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PENSION CREDIT |
The Work and Pensions Select Committee held an inquiry to examine the introduction of Pensioner Tax Credit
The following submission was sent to the Committee for its consideration, and has been published.
The author of this submission is an actuary born and educated in Scotland, a long term Australian resident, and a Vice President of the British Australian Pensioner Association. However, the submission is being made as an individual and not on behalf of any body.
1.1. The Pension Credit is an attempt to counter the poverty suffered by many pensioners.
1.2. Pensioner poverty is the result of failure by the state to provide adequate retirement incomes through the existing mechanisms. In part it is a failure to ensure that existing benefits keep up with pensioner expectations, and in part it is a failure to provide contributors with the means to save for additional pensions beyond the basic subsistence pension envisaged in the Beveridge Report.
1.3. The Pension Credit scheme must therefore be designed in such a way that the need for means tested benefit will eventually disappear.
2.1. It is commonly accepted that the foundation of the Social Security System was laid down in the Beveridge Report, which proposed a universal pension benefit sufficient for sustenance but not so great as to discourage individual thrift. It was an important principle that so far as was possible benefits should not be subject to a means test.
2.2. Over the years, successive governments seem to have lost sight of these fundamentals, and made many attempts to patch the system at minimum cost to the taxpayer. These attempts have not been successful.
2.3 In any consideration of proposed benefits which will be subject to a means test, attention needs to be paid to the interaction of all means tested benefits. This is especially so when the benefit is described and promoted in such a way that it conceals the effective "means test" underlying the benefit mechanism.
2.4 Special attention needs to be paid to the manner and frequency of re-assessment, so as to reduce the level of intrusion into private affairs, and to ensure that no pensioner feels discouraged from applying.
2.5 It is also important for the credibility of the system that any benefit which is conferred as of right should not be taken away because of a rule which selectively denies the benefit to any group of pensioners.
3.1. Relevant extracts from the report, together with comment thereon are given in the appendix. The following extracts are particularly important.
Paragraph 10 says: . . . It is, first and foremost, a plan of insurance - of giving in return for contributions, benefits up to subsistence level, as of right and without means test, so that individuals may build freely upon it.
Paragraph 16 says: . . . Briefly, the proposal is to introduce for all citizens adequate pensions without means test by stages over a transition period of twenty years, while providing immediate assistance pensions for persons requiring them . . . to solve the . . . problem of passage from pensions based on need to pensions paid as of right to all citizens in virtue of contribution.
3.2. The need to provide benefits free of means test is referred to several times in the Beveridge Report.
18 (x) For the limited number of cases of need not covered by social insurance, national assistance subject to a uniform means test will be available.
3.3. He also referred in paragraph 21 to:
.... the strength of popular objection to any kind of means test. This objection springs not so much from a desire to get everything for nothing, as from resentment at a provision which appears to penalise what people have come to regard as the duty and pleasure of thrift, of putting pennies away for a rainy day. Management of one's income is an essential element of a citizen's freedom. Payment of a substantial part of the cost of benefit as a contribution irrespective of the means of the contributor is the firm basis of a claim to benefit irrespective of means.
3.4. For most people, the state age pension was to be supplemented by private means, either through occupational and private pensions, or through individual thrift.
4.1. It was to be expected that during the long maturity period of the National Insurance Scheme many citizens would have prospective pensions less than the standard rate. Now that the scheme has existed for more than fifty years, one would have expected that nobody would have an inadequate basic pension.
4.2. The best pensions strategy must be one which minimises the role of means tested benefits. For that reason it must be planned that eventually the Pension Credit will be phased out. It must be designed for and restricted to those who through improvidence or misfortune have been unable to provide a sufficient level of pension for themselves.
4.3. To the extent that past governments have failed to increase basic pensions to reflect the level of prices and of prosperity, all pensioners have been short-changed by society.
4.4. It would be instructive to examine an age profile of impoverished pensioners. It might be found that the poorest group was composed mainly of older pensioners, who did not have a sufficiently long membership to benefit from the supplementary pensions under the graduated retirement Benefit scheme and the State Earnings Related Pension Scheme. If this is not so, then the efforts of past and present governments have been ineffective in addressing pensioner poverty.
