Examination of Witnesses (Questions 1-19)|
WEDNESDAY 27 FEBRUARY 2002
1. Ladies and gentlemen, can I call the proceedings
to order and start off by explaining that we are in this room
for a very particular and very happy purpose in that we have with
us a distinguished, visiting group of parliamentarians from the
Russian State Duma. It is hard enough trying to understand pension
policy in English but for a VIP group of parliamentarians from
Russia, the least we could do was provide translation facilities
for them. We are delighted to welcome our friends, who are part
of a twinning programme with the Russian State Duma Employment
and Social Affairs Committee. We have visited them and this is
the return visit. We are delighted to have them with us and we
hope that they have an instructive visit here in the United Kingdom.
Our friends from the Association of British Insurers have been
good enough to provide evidence for the Committee. The Committee
is embarking on a new inquiry into the proposed Government Pension
Credit and we have a delegation from the Association of British
Insurers, headed by Joanne Segars who is well known to the Committee
and has helped us to good effect in the past. Perhaps you could
introduce your colleagues, make a short opening statement and
then we will go straight to the questions, if we may.
(Ms Segars) Thank you for giving the
ABI the opportunity to comment on the Pension Credit today. With
me today are Adrian Boulding, who is the Director of Pension Strategy
at Legal and General, and Chris Curry who is a senior economist
at the Association of British Insurers. The ABI welcomes the Pension
Credit very much. We believe the Government has done much to tackle
the poverty of today's pensioners and we think it is right that
attention is focused on those pensioners who have managed to save
for retirement but nonetheless have modest incomes in retirement.
Our concerns are focused on tomorrow's pensioners and we are concerned
that, as currently drafted, it will not be the case that all pensioners
or would be savers will benefit from the Pension Credit. This
is because some groupsfor example, women and the low paidmay
not see the full benefits of saving as envisaged by the Pension
Credit. We have a number of constructive suggestions for minor
changes to the design of the Pension Credit legislation that will
enable us to say with confidence that it pays to save. Nonetheless,
we want to stress that Pension Credit is, we believe, a significant
improvement on the current position. We also think it is helpful
to see the Pension Credit in the wider pensions and savings context.
There is a £27 billion savings gap between what we are currently
saving for retirement and what we need to save for an adequate
pension. Our work is now focusing on filling that savings gap.
The Pension Credit will play an important part in encouraging
people to save, but for the Pension Credit to meet the objectives
set by the Government in its expectations of future generations
of pensioners it must result in Government, advisers and regulators
being able to say with confidencefor everybodythat
it pays to save. Our proposals for change focus on trying to achieve
that objective. They focus on helping those with less than a full
entitlement to the Basic State Pension; identifying an equitable
solution for women aged between 60 and 65; rewarding those who
have saved small amounts for short periods of time; and addressing
the issue of helping the self-employed. We recognise that these
changes are not without cost, but we believe the benefits will
eventually outweigh the costs involved. It will be much easier
then for us to say with confidence that it pays to save and we
will be able to advise and help those people who are currently
not saving to save and ensure that everybody can retire with a
2. Maybe I am reading too much into the textual
analysis but it occurred to me that the submission you made to
the Government in the formal, government consultation process
talked about you warmly welcoming the proposal. The written evidence
that you gave to us was a bit more sceptical. Am I right in saying
that your thinking has shifted and that you are now more concerned
about some of the drawbacks than you previously were when the
official consultation took place?
(Ms Segars) I do not think that is the case. We are
now at the stage of identifying particular issues where we can
make some small changes to reach the objectives that I have just
Chairman: If it is my imagination, I am pleased
to hear that.
3. You have touched on some of these points
already, but I would like to ask three fairly precise questions.
It is part of the Government's aim to ensure that this new scheme
addresses two things. First of all, the issue of poverty amongst
today's pensioners and secondly for the future as a boost to the
incentives to save. Can you tell us in relatively quick and simple
terms to what extent, on those criteria, the Government will meet
(Mr Curry) On the issue of poverty amongst today's
pensioners, it will to a certain extent address a lot of those
concerns. It will increase the income of many of those who are
already retired, whether or not they have some savings. The issue
of means testing is a fraught one, but given that it is used at
the moment it will increase incomes for those who claim means
tested benefits. Looking at the impact on the incentive to save
for those in the future, incentives to save are very difficult
and complex to look at. I will try not to go into the detail.
In my view, in the vast majority of cases, it will give people
more of an incentive to save than exists under the current system
of Minimum Income Guarantee.
(Mr Boulding) What is important is that today there
are some people who are put off saving because they fear that
if they do not save at all they will be just as well off. If you
like, it is the next door neighbour who did not save and would
end up with as much money in retirement as they will, even they
had foregone some current income to save. The Pension Credit in
principle changes that.
4. The Minimum Income Guarantee has reinforced
those feelings, has it not?
(Mr Boulding) It has. The Pension Credit in principle
changes that because it enables us to assure a potential saver
at the point where they are wavering, wondering whether to start
a savings plan or not, that if they do save they will be better
off in retirement than if they have not saved, bar the fact that
we have identified one or two glitches in the legislation where
it is not true in 100 per cent of cases.
