Memorandum submitted by the National Association
of Pension Funds (NAPF) (PC 22)
The NAPF welcomes the concept of the Pension
Credit in principle and believes that it is a useful step towards
rewarding low-income pensioners for their thrift during their
working lifetime. However, it is very complex. Although it will
act as an incentive to save for those on very low incomes, it
may increase the confusion for those at the margin.
1. OPENING REMARKS
1.1 The National Association of Pension
Funds represents around 1,000 schemes covering many thousands
of private and public sector employers (with a combined membership
of around 8 million) as well as 400 professional organisations
providing related actuarial, fund management, investment consultancy,
accountancy and legal services.
1.2 NAPF's members account for funds of
some £650 billion, and pension funds between them own about
a fifth of the entire market in UK equities. The scale of the
funds involved in pension provision, whether private pre-funded
or state pay-as-you-go schemes, is large enough to have a substantial
impact on national economies and international capital flows.
A thriving funded pension sector is good for the economy as a
1.3 The NAPF welcomes the concept of the
Pension Credit in principle and believes that it is a useful step
towards rewarding low-income pensioners for their thrift during
their working lifetime. It will be of considerable help to those
existing pensioners of occupational pension schemes who are receiving
state means-tested benefits, including a number of widows. It
will also assist existing employees on low earnings, eg part-timers,
to have greater confidence in contributing to an occupational
pension scheme without the fear that their contributions could
be "wasted" in terms of total retirement income.
1.4 It should be noted that the NAPF's field
of responsibility does not extend to the full remit of the Committee.
Consequently we have not responded to all the areas covered in
the Committee's call for evidence.
2. THE COMPLEXITY
2.1 The Pension Credit is very complex.
Although it will act as an incentive to save for those on very
low incomes, it may increase the confusion for those at the margin.
Significant numbers of people will be unsure whether they will
receive the Credit or not.
2.2 The Pension Credit is effectively a
combination of the recently introduced but now well-recognised
MIG, and a new savings credit. The amalgamation of two different
ideas into one credit is likely to confuse people who are thinking
of saving for their retirement. This confusion can only be increased
by the fact that the MIG is an entitlement for every pensioner,
whereas there are extra qualification criteria for the savings
2.3 Such confusion is particularly relevant
for those with broken work patterns. The poorest pensioners are
often those with a chequered work history which involves periods
of unemployment or under-employment. The Pension Credit will not
be of as much benefit to those who have not built up a full set
of National Insurance contributions.
2.4 For these pensioners, the first part
of their income from savings or private pensions will be used
to bring them up to the level of the basic state pension. People
on low incomes, and with gaps in their National Insurance record,
will therefore face a significant disincentive to save compared
to people with a full entitlement to the basic state pension.
This will apply particularly to women, who may take a long break
from work to raise a family or care for other relatives.
2.5 Given the scope for possible confusion,
it is essential that very clear and simple communications material
should be made available, together with a helpline (perhaps run
3. THE ROLE
3.1 When surveyed in June 2001, the majority
of NAPF members supported the Government's aim that, by 2050,
the provision of pension income be 60 per cent private and 40
per cent public. (This situation is currently reversed: 40 per
cent of pension income is private, and 60 per cent public).
3.2 To achieve this aim, pensions must be
an attractive option to people looking to provide for themselves
in retirement. The Government should therefore commit itself to
a stable hierarchy of taxation. This hierarchy should offer the
greatest incentives to those products requiring the longest commitment.
Pensions require an individual to commit their money until retirement.
Pensions should therefore attract the greatest incentives, as
they offer the greatest benefits to the community by guaranteeing
that assets will not be dissipated before retirement.
3.4 Pensions also offer benefits to the
Treasury. Pensions in payment attract income tax, unlike the income
from savings vehicles such as ISAs.
3.5 The Pension Credit makes no distinction
between income received from an occupational or private pension
and, for example, interest paid on PEPs or ISAs. This may put
a barrier in the way of transforming the provision of pension
income to 60 per cent private and 40 per cent public provision.
3.6 The proposals will, in effect, introduce
a marginal tax rate of 40 per cent for those receiving small occupational
pensions. Consideration might be given to reducing this to, say,
20 per cent, which seems more in line with tax policy in general.
If this cannot be afforded at the outset, it would be useful if
the Government could make it clear whether they see a case in
principle for the 40 per cent to be reduced in future years.
4. OTHER CONCERNS
4.1 It is recommended that special attention
be paid to the amount of pension which can be retained by pensioners
who are in hospital on a long-term basis. At present, we believe
that retention levels are inadequate to enable such people to
provide for occasional one-off expenditures eg presents to relatives,
leading to a loss of human dignity.
5.1 We are pleased that the Government has
listened to the pensions community in designing this scheme (in
particular, the proposed extension of the Pension Credit to benefit
people on Housing Benefit is very welcome). We will offer any
assistance possible in getting the small print of the Regulations
right. The Credit is likely to open up new options for employers
and the trustees of occupational pension schemes to help their
poorer pensioners through targeted increases which will no longer
be wasted. We know that some companies are already starting to
look at this issue, and the NAPF will be drawing members' attention
to the new possibilities which are opening up, once the regulations
have been made.
Political Liaison Officer
18 January 2002