Memorandum submitted by the Industrial
Society (PC 09)
1. The Industrial Society welcomes the opportunity
to contribute to the Work and Pension Committee's inquiry into
the Government's proposals for the Pension Credit. We are a long-standing,
independent organisation that exists to improve working life and
have over 10,000 establishments in membership across all sectors
of employment. We have become increasingly dismayed at the inadequacy
of state pension provision and the complexity of the whole pension
2. In Spring 2001, the Industrial Society
published its report Pension tension, measuring the UK's pension
system against the basic principles of fairness, clarity, security
and efficiency. We found severe drawbacks in the Pension Credit
proposals that are not ameliorated by the DWP paper, The Pension
Credit: the Government's proposals, published in November 2001.
Indeed, we cannot see the logic behind the some of the detail
in this paper.
Parts of the State Pension Credit Bill, notably Clause 3, defining
how the Pension Credit will be calculated, are equally bewildering.
The Bill needs a straightforward explanation of the proposals.
3. A much better way to persuade people
to save more for retirement would be to increase substantially
the basic state pension to provide a genuine subsistence income
and then re-link it to earnings in the future. This would then
mean that people could save as much as they wanted, to give themselves
an income above that level and have nothing taken off them. This
was not only the original Beveridge approach; it is also the current
approach in that bastion of the free market, the US. There, the
Social Security pension is earnings-related, and offers benefits
of between 25 per cent and 60 per cent of income up to a ceiling
considerably higher than our Upper Earnings Limit. In answer to
those who object that this is not "targeted" one can
for the group of pensioners well
enough off to be paying tax at the 40 per cent rate (currently
fewer than 2 per cent of the total), the tax system will remove
much of their gain; and
this is a social insurance transfer
payment paid for by National Insurance contributions and not a
"handout"; if the Duke of Westminster has paid his NI
contributions like everyone else, why should he not also receive
an NI pension?
4. The Government also appears to have changed
its views for the Pension Credit on the treatment of earnings.
The November 2000 consultation paper made it clear that earnings
were to qualify for the 60 per cent disregard. The Explanatory
Notes on the State Pension Credit Bill, however, state the Government's
intention that "qualifying income" (to be defined by
regulations under clause 3(6) of the Bill) should, broadly, be
income arising from national insurance contributions (eg retirement
pension) and the claimant's own retirement provision (eg occupational
or personal pension or income from capital). Earnings, it appears,
will not be included. The White Paper merely notes the existence
of "small earnings disregards in the Minimum Income Guarantee"
and adds: "We are continuing to consider the treatment of
earnings in the Pension Credit."
5. This appears to be in contradiction to
other Government policies, which favour encouraging older workers
to stay on and offering more flexibility about retirement, as
set out in the Cabinet Office report Winning the Generation Game.
The Government is keen to maintain or even improve the ratio of
workers to pensioners, and one way of doing that is to and make
it easier and more attractive for people to continue working for
By discouraging part-time work after retirement, this seems to
be an example of un-joined-up Government at its worst.
6. The way that the Government is seeking
to establish equal treatment for men and women in these proposals
will disadvantage women between 60 and 65 in the savings credit
above the level of the guaranteed minimum income. The problem
arises because the guarantee element will be payable to both men
and women at 60, and the savings credit element will be payable
to both men and women at 65.
7. There are major uncertainties regarding
future uprating of the pension credit. These add to existing uncertainties
about the future value of the basic pension, the state second
pension and money-purchase pension schemes, that will make pension
planning extremely risky. We fear that many young people may decide
to spend their money rather than to save it against this uncertainty.
8. The Government appears to regard the
answer to pensioner poverty as lying in an extension of means-testing
through the Pension Credit proposals. For every £1 of second
pension, savings or earnings above the minimum income level, 40p
of the pension credit will be deducted. The November White Paper
states (section 4, page 6) that:
"Any pensioner who receives the guarantee
part of the Pension Credit will be entitled to full Housing Benefit
and Council Tax Benefit. Nobody will lose Housing Benefit or Council
Tax Benefit as a result of the Pension Credit."
"We will achieve this by raising the level
at which pensioners qualify for help in line with the Pension
Credit, and also by mirroring the new rules on savings. . . ."
