Examination of Witnesses (Questions 100
WEDNESDAY 6 MARCH 2002
DILNOT, CBE AND
100. There is not one type of behaviour: it
depends which part of the food chain you are in really in terms
of Pension Credit.
(Mr Dilnot) Yes.
101. Are there any straightforward changes to
the Credit, which you would suggest, particularly ones which go
towards the Government saying they are increasing private provision
(Mr Dilnot) Not obviously. There are no design features
of the Credit which we would say manifestly fail to meet the objectives
the Government looks to set itself. We would probably argue that
if you wanted the given set of objectives the Government has set
itself, this looks like a pretty coherent way of addressing them.
You might well have different objectives. If your objective was
to get private savings into pensions to rise, then you would have
to think about another set of policies. Compulsion is one you
would have to visit, but the Government has not said that is its
overriding objective. If it were the Government's overriding objective,
then this would not be the best policy to achieve it.
102. May I just pick up one point you just mentioned
that some people will be disincentivised to save? Really people
do not think in those terms, do they? What you have is a position
where people who do not save now, or are only saving relatively
small amounts, will benefit. You now get to the stage where owing
to the taper, people will actually be better off because they
have saved substantially more. The real argument, I suppose, is
how steep or how far up the income distribution the taper goes
and the Government has made a pitch on that. Whatever you do,
you still have that same argument but realistically are we not
talking about people who get to the end of the taper and therefore
do not benefit. Frankly by the time you get to that stage they
are going to have reasonable levels of savings anyway. They are
not going to be motivated by whether or not they can qualify for
(Mr Dilnot) One needs to be very careful about asserting
how people choose to behave. I certainly do not think there are
very many people in this room, including me, who could readily
do the calculation. When faced with this kind of comment about
the effect of the social security system on incentives to work,
I often do something which I will not do here, because I do not
think any of you could catch my wallet if I threw it at you. I
can throw somebody my wallet and see whether they catch it and,
by and large, they do. Then I put up Newton's equation of motion
on the board, S=UT+1/2AT2 and so on, and see how many people know
those. Very few people do any more. It is true that the trajectory
of my wallet from me to the person who catches it is described
by Newton's equations of motion, but that is not actually how
you catch it. You catch through practising catching things and
that is how people learn how to behave in response to bits of
Government action, tax and social security regimes. So the way
in which people understand how the tax and social security regime
affects them is much more likely to be seeing how people up and
down their street, in their community who have done particular
things have ended up experiencing life and that way truth will
out. I do not think we can dismiss the potential impact of this
kind of thing on incentives to save for those who find themselves
newly entitled to means-tested benefits in this way. If it is
the case, as over time it may well be, that a very significant
group who have not in the past been entitled to any means-tested
support find that they are entitled to means-tested support and
they then discover that for each pound of savings income they
have, instead of keeping that pound they then keep 60 pence, then
we would expect that would have an effect on the decisions of
people like them in the fullness of time. I am not for a moment
arguing that is a very powerful force in the short run.
103. At the moment they lose the lot.
(Mr Dilnot) No, not if they are well enough off not
to be entitled to be means-tested. The point about cutting the
taper rate is that we are introducing a large number of people
into means-tested benefits who in the past have not been entitled
to means-tested benefits.
104. The point I am putting to you is the point
you just put back to me about people who saved a lot. When you
get to that stage frankly trying to fiddle around with these marginal
rates is not worth a candle.
(Mr Dilnot) The people we are bringing in are not
necessarily on very high incomes.
(Mr Clark) We are talking about whether they have
a stronger or weaker incentive to save. If their marginal rate
has gone up and they have higher guaranteed income in retirement
both those things are going to make them less likely to save than
they otherwise would have been. It might be that for some reason
we want to make sure everyone saves a bit and then not care if
they save more than that or not, which sounds like what you might
be getting at, but it remains the case that their incentive to
save has been blunted.
105. They are not losing. It is just the fact
that they are not gaining something.
(Mr Dilnot) Let us be clear about the income group
we are talking about. These are people, if they are single, in
the current regime with incomes of £100 to £135 a week
all told. These are people with incomes of less than £8,000
a year, not people who have saved so much. Under the new regime
this group will find that they have a higher income than they
would otherwise have expected to have, which will tend to reduce
their decision to save, to forego consumption during their working
life and they will also keep less of any saving that they do,
than they would have done under the current regime at the margin.
So for every extra pound they save they will only keep 60 per
cent and they will find they have more income anyway because of
the means-tested benefit they are receiving. Both of the effects
that we can identify would reduce their incentive to save.
