Examination of Witnesses (Questions 140
WEDNESDAY 6 MARCH 2002
140. Does that mean that the Government's projection
in terms of the numbers that it is claiming it would expect to
see in receipt of a private pension are unattainable?
(Mr Hawksworth) The model does not explicitly make
an assumption on that. What it makes an assumption on is incomes
from all sources. It does not assume any dramatic change in the
take up of private pensions. You could say it is a fairly steady
set of assumptions; it does not specifically make an assumption
on that, it makes an assumption about people's incomes from whatever
sources, which would be partly from the State Second Pension,
partly private pensions. Obviously there could be uncertainty
as to what the contracting out rate is or how you split it. To
some extent the model finesses that distinction by trying to look
at total incomes rather than trying to second-guess precisely
what the relationship there is. You need to recognise that in
this kind of long-term model you have to make quite a lot of simplifying
assumptions. Certainly we do not assume any dramatic change in
the take up of private pensions.
141. You are not assuming any significant behavioural
change either as a consequence of all the things you have been
(Mr Hawksworth) We are not assuming any, no. You can
say that underlying it implicitly is a fairly status quo
view of the situation which may be rather optimistic in some respects.
142. Just for the record, which of the uprating
proposals floated by the DWP do you think is the most likely to
(Mr Hawksworth) "Most likely" is difficult
to say but the most plausible, given past Government statements,
is policy scenario one. The Government has said that they are
committed to earnings indexing the MIG For this Parliament and
has an aspiration to go further than that, in its 1998 White Paper.
If you do not link the savings credit lower threshold to the Basic
State Pension, then you get some pretty perverse effects in the
long run. So policy option two, although on the face of it plausible,
is not really plausible in the long run. Policy option one is
the one we have based our main case on. We have looked at others
143. So if you were Alistair Darling for 60
seconds is that what you would do?
(Mr Hawksworth) That is a matter of political judgment,
which I leave to the politicians. That seems to me the most plausible
interpretation of Government pensions policy statements.
144. In other words yes.
(Mr Hawksworth) It seems the most plausible interpretation
145. Is that the IPPR's view?
(Mr Robinson) Yes.
(Mr Brooks) It is the IPPR view that only scenario
one is the plausible view of how the Pension Credit might evolve.
It is not necessarily our view that that is
146. If I read John Hawksworth's paper right
you could look at that the other way round and say the Pension
Credit could erode if S2P came in and filled that gap. Did I understand
you to be making that point?
(Mr Hawksworth) There is an alternative strategy.
In the paper we say basically that there are two strategies, which
also seem to us to be worth consideration: one is the one IPPR
have put forward, the more radical strategy; the second strategy
is to say that the Pension Credit is really only a temporary measure
to deal with this temporary problem of the MIG having gone up
and therefore after 2010 one phases the Pension Credit out and
puts the money back into the State Second Pension. Therefore this
tension between the two is only a temporary thing and ultimately
the Pension Credit goes to zero and you can phase it down over
a period of years, 10, 20 years, whatever, put that money you
save back into the State Second Pension and then you could build
the State Second Pension up above the MIG again, thus eliminating
the gap of 3 to 4 per cent I referred to earlier. You could
put that money back in, build that back up above the MIG and then
have a system based on a low Basic State Pension but a more generous
State Second Pension for those who contracted in. To the extent
that everyone contracts in, that would almost revert to the IPPR
option because you would have two flat rate pensions on top of
each other and it would almost become identical to the IPPR option,
however, you would give people extra choice. That is an alternative,
less radical option that has the disadvantage that the State Second
Pension is rather complicated, people may not understand it, so
it may not be politically sustainable, people may chip away at
it in the same way they did at SERPS. To me those are the two
coherent alternative strategies for the long term.
147. I should like to turn to your general IPPR
proposals and we are grateful to you for giving us sight of them
before publication date today. May I just talk about the two goals
you mention of tackling pensioner poverty and incentives to save
which are the ones most under discussion in the news at the moment.
Your proposals generate quite a lot of money by raising the retirement
age and by abolishing, as I understand it, both the State Second
Pension and the contracted out element. Did you look at the alternative
of targeting that money at poorer pensioners through what is now
the minimum income guarantee rather than spreading it amongst
the whole population through the Basic State Pension increases
(Mr Robinson) We took as our base case the Government's
current proposals, modelled out into the long term in the way
that John outlined in his previous reply. We took the Government's
base case as the comparison against which to look at other possible
options such as a generous increase in the Basic State Pension
or trying to make the State Second Pension more generous. We have
compared those three key models.