5.1. The credit will undoubtedly help to relieve pensioner poverty. But it will still be means tested, albeit on a less stringent basis than the Minium Income Guarantee.
5.2. Unless the basic pension is incremented regularly to keep pace with current living standards there will always be a need for supplementation of the pension with strategies such as are now being proposed. To solve the problem of pensioner poverty in the long term it will be necessary to devise a strategy which does not depend on means testing.
6.1. For ye have the poor always with you (Matthew 26:11). And no doubt much poverty is due to improvidence. But it is an incurable disease!
7. The ability of people on low and modest incomes to make the correct decision regarding future pension provision.
7.1. People on low and modest incomes suffer from disadvantages compared with other people.
7.2. Firstly, of course, the level of their income might preclude them from saving for the future. There is always a tendency, maybe even a need, to spend what comes to hand and let tomorrow look after itself.
7.3. Secondly, people on low and modest incomes often lack the expertise to make correct decisions (whatever “correct” might mean). Those on higher incomes may, if they lack the expertise, be able to buy the services of people who have. But for people on low incomes the price of good advice plus the administrative costs of investment management make severe inroads into the savings pound.
7.4. A third disadvantage is the impracticality of splitting small volumes of savings to obtain safety in diversification. For a person with a small nest egg the failure of one financial institution can mean disaster.
8.1. Among the impediments preventing the private sector pensions industry from providing the surplus benefits that Beveridge considered desirable are the structures of pension schemes, which by their very nature are unable to cope with severe inflation.
8.2. Some schemes are described asd "Defined Contribution" schemes. The contributions are defined in relation to salary or some other measure. The contributed money is invested on behalf of the member, to provide a benefit of whatever good investment management can provide. With the passage of years, the ravages of inflation frequently make the ultimate benefit insufficient to provide a meaningful enhancement to the social security benefit.
8.3. Other schemes are described asd "Defined Benefit" schemes, the most common type being some variation on "Final Salary" schemes. While such schemes provide well for those who spend a lifetime working for a single employer, they do not provide adequate preserved benefits for members who change employers in mid working life. Preserved benefits are not upgraded each year to cope with inflation. Indeed, someone who changes employers frequently could find himself ultimately with no better a benefit than could have been earned under a defined contribution scheme.
8.4. Those who do well out of private pension schemes, particularly the final salary type, are people who climb the career ladder and who therefore have a final salary pattern exceeding the average salary earned during their working career. Another group to benefit are those who are head-hunted and given an extra benefit in recognition of service with previous employers.
8.5. All private sector pension schemes face the problem of indexing of pensions to cope with inflation. This problem should not be left to private schemes to solve, since inflation is a problem caused by society itself, not just by pensioners.
8.6. One possible approach would be to impose a limit on the level of income taken into account for the state run supplementary schemes, and to discourage contracting out. The role of the private sector pension provider could then be limited to providing supplementary pensions for those who enjoy the highest level of earnings. The requirement to provide for indexation could then be relaxed or removed. Wealthier individuals could enter into whatever arrangements they could afford while all citizens, rich or poor, could be sure that the state pension - basic plus supplementary - would not be just at a minimum subsistence level.
9.1. Governments have attempted to remedy these shortcomings in various ways. Among these are the Graduated Retirement Benefit and the State Earnings Related Pension Scheme. Both of these have proved expensive to the taxpayer, largely because the benefit is upgraded to cope with inflation, both before and after retirement. In addition, both have a long period to maturity, and many pensioners will retire with a contribution record inadequate to purchase a decent retirement income.
9.2. If society is going to provide adequately for old age, then society must be prepared to pay the price.
9.3. The question then arises as to whether state provided age pensions should be paid universally, or should be subject to a means test.
