Memorandum submitted by the Association
of Consulting Actuaries (PC 14)
We have considered the issue at a recent committee
meeting and after subsequent discussions set out our observations
on the proposed legislation below. We welcome the changes that
are being proposed to the current system of means-tested benefits
but have a number of concerns as to their complexity and the resultant
potential impact on private sector schemes.
1. Government needs to disclose how the
thresholds will increase in the future and to signal that the
pension credit is only a temporary measure aimed at today's pensioners
and those retiring in the near future
If it is not made clear that S2P together with
the basic state pension, will deliver the foundation for those
retiring in the decades ahead, a culture could grow up of expecting
that the pension credit will remain a permanent ongoing feature
on the pensions landscape. This in turn will have a debilitating
influence on making private pension provision. The necessary future
withdrawal of the pension credit is explored below under its two
The redesign of SERPS, which comes into force
from 6 April 2002, should have the effect, but not for many years,
of making the guaranteed element of the pension credit redundant
for those then reaching retirement age. This is because the re-targetting
of SERPS on the lower paid, especially with the deemed earnings
effect for those with earnings below the upper limit for the 40
per cent band should result, for those who build up a full entitlement
the 40 per cent band of S2P; and
the basic state pension
in their obtaining an income from the state
above the minimum income guarantee.
Does this mean that from some time in the future
the guaranteed element of the pension credit is likely to be withdrawn?
Or will this necessarily means-tested benefit continue but affect
fewer and fewer people?
Under the current proposals, entitlement to
the savings credit will continue to grow and for many individuals
on low incomes will be driven by their SERPS and S2P rights. The
government should be more forthcoming as to whether it and its
successors intend to withdraw this benefit and if so what the
process would be.
It appears that the threshold at which the savings
credit starts to accrue has initially been set to equate with
the basic state pension, but it is not clear whether this relationship
will continue. There are a number of ways to effect the withdrawal
of the savings credit and it would be good practice for the government
to disclose which it had in mind given the different effects that
would result. Possible methods are set out below.
steadily increase the threshold above
the rate of the basic state pension until it reaches the minimum
income guaranteethis route would seem to be possible under
the current provisions of the Bill;
reduce the 60 per cent credit and
40 per cent debit aspects of the formula in proportionate steps
until they both reach zero;
place a monetary cap on the upper
income point at which the savings credit ceases to be payable.
If there is no increase in the Pension Credit
then increases in the basic state pension will have no beneficial
effect on many pension credit claimants and could make some of
them worse off.
2. The desire to control costs now in the
state sector has resulted in much complexity for those on low
incomes for the forseeable future
Much of the complexity could have been avoided,
if instead of refocussing SERPS on the lower paid in a gradual
way, the basic state pension had been quickly uplifted to a level
approaching the minimum income guarantee. If cost then became
an issue consideration could have been given to closing SERPS
for future accrual which if nothing else would have swept away
the complexities of contracting-out that most private schemes
have to address.
The complexity resulting from the government's
reforms to SERPS, its knock on effect to contracted-out schemes
and changes to the income support system has its expression in
a number of ways, some of which may impact on the advice that
members of our Association give.
We welcome the government's recent simplification
of the claim form for the current minimum income guarantee. But
at 10 pages plus another 30 pages of notes, it remains too long.
It still has some of the vestiges of the old lengthy income support
claim form applicable to all low-income groups. For example Part
10 of the notes informs the claimant that milk tokens may be available
after the individual concerned has given birth!
More seriously we question the extent to which
those who could claim the pension credit, available from 2003,
will in fact do so. But it is for others, with expertise in this
area, to offer their considered views on the level of take up
and whether the machinery of government will be able to efficiently
deliver means-tested benefits to 50 per cent and rising of the
The savings element of the pension credit replaces
a 100 per cent with a 40 per cent benefit tax for income up to
the minimum income guarantee (but necessarily introduces a 40
per cent benefit tax for income above this level until the credit
is exhausted). It should be welcomed for those on low incomes,
but with the proviso that claimants are unlikely to pay any income
tax. Therefore the message for those in work on low incomes must
continue to be that so long as one believes that this form of
income support will remain, it is not worthwhile making savings
that have to be delivered as an income in retirement.
This should act to discourage formal retirement
savings, counter to the government's objectivesit will
certainly make it very difficult to advise such individuals to
take out stakeholder pensions. In a climate where many employers
are cutting back on pension provisionredesigning their
schemes to transfer the risk to their employees and then reducing
the contribution commitmentthis issue could become of importance
to those beyond the lowest paid.
Given the 40 per cent benefit tax, individuals
in work who are likely to qualify for the pension credit in retirement,
should be looking at other vehicles, such as ISAs, to invest any
spare money. But this is only so long as the fruits of such saving
can be consumed in one way or another before the age of 60. For
example expenditure on home improvements may result in an increase
in the value of an asset that remains outside the means test.
But it is more likely that individuals will choose to raise their
immediate standard of living whilst in work and then fall back
on state provision.
It is therefore necessary to revisit:
the design of the pension credit;
have a clear statement of intent
from government as to the manner of its withdrawal
if those beyond government, in the business
of supplying professional advice, are to be encouraged to give
out the message that it always pays to save.
3. There are unnecessary elements of complexity
in the proposals
It is not clear to us why the qualification
age for the pension credit should be split in two. Entitlement
to the guaranteed income top up starts at 60 (and gradually moves
to 65 as state pension age for females makes this transition)
whilst entitlement to the savings credit starts at 65.
We understand the reason of practically for
the use of a notional rate of interest to turn capital into an
income equivalent and welcome the reduction in the rate from 20
per cent, but there is no clear statement of the rationale for
the section of 10 per cent. There is also no indication of how
and whether it will be reviewed.
The ten per cent rate will affect different
pensioners in different ways. For an individual with no private
pension income, allowing for the fact that the first £6,000
of savings is ignored in the calculation, the effective rate of
interest on total savings will rise from 0 per cent to around
8 per cent by the time that entitlement to the savings credit
is extinguished (at around £36,000 in 2003-04). For those
reliant on savings, this will remain a penal rate.
4. The long-term cost of the pension credit
has not been disclosed
In his statement the Chancellor indicated that
50 per cent of pensioner households will benefit from the pension
credit when it is introduced in 2003. He also said that the cost
in the first full year of its operation would be £2 billion.
What is missing from the pre-Budget statement is an indication
of the proportion of the pensioner population that could benefit
in the long-term and the resultant cost. Both can be expected
to rise thanks to the nature of the benefit and the growing number
of pensioners. The rise in the pensioner population is well documentedthere
are two aspects to the benefit design that will cause the cost
the policy intention that the guaranteed
element of the pension credit will rise in line with the increase
in national average earnings, resulting in an expanding gap with
the lower basic state pension which will only increase broadly
in line with retail prices; and
the fact that the upper income point
at which the savings credit is no longer paid is a function of
the expanding guaranteed element.
The second factor means that the savings credit
can be expected to extend up the pensioner income scale, expressed
as a percentage of national average earnings, as the basic state
pension loses its value on this measure. In 2003-04 this upper
income point will be around 30 per cent of national average earningsby
2040 it could be 40 per cent.
Helen James, Chairman
Pensions committee of the Association of Consulting
9 January 2002