148. If you stuck to your proposals for revenue
raising, if I may put it that way, of increasing the retirement
age and abolishing the State Second Pension and put that instead
into increasing the income support amount, would that make the
poorer pensioners better off than under your proposals?
(Mr Robinson) Clearly if you raise the retirement
age you can do that under any possible policy scenario. If you
did that you would reduce expenditure against the base case and
then you could use that extra money to boost some other part of
the pensions system, whether it is Pension Credit or anything
(Mr Hawksworth) To be clear, you are talking about
raising the MIG even more than earnings, so boosting it even faster
149. Absolutely. What I am saying is that if
your overwhelming policy goal is pensioner poverty, would you
agree that the way of attacking that would be to put it into the
MIG rather than into the Basic State Pension?
(Mr Hawksworth) That would then also mean, assuming
that you keep the Pension Credit as well, that the gap between
the Basic State Pension and MIG would get even wider and therefore
the Pension Credit ceiling, at which you would hit it, would go
even further up the income distribution, so instead of 70 per
cent you might be up to 80 per cent or whatever of people affected
by the Pension Credit means test. It would then be a question
of whether that actually works, in terms firstly of whether you
achieve the take-up rate in terms of targeting that extra money.
You would also be extending the means test yet further up the
distribution. One could take that to an extreme whereby almost
everybody, apart from the few millionaires like Paul McCartney,
as pensioners end up being means-tested and getting sums other
than means-tested benefit. Certainly that would be an alternative
strategy but it would retain all of the complexities of the existing
strategy as well in terms of the rather ambiguous impacts on savings
incentives, which Andrew Dilnot spoke about earlier. Like every
other pension strategy it is not perfect; no strategy is perfect,
all of them involve trade-offs.
150. Would you agree that that approach would
target pensioner poverty more than the approach which you have
put forward today?
(Mr Robinson) Only in so far as you lick the take-up
problem. So long as take-up is significantly less than 100 per
cent, you will continue to have a significant amount of pensioner
(Mr Hawksworth) It would depend also on where you
define pensioner poverty. It would certainly help those people
at the lower end of the pensions' scale, the people below the
MIG basically. To the extent that it slightly muddies the water
on saving decisions, you might end up with some people making
less good decisions and being less clear about the State Pension
in the next range up from the MIG upwards. It might help those
at the bottom but the people who are still on quite modest incomes
between the equivalent of £100 and £135, whatever it
might be in the future, might end up feeling rather less well
served in terms of the kinds of incentives for saving. It retains
the problems of complexity.
(Mr Brooks) In terms of addressing pensioner poverty,
if you accept that the Minimum Income Guarantee, at the level
it will be raised to next year of £100 per week, is the adequacy
level, and that people who receive that level have been lifted
out of poverty, then increasing that MIG level in itself does
not actually reduce pensioner poverty it just gives those people
who receive the MIG more income.
151. I do think pensioners who receive the MIG
at the moment would not turn down an increase above that level
if they were offered it.
(Mr Brooks) I am quite sure that is true.
152. The debate is about the relative impact
on pensioner poverty of the take-up problem versus the impact
on poverty of giving them more money through the MIG. Would you
agree that some of the issues about take-up will depend on the
things Andrew Dilnot was talking about, whether the quinquennial
reviews work, whether the reforms the Government propose work
and whether the benefit people were getting through MIG made it
worth them claiming because the difference between what they get
and what they would get would improve.
(Mr Robinson) There is another important point to
make here. We have already emphasised that currently someone who
had only accumulated rights to the State Second Pension added
on top of their Basic State Pension would retire on an income
below the MIG once the system has matured. You will face the problem
that lots of people with modest private savings or private pension
provision will, even if they are above the MIG, even above the
Pension Credit limits when they are 65, be trickling down into
the means-tested provision year by year; they will get into it
at 66, at 67 or 68 or 69 or 70. So the Pension Service is going
to have to do a really heroic job in catching all of these people
who year by year will be falling into the means-tested system.
