it is too late for them to rectify the situation.

  14.  Currently it is estimated that people have to save about 15 per cent of their gross salaries for all of their working lives (40 years or more) to provide a decent pension. Very many are unable or unwilling to save this amount, particularly if their employers make no contribution to their pensions. (There is no compulsion on employers to contribute to Stakeholder Pensions). It was estimated in 2000 that an individual would have to have life savings of about £92,000 to generate income equivalent to the MIG, Council Tax and Housing Benefits. People on low incomes cannot be expected to save this amount on top of their normal retirement pension savings. It is unlikely therefore that savings will increase sufficiently to provide decent pensions unless people are given real incentives to save, especially for those on low incomes. This was recognised by the Government in the Green Paper,[5] but we remain unconvinced that the Bill adequately addresses the issue of incentive to save. Indeed we believe that the proposals in the Bill may act as a disincentive to save for those who do not qualify for the full state pension (14 per cent of men and 51 per cent of women[6]).

  15.  Our comments on the areas identified by the Committee are detailed below.

GOVERNMENT'S OVERALL PENSIONS STRATEGY

  16.  The Government set out its pensions strategy in the Green Paper "A new contract for welfare: Partnership in Pensions". The Prime Minister wrote in his foreword:

    "Pensions are all about security. We all want to be able to retire on a decent income, and as we live longer and healthier lives, we want to be able to save more, so we can make the most of our retirement."[7]

  17.  The Green Paper stressed that everyone should recognise their responsibilities:

    —  "Those who are able should save what they can for their retirement.

    —  The Government should support those who cannot save and regulate the pension system effectively.

    —  The private sector should provide affordable and secure second pensions."[8]

  18.  The Government introduced the MIG, targeted at the poorest pensioners and Stakeholder Pensions to allow people on modest incomes to save for a second pension, run in conjunction with the private sector.

  19.  The Government recognised that many people had saved for their retirement but, because they were on low incomes or had little time to save and their second pensions were small, they were disadvantaged compared to those who had not saved. Small amounts of second income meant that individuals were above the limits for MIG, Housing Benefit and Council Tax Benefit. A Consultation Paper was issued in November 2000 on a proposal to reward those who had saved by introducing a Pension Credit.[9] The Government responded to the Consultation in December 2001—"The Pension Credit: the Government's Proposals." In this they said:

    "There is inevitably a 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. The Pension Credit will ensure that we can both tackle poverty amongst today's pensioners, and boost the incentive for future pensioners to save for their own retirement. The Pension Credit will make sure that it pays to save."

  20.  Overall a Pension Credit designed to remove the anomaly that those who saved all their lives but were no better off than those who had saved nothing, must be welcomed. Many of our members had to save for their retirement, as it was compulsory to join their pension schemes. Very many are certainly aggrieved when they just miss out on other benefits because of their small occupational pensions.

  21.  Combining the Pension Credit with the MIG is a sensible proposal since it is essential to keep the system as simple as possible.

  22.  We are pleased, therefore, to be able to agree with the Government's aims and objectives in attempting to rectify the disparities inherent in the pension system. However, we note, with some concern, that key elements of the Bill are likely to have a deleterious effect on the application of the credit in the wider world and seek to draw the Government's attention to these problem areas. We believe that unless amended, the State Pension Credit will not meet the Government's own stated aims and objectives for the following reasons:

    (a)  The proposals are too complex for most people to understand and therefore many will not know if they are getting the amount they are actually entitled to or even know if they are entitled to receive it. We had hoped to see a much more straightforward approach designed with the applicant in mind.

    (b)  The Savings Credit discriminates against those who do not have the full basic state pension (BSP) since it assumes that everyone has the full entitlement before the Savings Credit is paid. This will actively discriminate against women since, from the Government's own figures, 51 per cent of women do not qualify for the full BSP.[10] Furthermore, the state pension age for women is to rise from 60 to 65 by 2020 and so this problem is likely to be exacerbated as more qualifying years will be required for women to qualify for the full BSP.

    (c)  The operation of the Savings Credit may be a disincentive for people to save if they will not qualify for the full BSP. In this case all of the income from a second pension, or savings, will be taxed effectively at 60 per cent until the value of the full BSP is reached.