5. In your submission to us, you made it clear
that there are some groups that simply will not benefit. It will
not pay for them to save. How many? How big is that grouping?
Have you a shopping list of things that could be introduced into
the legislation which would meet your concerns on that specific
(Mr Curry) Looking at precise numbers, it is very
difficult. I can give you some contextual information. One of
the groups we have identified, women aged 60 to 64, as the legislation
is drafted, would not benefit from the savings element. It is
estimated that there are 1.5 million women in this age range at
the moment. That will increase over time to about 2.2 million
by 2031. That is a potentially sizeable group but I must stress
that it is not all women within that group who would be affected
by this. The other groups we have identified are those who have
a less than full record of Basic State Pension. Estimates I have
seen from the Government Actuary's Department suggest that at
the moment 93 per cent of all men have a full Basic State Pension
record but if you look at those who have only just recently retired
that drops to 88 per cent. But for women the corresponding figures
are 53 per cent of all retired women but only 25 per cent of those
newly retired. There is definitely some scope there for people
who do not have a full Basic State Pension to not benefit fully
from the impact of the Pension Credit. The other groups we identified
were the self-employed. There are currently over three million
people self-employed in this country and the particular problem
there is that they are not automatically members of the existing
compulsory second tier pension provision in this country, so they
have perhaps a larger gap to make up through saving.
6. You argue that the self-employed should be
brought into the State Second Pension so that they can gain access
to the Pension Credit but are you clear that they are excluded
(Mr Curry) They are not excluded from the Pension
Credit, but they are excluded from the State Second Pensions.
If they are included in the State Second Pension, they have a
much better chance of gaining from the Pension Credit.
7. There is a specific point in your submission
that suggests that those people who save £50 a month would
suffer negative return. Could you explain that to us?
(Mr Curry) The reason for that is because, under the
proposed Pension Credit, say for example a person had a full Basic
State Pension and £10 of saving's income on top of that;
their total income would only increase by £6 because of the
tapering effect within the Pension Credit. If you look back at
the contributions people have made to build up a pension fund
which gives you £10 income in retirement they will only see
£6 income in retirement so their rate of return as it affects
their total income is lower than the private rate of return on
their pension contributions. If you only save for short periods
of time, the effect of not getting the full benefit of your saving
takes the rate of return on those contributions below zero. It
is negative in the examples included for up to ten years. Under
the existing Pension Credit scheme, that is still a considerable
improvement on the Minimum Income Guarantee system where it can
take over 20 years to achieve a positive rate of return.
8. Continuing on the theme of incentives to
save, do you believe that the Pension Credit will have a positive
effect on future patterns of saving or would you agree with the
Norwich Union that "incentive to save is insufficient"?
(Mr Boulding) I think it will be a significant incentive
to save, particularly amongst the lower income groups where we
have the hardest battle in terms of persuading people to save.
There is a genuine fear at the moment of being made to look a
fool. People think they are being made to look a fool if somebody
similar to them that did not save got as much through means tested
state benefits as somebody who does save. The Pension Credit removes
that fear of being made to look a fool.
9. Pension Credit is in effect a means tested
benefit as well, is it not? It has been suggested to us that increased
reliance on such benefit for pensioners would discourage small
scale saving. Do you agree with that or disagree?
(Mr Boulding) I disagree with that. I think it is
increasing the chance that people are going to save for the reasons
that I have given. Although it is a means tested benefit, whereas
most means tested benefits have this cliff edge cut off that,
as soon as you move out of the range you lose entitlement, this
is a means tested benefit that is only progressively withdrawn
over a taper. You can clearly see that as you save and as you
save a bit more you still get some benefit from making that saving.
10. Presumably interaction with Housing Benefit
is crucially important here?
(Mr Boulding) Absolutely. One of the points we made
in the early submission, when it was originally a consultation
document, was that this interaction with housing tax benefit and
also Council Tax Benefit needs to ensure that it is still a progressive
taper as it is withdrawn. Indeed, that has been taken account
of in the drafting of the Bill.
11. The Government has set itself a target of
changing the ratio of private to public pension provision from
40:60 to 60:40. Will the Pension Credit help to achieve this target?
(Mr Curry) It is difficult to say until we know exactly
how the change in incentives affect behaviour. It could be that
the Pension Credit does lead to an improvement in savings rates
amongst people, in which case the Pension Credit will be supplemented
by higher private income in retirement as well. In theory, if
things work that way, it can move towards helping that objective.
As a counter balance, it does also increase the amount of income
that the state will be putting into retirement income in the future.
That will tend to work slightly in the opposite direction.
12. If you were able to alter the current proposals
for the Pension Credit to encourage more people, particularly
those on lower incomes, to save for their retirement, other than
through private means, how would you do that?
(Mr Curry) We put a specific proposal into our consultation
response and it is also mentioned in the written evidence to the
Committee. We feel that there would be a lot of merit in adding
a disregard into the Pension Credit so that the initial sums of
saving are not subject to any withdrawal rate and are kept in
full. We suggested initially that this might be at a level of
£10. This may have some expense, both short term and longer
term, but we feel it could be either met out of public expenditure
or there could be ways of adjusting the taper rates within the
other areas of the Pension Credit, which mean it could be done
on a cost neutral basis.