10.1. It is easy to disguise a means test so that to the unwary, or perhaps to the innumerate, it appears not to be so.
10.2. It should be clear, however, that the proposed Pension Credit is a means tested benefit. To see why this is so, it is necessary to consider the Minimum Income Guarantee and the Pension Credit in tandem. Let us take the three examples given by the government in its consultation paper.
John is aged 70 and single. He has a basic state pension of £77 a
week. He also gets a weekly wage of £20 for some part-time
work. The Pension Credit would top his income
up to the guaranteed minimum income of £100 a week and give
him a further savings top-up of 60p for every £1 he gets from his
employer – an additional £12 a week. So his total Pension Credit
would be £15.00 and his total income would be £112.00.
The Pension Credit here is made up of £3 under the MIG (100-77-20) plus £12 reward for his "other" income of £20.
10.3. A simple case:
Mary is 85-years-old and widowed. Her basic state pension is £77
a week and she gets £23 a week in pension from her former
employer. That’s a total of £100 a week. The Pension Credit
would reward her with a Credit of £13.80 a week to give an
overall income of £113.80 a week.
There is no MIG element here, because her two pensions amount to £100 a week. But she gets £13.80, which is 60p for every £ of "other income"
10.4. It is the third example which shows up the true nature of the Pension Credit.
Ivy is aged 66 and single. She has a basic state pension of £77 a
week and SERPS of £40 a week – a total of £117. The Pension
Credit will lift her income to the £100 guaranteed minimum
income level plus 60p for every pound of her SERPS – that is, by
£24 a week. So her final income will be £124 a week, and her
Pension Credit will be £7 a week – the difference between £124
and her total basic state pension and SERPS (£117 a week).
In this case the pensioner has a total income which exceeds the £100 MIG. Consequently her Pension Credit is much less than 60p per pound of SERPS pension. Her total income after MIG and PC is just £7 more than it would be without the PC. She is in effect providing £17 of the PC out of her own income. It is as if the MIG served to reduce her income to £100.
10.5. For a pensioner with the basic pension of £77 plus other income of £55, the PC reduces to one pound per week. At higher levels it disappears altogether.
10.6. Another way of seeing the Pension Credit is as a means tested pension of £23 per week, reduced by 40p for every £1 of income other than the basic state pension.
10.7. A third, and equally valid, way of viewing the proposals is an increase in basic pension from £77 per week to £100 per week, with weekly income between £100 and £157.50 being "taxed" at 40p in the pound. The words are different and the mechanism is different, so the perception may well be different; but the economic impact is the same.
10.8.In other words, a means tested benefit with a fade-out of benefit at 40p in the pound has the same effect on the pocket as a benefit taxed at 40p in the pound.
10.9. Whether the credit is presented as a useful supplement to private pensions, or as a means tested benefit, or as a taxed addition to the basic pension, will depend on what the commentator is trying to achieve. It may even depend on whether the commentator is in government or opposition.
11.1. One of the failures of the existing system is that pensioners and prospective pensioners are expected to find out for themselves what rights and options they have. In recent correspondence regarding Voluntary (Class 3) Contributions the department wrote to one enquirer:
"You were not previously advised that you could pay voluntary contributions, as the Department's policy then was only to supply the information if the customer asked for it."
11.2. In the investigation into the Inherited Serps debacle, the National Audit Office severely criticised the department for failing to keep people informed, for failing to be pro-active in serving contributors' interests. The culture of concealment must end.
11.3. The Department should be able from its own records to determine whether a pensioner has a state pension income high enough to disqualify him from the Pension Credit. It may also, from its records, be able to determine whether a pensioner has private or occupational pensions sufficient for disqualification . What it will not be able to do is to determine whether a pensioner has other income from casual and part time work that would lift total income beyond the threshold for Pension Credit.
11.4. Perhaps with the integration of tax and pensions systems it may be possible for the department to have access to taxation records, but there are important privacy considerations which must be addressed.
11.5. Rather than wait for pensioners to apply, the department must take the initiative in approaching pensioners who seem, prima facie, to qualify for the Pension Credit.