106. Are you not assuming a sophistication out
there that simply does not exist, that people have the sort of
understanding about the interaction of pensions and additional
savings, earnings that simply is not out there?
(Mr Dilnot) No.
107. When I speak to many people, they actually
do not have the foggiest idea what sort of pension entitlement
they are going to have. I just wonder whether people in this particular
group have the level of awareness and interest to start messing
about with the odd pound here or there.
(Mr Dilnot) I fundamentally disagree with that. If
I agreed with that then I would suggest you stopped this inquiry
because this inquiry is about precisely changing those rules in
a way that the Government argues will change behaviour. If we
do not think these kinds of changes affect behaviour, if it is
all too complicated, you might as well not bother. The discussion
I was having with Mr Dismore effectively was that he was saying
we are cutting the taper rate so that should lead to more saving
and I am saying no. When you do something like this there are
two effects. Let us forget about pensions for the moment, as often
that confuses. Let us think about a tax cut. Politicians will
frequently say something that the Opposition often said: that
cutting taxes is greatwill make people work harder. There
are two effects when you cut someone's taxes. One is that by cutting
tax they keep more of any extra pound they earn, so if they work
an extra hour they are effectively increasing the wage rate for
working the extra hour. That tends to make people work harder.
The corollary here would be that they save more. That is the effect
of the taper rate, so we cut the taper rate and that tends to
make people save more because they keep more of everything. Then
there is another effect, which is that when you cut somebody's
taxes it is a bit like giving them a win on the lottery. We have
all seen the pieces in the local newspapers saying "I won
the Lottery last week but I'm still going to go down to the factory
every morning". That lasts for three or four days until the
accumulated effect of champagne the night before means that getting
out of bed is just too difficult. A tax cut or benefit increase
makes you better off and that makes you choose to work less hard
or in this context save less. For the people we are talking about,
who are newly brought in to the means-tested benefit regime, they
are better off than they otherwise would have been and that will
tend to make them save less and for any saving they do do, because
they are now entitled to means-tested benefit and their means-tested
benefit will therefore be cut if they save more, they receive
less. I absolutely believe these things matter.
108. You have misinterpreted the point I was
making. There is a clear message to individuals to save and that
the Government is introducing a scheme which will reward them
for that saving and people understand the simplicity of that message,
people I have talked to. I have many pensioners who fit into this
category. The issue I was actually wanting to explore a little
more was whether or not the people who are in that particular
narrow group, who have only very limited savings and who might
then disqualify themselves from this additional benefit, would
go to the effort you are describing of producing savings in order
to qualify for the benefit. A lot of people are going to be outside
this because they have substantial savings or a substantial occupational
pension, private pension. Then we have the people who are on means-tested
benefit, who understand the system and who are going to be taken
through the system. It is that group with a relatively small occupational
pension, small level of savings. Are you seriously saying they
are actually going to go to the effort of understanding all the
complexities of the system in order to manipulate it at the margins
and remain entitled?
(Mr Dilnot) I am not suggesting they will seek to
manipulate the system. I am suggesting they will seek to make
rational choices. They will for example quite possibly go to seek
independent financial advice because these are areas where in
pensions and savings questions more generally you need to.
109. If you are on £100 a week and you
have the chance of getting £130 a week by saving a bit on
one side and you get 60 per cent of that on top, you are going
to do it, otherwise you are stuck on £100 a week.
(Mr Dilnot) The point I am making is that if you are
thinking about the choice between £100 and £130 a week
at the moment, under the current regime you would have to save
the full £30. Under the new regime you would only have to
110. And you keep the rest and you are financially
better off at the end of the day. Let us change the subject, because
you have not convinced me. The DWP set up three different scenarios
which you can perm them all sorts of different ways about uprating
all the different elements of basic and MIG and Pension Credit,
to use existing terminology. Which do you think the Government
is going to go for?
(Mr Dilnot) I do not know. The implication of their
statements is that the most expensive on Pension Credit is earnings
indexation and the means test and price indexation of the basic,
but more than five years ahead pension policy is a complete unknown
and we should leave it like that.
111. In the long-term projections DWP, said
that, even under the high cost the Pension Credit scenario, the
share of GDP would remain broadly the same. Do you think that
would be right?
(Mr Dilnot) Yes.
112. Which of the options would go more to meeting
the needs of encouraging individual provision, combatting pensioner
poverty and being sustainable in pension expenditure terms? Is
one of the options going to achieve all those three or which would
achieve each of them?