(Mr Boulding) The two groups we have identified that
are particularly disadvantagedwomen aged between 60 and
65 and both men and women with an incomplete Basic State Pensionare
disadvantaged because of the way the legislation has been drafted.
The formula for calculating the Pension Credit uses the actual
Basic State Pension that is payable from 65. If the drafting of
the legislation was changed to refer instead of the full rate
of Basic State Pension to the rate of Basic State Pension available
to the particular individual, those two categories would be fully
included in the Pension Credit. We could also say to those people
that it will always pay to save.
(Ms Segars) There are relatively easy changes that
could be made at this stage to the legislation.
13. Which is very important when it comes to
(Ms Segars) Precisely.
14. Baroness Hollis has described the Pension
Credit as the "final bit" of the Government's pension
strategy. On the other hand, Sue Ward, of the Northern Pensions
Resource Group, has said that the Pension Credit "reduces
the Government's strategy to incoherence". What is your view?
(Ms Segars) I am not sure we would concur with Sue
Ward's comment. As we have suggested, we do see the fact that
the Pension Credit should increase incentives to save and should
help people save for private pension provision. We do have a number
of improvements to make around the margins but we believe that
the principle is right and that the overall mechanism is right.
It is one that we see as being a building block in the Government's
(Mr Boulding) It is a very important correction to
a lot of damage that the minimum income guarantee has done. The
minimum income guarantee, which has been set at a level considerably
higher than the Basic State Pension, introduced a disincentive
to save and was putting people off saving. The Pension Credit
is correcting that disincentive.
15. If you think of all the elements of the
Government's pension strategy, MIG, stakeholder pensions and so
on, if you put them all together, how difficult does this make
for private insurers to provide effective advice to clients? Is
there any recommendation you would make here?
(Mr Boulding) The important thing to realise on advice
is that we are talking at people who are essentially going to
be buying stakeholder pensions in the workplace and the advice
they are getting is going to be generic in the sense that it will
be a financial adviser standing up, doing a presentation to a
number of workers rather than trying to sit down with each one,
one at a time, and individually assessing their own situation.
The particular thing which we believe is very important in the
Pension Credit is for that advice to hold at the generic level.
It is not practical for an adviser to spend time trying to assess
an individual's likely future entitlement to means tested benefits
(a) because of time but (b) because means-tested benefit will
be very dependent upon the individual's future circumstances which
at best are a crystal ball gazing prediction. It is critically
important for that adviser to be able to give the same message
to everybody in the room. If the details of the Pension Credit
are sorted out so that it works properly, they will be able to
deliver that message and quite simply say to them, "If you
save some money now, you will be better off in your retirement
than if you had not." I think that is a very important message
for them to be able to deliver.
16. In its memorandum to us, the Institute of
Actuaries said that, owing to the extension of means testing,
the introduction of the Pension Credit would "make it impossible
to provide savings advice to those on low to medium incomes"
and "means testing institutionalises mis-selling since certain
groups will receive a negative return on their savings, regardless
of the private provider's efforts." Would you agree with
(Mr Boulding) I agree with the point on negative returns
on savings. There will be some instances, and it is the effect
of a tapered withdrawal of means tested benefits, where you can
get a negative return on savings, but they are nevertheless getting
some benefit from their savings. This was not the case before
the Pension Credit was introduced, where you had people who could
save and get no benefit from their savings. I do not agree with
the Institute of Actuaries' view that we cannot give advice to
people on low income. Indeed, my company is in the position of
doing just that, going out into the workplace and setting out
the stall for how these things work for people on low incomes.
17. It sounds to me as though you would agree
with the DWP who said, "... it will be possible to make a
reasonably positive statement that for most ... people, most of
the time, they would be better off saving for retirement through
a pension." Is that statement helpful? What further advice
or information would you seek from Government?
(Mr Boulding) The statement is helpful if it can be
made more definite. The statement "for most people, for most
of the time" throws doubt into the workplace if you are making
a presentation, because the workers are left not knowing whether
they were in the "most people" group or in the "less
than most people" group.
(Ms Segars) Hence our suggestions around women, those
with small savings and so on, so that we can say that for everybody
it pays to save and you are better off saving than not saving.
18. The Government has said that it is going
to uprate the guarantee element of the Pension Credit in line
with earnings for the rest of the Parliament. Neither the Government
nor any political parties have said what their intentions would
be after that. Does the industry have a view on the level of uprating
which should be pursued?
(Mr Curry) No, certainly not that I am aware of. It
is interesting that even though nobody has committed to increasing
in line with earnings beyond the end of the next Parliament it
tends to be a fairly widely held belief that it will have to increase
by more than prices. If those who are already retired are to share
in increasing prosperity of the nation, it probably means that
we are expecting the guarantee element to increase faster than
19. There is an assumption that it will increase
faster than prices, although people are not sure whether that
should be in line with earnings in perpetuity?
(Mr Curry) That is right.