  23.  Experience from the relatively poor take?up of the MIG will show that a substantial number of people will not apply for the State Pension Credit and so, potentially, will lose out on two benefits instead of one.

  24.  In Moving the Second Reading Debate on the Bill in the House of Lords, the Minister, Baroness Hollis of Heigham said:

    "In particular, too many of those who could afford to save were not doing so or were no saving enough. Roughly 40 per cent of all employees and workers were not making any voluntary provision for their retirement. Thus they were heading for poverty in retirement."[11]

  25.  Baroness Hollis went on to say:

    "The principle is that those who can afford to save should do so, but also that the Government should support those who cannot afford it. . . . But that principle presents us with a difficult structural puzzle . . .. We must lift the poorest pensioners out of poverty by increasing their income, but at the same time we must restore the incentive for people to lift themselves. How those two apparently conflicting pressures are balanced is the question which the pension credit seeks to address"[12]

  26.  We believe that the State Pension Credit proposals will not resolve this conflict.

EFFECT OF MEANS TESTING ON INCENTIVES TO SAVE

  27.  Increased means-testing introduced by the Bill will, in our view, have no effect on the incentive to save for younger people. However we do believe that the means-test will be a disincentive for some older people to apply.

  28.  Baroness Hollis[13] referred to the use of the phrase means-testing as "serving to stigmatise that which is their right." She said that the Government ". . . intended to make a cultural shift in the way in which pensioners are treated." We agree wholeheartedly with this sentiment and hope that all younger and new pensioners will look upon state benefits in a different light. However, the main problem of poverty is with today's older pensioners and inevitably they have long memories of when applying for means-tested benefits was demeaning and even thought to bring shame on a family. They are a proud generation brought up with the notions of the importance of being completely independent and of not "seeking charity".

  29.  All organisations working with older people take great care to encourage them to apply for any benefit which it is their right to claim. This message is reinforced at every opportunity. Despite all this many older people still do not claim and we see no reason to suspect that attitudes to claiming will change just because a new benefit is introduced.

IMPACT OF PENSION CREDIT ON PENSIONER POVERTY AND LIKELY LEVELS OF TAKE-UP

  30.  We welcome any proposal to provide poor pensioners with more money to enable them to lead dignified lives. On this basis we welcomed the introduction of the MIG, which has helped many pensioners. However MIG has failed to reach all those entitled to receive it simply because they have not applied. We were sceptical about the MIG and for the same reasons were are sceptical about the ultimate value of the Savings Credit element of the State Pension Credit. Any proposal to increase means-testing for older people will in our view not achieve a 100 per cent take-up and will therefore fail in its primary aim of relieving pensioner poverty.

  31.  The maximum Savings Credit of £13.80 may be regarded by the Government as a significant extra sum for those who qualify. However, many will still be living on incomes below the £150 recommended by the Family Budget Unit as necessary to lead a dignified life.

  32.  Baroness Hollis recognised that:

    ". . . the income of many pensioners declines as they get older. Even those who start above the pension ceiling may find at some stage that they become entitled to a savings credit, particularly if one goes up related to earnings whereas their own pension is related only to prices."

  33.  By the Government's own admission therefore, the State Pension Credit will not prevent poverty, only alleviate it. Uprating of MIG by earnings and the BSP by prices was considered "unlikely to be sustainable in the long run" by the Social Security Committee Report into Pensioner Poverty.[14] The Report went on to say:

    "Moreover, if it is right for the MIG to be linked to earnings, so too must both components of the state pension if we wish pensioners to share equally in the rising prosperity of the nation."

  34.  We fully support this view.

  35.  It is our strong belief that the way to tackle pensioner poverty is to maintain the value of the state pension (and SERPS) to prevent the real decline in pensioner incomes over time. The MIG and now the Pension Credit will operate in a way which will draw more and more people into the means-tested net, unless a serious review of the uprating mechanism for the BSP and occupational pensions is undertaken.

  36.  Having said that, we welcome the fact that some pensioners will be rewarded for their thrift. They will not only benefit from their hard earned savings but will also receive extra money through the Savings Credit. We very much welcome the move away from capital limits and the abolition of the 16 hours work rule.