(Mr Dilnot) No, there is an inevitable trade-off.
You do best on pensioner poverty if you enhance means testing
and enhancing means testing inevitably is less favourable towards
increasing incentives to save and a greater reliance on universal
113. Which do you think we should do?
(Mr Dilnot) That is up to you. You set the objectives.
114. You have already answered many of the questions
I was going to ask on Housing Benefit but you confirmed earlier
that you believed the Government's announcement will protect pensioners
on Pension Credit so there will be no disadvantage with regard
to Housing Benefit and Council Tax Benefit. You also said it was
a very expensive solution to the problem. Do you think the Government
has hit on the right solution?
(Mr Dilnot) Given their objectives it is. I have a
long-running concern, which I have expressed to the Committee
before, that Council Tax and Housing Benefit will never seem worth
reforming on their own. Had a coherent strategy been devised five
years ago, then a lot of progress could have been made on Housing
Benefit and Council Tax Benefit alongside all the reforms to the
means-tested benefit regime which have gone on. By leaving it
aside and treating it as add-on on each occasion, it means that
there is little choice for the Government but to do this, which
perpetuates problems which are of long standing.
115. This whole issue of complexity and take-up.
One view has been expressed by Baroness Castle who has said it
is a complicated system, which will further confuse pensioners.
I take it that she is implying that people are so confused that
it will affect the take-up. That is one view. However, Baroness
Hollis has said that the pensioner does not have to do the calculating,
that what matters is that the pensioner knows there is something
there to apply for. Which roughly is your view?
(Mr Dilnot) It is moderately more complex in that
we are extending entitlement to a range of people who have not
traditionally thought they were entitled. We found when things
like the Working Families Tax Credit were introduced, that if
you extended something to people who had not traditionally thought
they were entitled, take up is a problem. That is why the approach
of having quinquennial reviews and of seeking to establish entitlement
at the beginning of retirement is important. As it stands, I expect
this to work pretty well in terms of take-up. The biggest problems
will be for those who become entitled after they first reach retirement
and for a means-tested regime it is being pretty much done in
as uncomplicated a way as is possible. For example, the treatment
of capital all seems to have been thought about with the objective
of minimising complexity.
116. Do you think the DWP will hit its target?
It is assuming a 67 per cent take-up by 2004, which is itself
described as ambitious.
(Mr Dilnot) I just do not know and particularly for
2004; we will not know until we actually see when they manage
to introduce this and how the phasing-in works.
117. Is there anything the Government could
do to reduce the complexity or does reducing the complexity have
effects on all the other things the Government is trying to do
by introducing the Credit in the first place?
(Mr Dilnot) Most of the things it could do to reduce
the complexity would mean either spending a lot more money or
increasing the coverage. There is not much capricious complexity
left in the scheme. Most of the complicated elements of the scheme
are there for clear policy reasons.
118. My question follows on the generality of
the Government's pension strategy. It would not surprise you that
we could go on for ages about that. You will also not be surprised
to hear that the Opposition, to whom you referred earlier, are
very concerned that the Government's policy on pensions is too
complex; it is muddled, at times it is incomprehensible, and it
really does not meet the challenges which are being heavily aired,
particularly in the last month, in the papers. Can I just narrow
that down to a couple of points? I want to ask you whether, if
you were starting with a clean slate in terms of pension provision,
you would create the Pension Credit. I want to ask you that in
the context of several of the suggestions, which this Committee
has heard during the course of this inquiry, many of which were
a far more radical approach to the problem. Have you seen any
of the more radical ideas which appeal to you or which you think
would be better at tackling the problems which this inquiry is
(Mr Dilnot) In all of this the starting point has
to be objectives and what we would want to say is that it is very
difficult to think of a coherent set of objectives, which are
met by the Pension Credit and the State Second Pension. You could
think of a coherent set of objectives met by either of them and
there is certainly a coherent set of objectives met by the Pension
Credit, allied with a big increase in the MIG and a steady reduction
in the basic state retirement pension relative to earnings. Quite
where the State Second Pension fits into that, is hard to understand.
119. Do you think the Pension Credit effectively
(Mr Dilnot) Yes. If you were to ask me to gaze into
my crystal ball, my own sense would be that we are very likely
to see the Pension Credit, and a Pension Credit which over the
next five or ten years looks rather like what it is suggested
at the moment it will look like. I think the chances of the State
Second Pension reaching anything close to maturity are slight,
but I have been wrong before.