The Government's pension reform

Written evidence submitted by the Citizen’s Advice Bureau

Introduction

Citizens Advice welcomes the opportunity to present evidence on the pension reforms, including those in the Pensions Bill. In 2009/10 the CAB service helped 2.1 million people with 7.1 million issues. These included 26,600 relating to state retirement pension, 89,000 to pension credit and 13,500 relating to personal pensions, savings and investments.

We responded to two consultations in August 2010: by DWP on raising the state pension age, and by the Review on Making Automatic Pension Enrolment Work. This evidence summarises the points we made then and takes account of subsequent developments.

The Committee has highlighted three topics of particular interest, and our response follows these.

1.The proposed accelerated increase in the State Pension Age (and particularly the impact of the change on women)

We were concerned that the government’s consultation on raising state pension age (SPA) only discussed increases in average life expectancy. It did not address the socio-economic distribution of life expectancy, and current trends related to this. Consequently no account has been taken of the impact that raising state retirement age will have on those people who are not fit and well enough to work until current state pension age, or can expect only a short life in retirement. The Marmot Review "Fair Society, Healthy Lives" (Feb 2010) showed that there are significant geographic, income and socio-economic variations in life expectancy and disability-free life expectancy. Since poorer people tend to depend more heavily on state benefits for their retirement income than wealthier people, it is important that the government considers how raising the state retirement age more quickly will affect poorer, less healthy and more vulnerable people, not just the population as a whole.

Our main concern about the accelerated increase in SPA is the impact that this will have on people who have health problems that prevent them from working right up to SPA. Not only will such people have to wait longer before they get their state pension, they will also have to wait longer to obtain pension credit, and they are likely to be victims of the government’s proposal to restrict the payment period of the work related component of contributory ESA to one year.

Without any public consultation or discussion, the government is proposing to make substantial changes to pension credit eligibility in the Welfare Reform Bill. For couples it is currently possible to claim pension credit guarantee at the couple rate as soon as one of them reaches women’s SPA. Single people can claim as soon as they reach women’s SPA. These provisions are very valuable for people who lose their job in their early sixties, with little prospect of finding another, or who have become unfit for work. The Welfare Reform Bill proposes that couples will not be able to claim pension credit until both reach their SPA. It is unclear what the detailed financial arrangements will be for a couple claiming universal credit when one of them is over SPA. For single people, it is not clear if pension credit is to be restricted to claimants above "their" SPA (rather than, as currently, anyone over women's SPA being able to claim PC). This would disadvantage men who are over the SPA for women but under men's SPA.

We suggest that the Committee should ask the minister for the rationale for these proposals, why there was no public consultation, and when an impact assessment will be published.

The CAB service sees substantial numbers of people who become unable to work before SPA. Typically these are men who have done manual work all their lives probably from the age of 15 or 16. They are no longer able to do their usual work and are unlikely to possess or be able to acquire the skills needed to do other jobs. Currently, providing they meet the requirements of the work capability assessment (itself a problematic issue), they will receive CBESA until they reach SPA, even if they have a partner in employment. This gives them a modest income in reward for 40 plus years of national insurance contributions. If they are in a low income household they can claim pension credit when they meet women’s SPA – currently more than 4 years before they can get their state pension.

In future, they will lose their CBESA after a year, and will qualify for no benefits if they have a working partner or have household savings above £16,000 – modest for a household approaching retirement. They will be well and truly on the scrap heap. Then they will have to wait longer and longer as time passes before they can get pension credit or state pension. They are unlikely to enjoy a long retirement, and will get a poor reward for their lifetime of national insurance contributions.

When we commented to the DWP on the proposal to increase SPA, we suggested that the state pension scheme should be modified to follow the example of many occupational pension schemes and include an option for ill-health retirement. The case for this change has been strengthened by the government’s proposal to time limit CBESA.

We suggest that consideration should be given to introducing a state ill-health pension from, say the age of 55, for people in this situation. This could be based, like the state pension, on the person’s long term National Insurance contribution record, so recognising the payments these people have made over their working lifetime. The costs should not be great since these people will not generally have a high life expectancy.