PROPOSED METHOD OF CLAIMING/ASSESSMENT AND FREQUENCY OF ASSESSMENT

  37.  The proposed method of claiming will be based upon the MIG form which has recently been reduced to 10 pages. Many will be able to claim directly by telephone or will be assessed by the Pension Service when their State Pensions become payable. We welcome these initiatives for new, younger pensioners. The problem is that most pensioner poverty today and therefore potential claimants, is concentrated amongst the older pensioners. It is precisely this group who are least likely to claim. We therefore believe that the Savings Credit will not reach all those it is intended to help. In order to reach all potential claimants the Government must be prepared to recruit and train a sufficient number of Civil Servants, who will go out into the community, work with voluntary organisations and visit pensioners in their homes to assist them with their claims.

  38.  We welcome the proposal to have a five year period of assessment, with the ability of the pensioner to seek an earlier assessment if they believe their circumstances have worsened.

  39.  The method of assessment causes us most problems. The Savings Credit element is only payable when the income of an individual, excluding the MIG, exceeds the level of the BSP (£77 in 2003). This is bound to cause resentment. There will be many who, for a variety of reasons, could not achieve the full BSP entitlement. Any second income they receive will therefore be taxed at an apparent rate of 60 per cent against the Savings Credit and so no benefit will have been gained at all from having saved.

  40.  For example:

    Mr A has a BSP of £77 and second income of £10. He will receive £13 Guarantee element and £6 Saving Credit giving a total of £106.

    Mr B has a BSP of £67 and second income of £10. He will receive only the £23 Guarantee element giving a total of £100. He will receive no reward for having saved the same amount as Mr A. He will have been "taxed" £6 for not having the full BSP.

  41.  We believe that a much fairer system will be to disregard all second income up to the value of the difference between the BSP and the MIG. This will have the effect of rewarding all savings if an individual does not receive the full BSP.

  42.  For example:

    Mr A has a BSP of £77 and a second income of £10. He will receive £23 Guarantee Credit giving a total income of £110, compared to £106 under the Pension Credit.

    Mr B has a BSP of £67 and a second income of £10. He will receive £33 guarantee element giving him a total of £110. Compared to only £100 under the Pension Credit, he will therefore be rewarded for having saved.

  43.  A further example is:

    Mr A has a BSP of £77 and no second income he receives £23 Guarantee element to give him £100.

    Mr B has a BSP £57 and £20 second income. He receives £43 Guarantee element giving a total income of £120 compared to only £100 under the Pension Credit. Mr B will benefit fully from having saved.

  44.  Annexed are Tables 1 and 2 and 3 showing how this would work with differing pension incomes.

  45.  A further area of concern is the cost of the proposals. The Government's own figures show that there will be an extra 2.5 million pensioners drawn into means testing, approximately 25 per cent of the pensioner population. This must therefore put a significant extra administrative burden onto the Department of Work and Pensions, at least in the first year. For the proposals to be successful, sufficient numbers of Civil Servants need to be recruited and trained prior to their introduction. We would like to see evidence that the Government has made a proper assessment of the costs of this legislation. Further, we question whether the State Pension Credit is the most cost effective way of spending this money and argue that increasing the level of the BSP to at least the level of the MIG and then maintaining its real value, with consequential changes to the eligibility rules for other benefits, would be of much greater help to all those who would be drawn into the State Pension Credit net.

January 2002


1   Cm 4179, December 1998, Page 17, Para 14. Back

2   Submission to Social Security Select Committee into Pensioner Poverty, 2000. Back

3   Cm 4179, December 1998. Back

4   Social Security Committee Seventh Report, Pensioner Poverty, HC 606, July 2000, Page xiv, Para 28. Back

5   Cm 4179, December 1998, Page 20, Para 33. Back

6   Cm 4179, December 1998, Page 17, Para 14. Back

7   Cm 4179, December 1998, Page 1, Para 2. Back

8   Cm 4179, December 1998, Page 3. Back

9   The Pension Credit: A Consultation Paper, November 2000, Cm 4900. Back

10   Cm 4179, December 1998, Page 17, Para 14. Back

11   HL Hansard, 18 December 2001, Column 140. Back

12   HL Hansard, 18 December 2001, Column 141. Back

13   HL Hansard, 18 December 2001, Column 140. Back

14   Social Security Committee Seventh Report, Pensioner Poverty, HC 606, July 2000, Page xxiv, Para 77. Back


 
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