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


APPENDIX 19

Memorandum submitted by the Government Actuary's Department (PC 24)

  1.  The following provides comments on the two specific questions, (a) and (b), in the letter of 10 December 2001 from the Clerk of the Committee to Mr Daykin, government actuary.

    (a)  Whether the State Second Pension (S2P) needs to change to accommodate the Pension Credit, and if so, how.

  2.  In order to assess the effect of the Pension Credit with S2P, it is useful to examine some simple examples. Inevitably numerous assumptions have to be made to illustrate the position, even for relatively simple examples, and the key assumptions are set out in the Appendix. The examples aim to illustrate the key features.

  3.  The annual uprating of the various limits that will apply to the pension credit in future are to be decided by the government of the day at the relevant time. Other than a commitment that the guaranteed credit (ie the minimum income guarantee in today's terminology) will increase in line with earnings for the remainder of this Parliament, there is no commitment to any particular rate of increase. The effect of the pension credit in the longer term will depend heavily on the future upratings of the relevant limits. This can be seen from the recent publication from DWP "The Pension Credit: long-term projections". The greatest costs will arise where the guarantee credit continues to be uprated in line with earnings in future at the same time that the savings credit threshold (which starts off at the same level as the basic state pension) increases with prices in future.

  4.  The illustrations in the Annex assume that the guarantee credit increases in line with earnings and the savings credit threshold increases in line with prices. There is an infinite variety of illustrations that could be produced to show the interaction of the pension credit and S2P but I trust that the two that we give here give a feel for the position.

  5.  The person who retires in 2025 will have some SERPS and some S2P. Quite high earners who make no private pension provision will receive the pension credit, which will be paid to anyone whose pension income is below approximately £230 per week in 2002-03 price terms. This compares with the current limit where a single pensioner receiving more than £135 per week will not get pension credit.

  6.  The person who retires in 2051 will have no SERPS and all S2P. Again relatively high earners who make no private pension provision will receive the pension credit, which will be paid to anyone whose pension income is below approximately £390 per week in 2002-03 price terms.

  7.  The illustrations in the appendix show the interaction of S2P and the pension credit. Although the interaction is complex, it does not seem to us that S2P needs to change to accommodate the Pension Credit.

    (b)  The extent to which it is possible to know how people's second-tier pension will be uprated each year, so that their entitlement to Pension Credit can be reassessed without their having to supply this information

  8.  As far as the predictability of annual uprating is concerned, second tier pension income can be derived from various different types of pension arrangement, including either occupational pensions or personal pensions. The extent to which it is possible for the Department for Work and Pensions to reassess the exact uprating from time to time will depend on the data collected by them. It is a matter of policy whether the basis for reviewing or revising an individual's Pension Credit entitlement has to be based on a precise recalculation at all times, or whether something more approximate for a period would be satisfactory, subject to allowing the individual's to request a more precise recalculation if they provide the detailed information needed.

  9.  In order for a precisely accurate reassessment to be made, a considerable amount of information on the nature and/or source of the pension would be needed. Even if that were done, increases to many occupational or personal pensions will be subject either to discretion or affected by changes in investment changes. Where the occupational pension scheme increases include some discretionary element, it would be necessary to collect information from the occupational scheme on the level of any upratings in order to make precise reassessments, if the intention is not to request this information from the individual claimant. This would be a very serious administrative burden both for the DWP and the pensions industry.

  10.  It would also be necessary to collect information from personal pension providers on the level of any changes in order to make precise reassessments for those people whose payments are not fixed, either in cash or real inflation linked terms. This would apply to pensioners who have investment linked or with profit annuities as well as pensioners taking income drawdown.

  11.  By way of general information, the following table show the number of pensioners whose occupational pensions were subject to different rules for annual uprating in 1995, the last date for which such detailed information is available. Broadly speaking we would expect the position to be similar at present, although the number of pensions will have increased. Although in some cases the changes from year to year could be done formulaically, a substantial number involve some discretion.

Table 1

NUMBER OF PENSIONS IN PAYMENT IN 1995 FROM DEFINED BENEFIT SCHEMES BY TYPE OF PENSION INCREASES PROMISED BY SCHEME RULES

Thousand
Pensions increases awarded
Private sector
Public sector
Total
Guaranteed
Guaranteed plus discretionary
Discretionary
Not increased
1,740
1,920
640
  
200
3,360
340

  
5,100
2,260
640
  
200
Total
4,500
3,700
8,200


  12.  Table 2 shows similar information to that in Table 1, but in respect of the number of current members of occupational schemes with different promises for upratings in the scheme rules. As would be expected, there is little difference between Table 1 and 2, both indicating a substantial level of discretion, implying the need for specific data if the reassessment were to be precise.

Table 2

NUMBER OF MEMBERS OF DEFINED BENEFIT SCHEMES BY TYPE OF PENSION INCREASES PROMISED BY SCHEME RULES

Thousand
Pensions increases awarded
Private sector
Public sector
Total
Guaranteed
Guaranteed plus discretionary
Discretionary
Not increased
2,210
1,690
900
  
280
4,000
100

  
6,210
1,790
900
  
280
Total
5,080
4,100
9,180
Andrew Young
23 January 2002




 
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