Saying we just have to look at everybody's circumstances every
five years is slightly misleading in that there will be people
year, after year, after year who will be drawn into the means-tested
(Mr Hawksworth) I do think also that in your solution
you would really have to look very hard at whether you would want
the State Second Pension and what sort of function that would
153. I am not necessarily advocating that as
a solution. What I am saying is that there is a significant amount
of revenue raising in your proposals and just highlighting the
policy choice between targeting to the poorest or spreading it
amongst the whole population. May I go on to savings? Your proposals
would get rid of the current element of compulsion to save in
the system, either through SERPS or through contracting out. Given
the discussions which are going on about stakeholder encouraging
people to save for retirement, what effect do you think that would
have on people's incentives to save over the long term?
(Mr Robinson) It is worth going back to the underlying
objectives here. The underlying key objective, which we share
with the Government, is to deliver an adequate income in retirement
for everybody and to abolish pensioner poverty. You also want
to make sure that the overall pension provision is affordable
for the state. You want a system which is seen to be fair and
equitable by people and you need a system, which is clearer and
more simple than the system we have now. You also want to give
people clear incentives to save, however increasing the overall
level of saving is not a first order objective. That is a possible
means to an end. In terms of the overall impact on saving of what
we are proposing, as with any set of pension reforms, it is ambiguous;
the word Andrew Dilnot used in his evidence, when he made a valiant
effort to explain the substitution and income effects that you
have with any reform to the tax and benefits system. Because everybody
under our proposals would be getting a higher Basic State Pension,
their income would be higher. Some people might therefore choose
to save a little bit less. We would argue that because the whole
system would be much more simple, much clearer, and without any
means testing, that should incentivise people to save more. We
had a lot of discussions with our colleagues in the financial
services industry on this point about whether a more simple, clearer
system would in itself be enough or whether you would have to
have compulsion, if we can define compulsion very clearly here,
that people would be compelled to put a certain proportion of
their income into a funded private pension, either a stakeholder
personal pension or occupational pension. There was some disagreement
over this and in our Report we used the usual let-out clause of
saying this is something we would have to look at carefully and
re-visit in the medium term, depending on what we saw was happening
to private savings. There are many imponderables here of course,
because we know it would be difficult not to have seen all the
coverage recently about what is happening to company pension schemes
and switching over from defined benefit to defined contribution
schemes. We are in a very difficult situation at the moment in
trying to guess what is likely to happen to private savings patterns
over the next few years and how people save into different vehicles.
That is why it is a question that any government is going to come
back to continuously.
(Mr Hawksworth) The Stakeholder Pension is very young
and we really do not know how successful it will be. We think
in some ways this would make it more attractive and in other ways
it would be less attractive. As always, there are effects both
ways. Just on the point of compulsion, I would actually interpret
the IPPR proposal as being compulsion neutral. What they are saying
is that everybody would be moved to the contracted-in rate and
therefore there would be a compulsory contribution to a stronger
Basic State Pension. Now there is effectively a compulsory contribution
to the Basic State Pension, which is lower, plus either SERPS
or some sort of approved private pension. Ultimately, in terms
of the level you are contributing, it would be the same. I would
see it as being compulsion neutral in terms of the amount of money
you are contributing to a future income in retirement.
154. You mentioned the doorstep factor. You
recommend raising the retirement age to 67. Did you do some research
on what people's reaction to that would be? As politicians we
would say that would have a fairly significant doorstep impact
and it would be fairly difficult to justify it unless the benefits
and the way money was spent were clear and significant.
(Mr Robinson) The first thing to stress here is that
this is a recommendation for 2030. Interestingly enough, I will
be one of those to be first affected in that currently I would
be entitled to get my basic pension in 2030. I will have to wait
two more years. It comes in the decade after the retirement age
will have risen for women from 60 to 65, which will sensitise
the whole population to this issue of all probably going to have
to work a bit longer. In a sense the issues around the official
retirement age will already have been very much aired in that
decade. Then if in the decade afterwards you also say it might
have to go up by another two years for both men and women, so
that we can afford to pay a more generous Basic State Pension
to everybody, that provides the basis for a discussion, which
we would need to have as a nation about what will happen to the
working age over the coming decades.