2. The impact of the change to using the Consumer Price Index to uprate workplace pensions

We are concerned that the government’s eagerness to switch to CPI indexation for most benefits, additional state pension and for most workplace pensions is driven more by a desire to reduce costs than by any careful evaluation of the appropriateness of making the switch from RPI. We suggest that the Committee should invite the government to undertake an assessment of the impact of this change on the standard of living of workplace pensioners, and upon recipients of state benefits which have been similarly switched to CPI indexation.

3. The plans for auto-enrolment into workplace pension schemes and the establishment of the National Employment Savings Trust (NEST).

We are concerned that, in the absence of good quality, readily available, preferably free advice, significant numbers of employees will allow themselves to be auto-enrolled when they are likely to face high Marginal Deduction Rates (MDRs) from the private pension they will receive because of the impact on their means tested benefits in retirement. The Pensions Policy Institute has carried out a great deal of work on this topic. For example, PPI Briefing Note Number 44 (March 2008) suggests that 20% of people are likely to face an MDR of over 80%.

The people who are likely to face high MDRs will be people on low incomes, including those with significant periods out of work. Such people will be living in relative poverty during their working life and may well have better things to do with their earnings than to put 4% into a private pension offering a very low rate of return.

Similar considerations will apply to people who have high levels of debt and are struggling with their repayments. With the recession, there has been an increase in the number of people with debt problems – 2.4 million people sought advice on debt issues from CABs in 2009/10 – a 23% increase on 2008/09. People with debt problems need to consider carefully how they use their income. For example, it may be better to pay off loans and credit card debts, both of which charge high rates of interest, rather than to pay into a private pension. For people with mortgage arrears, it will clearly be better to use income to avoid losing their home than to invest in a private pension.

While it may be possible to give some general pointers to all employees about the circumstances in which they may wish to opt-out of auto-enrolment, we think that everyone should have the opportunity to access good quality advice to help them to decide whether to opt out. For most people this advice will need to be free to them, and consideration needs to be given to how such advice can be provided and funded.

We are concerned that people who are employed on pay which is at or near the minimum wage may struggle to find the employee contribution to the scheme their employer must offer. The phasing-in arrangements will soften this impact initially, but for many people it will be a challenge to sacrifice 4% of their wage. We do not think the answer is to discourage such people from saving for their retirement. For those on tax credits, the pension contribution is deducted from the person’s gross income to assess their income level, providing partial compensation for their pension contributions for people with low household incomes. It is unclear whether such compensation will be retained in Universal Credit. It should be.

Further compensation could be provided to the lowest paid by adjusting the national minimum wage to recognise that, with auto-enrolment, most people will be sacrificing current income to contribute to a pension.

We believe that it is sensible to phase in the new scheme in the way proposed. We should like to see an explicit commitment by the government to monitor the scheme during this phased introduction, so that necessary improvements can be made in the light of early experience.

We have two concerns about employer aspects of the plans. The first relates to micro-employers, particularly frail and disabled people who employ carers. It is government policy to encourage local authorities to provide assistance to people with social care needs by offering them direct payments or personal budgets, rather than directly providing care. We support this policy, but have become aware through casework, both with cared for people and their paid carers, that some people with social care needs are struggling to fulfil their responsibilities as an employer. For example, CABs have seen cases where carers have not been paid on time, or have not been given statutory holiday entitlement, or where disciplinary and grievance procedures have not been followed. Having to make private pension provision for paid carers will be a further responsibility for this group of micro-employers. We would like to see DWP work with DH to ensure that social care local authorities are obliged to make support on employer responsibilities, including the new pension responsibilities, available to all their clients who are receiving direct payments and individual budgets. We believe that a number of local authorities already do so – for example, Hertfordshire County Council contracts with Leonard Cheshire to provide such a service. It would be desirable for such support arrangements to also be accessible to self-payers, who do not qualify for local authority support.

Our second concern is that there should be effective policing to ensure that employers, particularly small employers, do not seek to encourage their employees to opt out of auto-enrolment. Employers have a financial incentive to do this, and the nature of the employment relationship in small firms, which is likely to be relatively informal, will give them ample opportunities to do so. CABs see many employees whose employers appear to have scant concern or knowledge of their responsibilities towards their staff.

February 2011