Without further information, it is difficult
to know exactly what this means, or whether the changes will be
effective. It is important, therefore, that Parliament sees at
least draft Housing Benefit regulations during the passage of
the Bill, in order to ensure that it is dealing with the full
picture. If the proposals in section 4 are not properly carried
through, then if a pensioner is also claiming Housing Benefit
or Council Tax Benefit, a further 51p in the £ of income
from these sources could be lost, leading to an effective marginal
tax rate of 91 per cent.
9. These credits, planned to start in 2003,
will bring half the pensioner population within the ambit of means
tests. This is a U-turn from the Government's stance in the Pensions
Green Paper, where they gave as one of the reasons for change
that, "By 2025, without reform, well over half those reaching
retirement age could have to rely on income-related benefits in
Currently, around a third of pensioners, according
to DWP estimates, do not claim the means-tested benefits to which
they would be entitled.
Even expensive take-up campaigns, like those, last year, for the
Minimum Income guarantee, have low rates of success.
The Government appears to believe that such take-up problems can
be solved by simplifying claim forms and using the tax system
rather than the Benefits Agency to paydespite the fact
that only a third of pensioners pay tax.
10. Those designing this new arrangement
are taking a contradictory and illogical position. Up until they
retire, low-paid workers are assumed to act on imperfect knowledge
of the benefit system and to take financial decisions which are
irrational, since they will be foregoing current consumption in
order to make investments on which they will make low or negative
rates of returns.
As soon as they reach retirement age, however, the same people
are expected to have perfect knowledge of the benefit system and
take financial decisions that are rational in claiming all benefits.
11. One effect of the proposals will be
to increase the numbers of pensioners within the scope of paying
tax at the 40 per cent rate. This has important implications for
people of working age, saving for a pension, financial advisers
and sellers of pension products. Many people of middle age or
younger have been able to assume that, by paying regularly into
a good second pension scheme for the rest of their working life,
they would stand a good chance of retiring with an income above
the means-tested minimum. Mostly people are unlikely to be aware
that, to counter this effect of the pension credit proposals,
they will have to put more aside.
12. We have seen nothing in the Government's
proposals as currently presented to change our views that the
Pension Credit, involving a huge increase in means-testing, is
not the way to tackle pensioner poverty; and that as currently
planned, it will be seriously flawed in its operation.
10 January 2002
15 For example, the reason why the savings credit
for a single pensioner increases by 60p for each £1 of income
between £77 and £100 and reduces by 40p for every £1
of income over £100 (The Pension Credit: the Government's
proposals, Annex A). Back
As drafted, this clause appears to have the effect of not only
rewarding pensions and other income from savings ("qualifying
income" to be defined by regulations under clause 3(6)) but
also income above (but not below) the MIG level derived from other
sources. We understand the Government's intention to be to reward
only "qualifying income". This needs clarifying and
we also support suggestions put to us for a major simplification
of the Bill to dispense with the proposed separate "guarantee"
and "savings" credits in order to achieve one benefit,
the pension credit, which would replace the Minimum Income Guarantee. Back
See Re-centring the debate on pensions-part 1, Euro Area Weekly
no 2, 2000, CSFB, quoted in "Age shall not weary them",
Martin Woolf, Financial Times, 7 February 2001, and also Age of
Retirement and Longevity, Institute/Faculty of Actuaries Pension
Provision Taskforce, 28 February 2001. Back
While women under 65 will benefit from the reduced notional interest
rate on their savings, the notional rate will still be over 10
per cent and this will be only of limited help. Back
"Recent pension policy and the pension credit", IFS
press release, 21 February 2001. Back
Pensions Green Paper, p 14. Back
Income-related benefits; estimates of take-up in 1998-99, 2000,
available from DWP website: http://www.DWP.gov.uk. Back
Touchbase. Issue 22, DWP 2001, p 3. For information about take-up
issues, and the experience at local level, see Benefits take-up
initiative-a good practice guide for local authorities-it's a
right . . . not a lottery, Local Government Association, July
1998, available on website: http:/www.lga.gov.uk. Back
Means-testing, position paper from Institute/Faculty of Actuaries
Pension Provision Task Force, February 2001 available from: http://www.actuaries.org.uk. Back