(Mr Hawksworth) It is worth making the point that
in the past people proposing earnings indexation of Basic State
Pension, with or without raising it to the MIG, have tended to
propose that as a stand-alone policy which is justified on its
own. We started from the proposition that the political realities
were that you had to make the numbers add up in broad terms in
the long term. That inevitably means you have to make some political
choices about where the money is going to come from. One of those
is the choice on the State Second Pension and the associated rebates,
the other is the hard choice on raising the retirement age. It
may be that you could raise the money in some other way by just
raising the general rate of income tax or something else. Nevertheless
we have tried to address the fact that you want to try to make
the overall thing be broadly affordable in the sense of similar
to the Government's own strategy, at least if you accept policy
scenario one. That inevitably involves some difficult political
choices and no doubt that partly explains why the Government has
not reacted very well to it.
155. You are absolutely right about that. You
say in a rather svelte way that we should have a discussion about
this but women are going to be invited, having paid their National
Insurance contributions, not to have a state retirement pension
at 60 but at 67. That is a huge political argument. That is not
a discussion, that is surely a significant problem.
(Mr Hawksworth) But it is already going up from 60
156. I know that, but what you are saying is
just another two years. Five, seven, why not make it 15? Do you
think this is easy? I have to tell you that I do not think it
is easy. Another thing is where have IPPR been all this time?
Here we are in the middle of a huge set of reform, proposals for
change, stakeholders, S2P, and suddenly you come out and say all
we need to do is increase the retirement age. Why did you not
do this five, six, seven years ago when we were at the beginning
of this debate. Please, answer.
(Mr Hawksworth) One important point is that to some
extent it was only after the decision to raise the MIG, which
was taken in about November 2000 in the pre-budget report, that
I began to look at this issue in terms of thinking about what
it actually meant in the long term, what it meant for the Pension
Credit cost. That decision and that whole debate which followed
the 75 pence fiasco, did change the terms of the debate to some
Chairman: Let me put it to you brutally. However
politically appealing these proposals may or may not be, you are
just out of time. I put it to you that no serious government,
having gone through this degree of policy reform, is going to
say okay, fine, next Monday we will just change it, unless Andrew
Mitchell is going to tell me differently.
157. I think the Chairman, uncharacteristically,
is being slightly unfair to you on this. I think your proposal
intellectually is extremely coherent, as a left wing proposal
on pension reform. I assume that it was born out of the incredibly
complex muddle we have got into now. You are perhaps, Chairman,
being slightly unfair. I disagree with your proposal because I
am in favour of funded pensions for everyone, using the tax and
National Insurance system to promote that, but as a contribution
to the debate I think the IPPR proposal is intellectually coherent
and does take the debate forward.
(Mr Robinson) May I address the direct question of
where we were several years ago? We could see the logic of the
current government having tried to address the issue of pensioner
poverty in the short term by significant increases in the generosity
of the MIG. We could see that as a reasonable short term way forward.
When the State Second Pension was announced, there were already
some doubts about its rationale given the continued price indexation
of the Basic State Pension. Once the Government addressed the
issue of the incentives problems created by the MIG with the Pension
Credit, that opened up a whole new ball game in large part because
of John's work suggesting the cost of that over the long term.
So we asked whether if in 1998, at the time of the Green Paper,
we had known the Government was prepared to put up to 1 per cent
of GDP more into pensions provision, we could have thought of
a better structure in 1998 to use those resources in the most
effective way to create a pensions system that would be more sustainable
A critical part of our argument is that because the current system
is so complex, we are not sure it is sustainable politically.
158. I do not think your proposals are left
wing at all. That is where I would start with my disagreement
with Andrew Mitchell. We talked a lot about the doorsteps and
talking to pensioners on the doorsteps. Have any of you actually
been to talk to pensioners on the doorsteps recently?
(Mr Brooks) Yes, I am standing as a Labour Councillor.
159. Good. Let me put this to you. In my constituency
I have one ward where 50 per cent of the population are on income
support and most of those are pensioners, the rest are people
bumping along on average earnings trying to bring up a family.
I have to go and knock on those doors and ask these people if
they will vote for me if I promise to ask them to work an extra
two years, to pay more, to enable the people who live in Manchester
and Mill Hill, where they have more millionaires than anywhere
in London, to have £20 a week more. Do you think I will be
able to sell that to them?
(Mr Robinson) Yes, I think you would because you would
be able to say to them everyone will pay into the pot, everybody
will get £100 back.