11.6. The system could be set up on the basis that everyone, or alternatively everyone with a total pension up to some practical limit, is paid the Pension Credit. By carefully integrating the pension and taxation system it should be possible to ensure that the Pension Credit does not exceed what is properly due.
11.7. An alternative, which would not cost much in the whole scheme of things, and would attract less criticism from those affected, would be to base the Credit payment on the known "regular" income from state and other pensions, and to declare amnesty on small amounts of income derived from casual and part time work. For larger amounts of irregular income the overpaid credit (above some practical threshold) could be deducted from payments for the following year.
11.8. One of these approaches would enable the department to take a pro-active role in the provision of benefit. The cost of Credits overpaid could well be less than the cost of a cumbersome assessment system.
12.1. The levels of take up will be greatly improved, and pensioner poverty therefore mitigated, if the department takes a pro-active stance, and seeks out pensioners who might be eligible for a credit payment. The forms of application need to be simple and unintrusive, otherwise some pensioners will give up in frustration.
13.1. Some consideration needs to be given to the combined effects of means testing and taxation. Without detailed knowledge of the UK system, the present author can only offer some warnings based on the Australian system.
13.2. In Australia, the whole basic pension is means tested, with a reduction of 40c in the $ for all income above a threshold. This reduction is at the same rate as is proposed for Pension Credit. But no part of the Australian age pension escapes the means test.
13.3. There is a further reduction in total income brought about by the taxation system. The first band of income tax is 17% for incomes above $6,000. For elderly citizens there is a special tax offset which can extinguish income tax on lower incomes. When it was introduced the government announced that for elderly citizens there would be an income tax threshold of $20,000.
13.4. Unfortunately this turned out to be untrue. The tax offset is reduced by 12.5 cents for every $ above $16,306. The effective tax rate over this income band is 29.5%, made up of 17% tax and 12.5% reduction in the tax offset. Over certain bands the effective reduction in "other" income can be as high as 57.7%, made up of 40% reduction in pension because of the means test, plus 29.5% of the balance.
13.5. This example from Australia illustrates the need to consider the whole effect of income tax, means testing of pension and means testing of other benefits.
13.6. Without detailed knowledge of the means testing of other benefits accruing to UK pensioners we will leave it there.
14.1. The existing MIG system works on a pound for pound means test reduction. It is proposed that the Pension Credit will have a 40p in the pound means test. This seems to be a reduction, rather than an increase, in means testing.
14.2. It is doubtful whether the level of means testing will affect the incentive to save. Retirement is a long way away in the future, and who knows how many changes will be made in the system before retirement.
14.3. Wealthier people, and especially those who have a strong propensity to save, are not going to take means testing into account when making savings decisions. They aim to have a total retirement income well above the levels at which Pension Credit will have any meaning.
15.1. The various systems used in the past 50+ years have failed to eliminate pensioner poverty. It should not be expected that the new system will fare any better.
15.2. If pensioners are to share in the increasing prosperity of the society in which they have lived and worked and contributed, then the level of total pension must be set at a level which provides a dignified standard of living. Means testing of benefits must always be an interim solution – a band aid applied to cover (but not cure) the insufficiencies of the system.
16.1. Poverty can be caused by the matters considered above. There is, however, another cause of pensioner poverty, a cause which was never envisaged in the Beveridge Report, and which denies the principle of a benefit earned by right and based on contribution history.
16.2. Consider the case of JW. He was born in 1917, and when he was nearing age 65 decided to emigrate to Australia for understandable family reasons. Having learned that the UK state pension is "frozen" for expatriates residing in Australia, he applied to the European Commission of Human Rights for a directive that the freezing of pensions be terminated.
16.3. JW was under the impression that when he attained age 70 in 1987, he would be entitled to an Australian pension free of means test.
16.4. The Commission, accepting his evidence without further investigation, concluded that JW would only suffer minor, temporary inconvenience and dismissed his appeal, thereby setting a precedent from which subsequent appellants have been unable to escape.
16.5. Unfortunately JW had been completely mistaken. The pension free of means test had been introduced by the Whitlam administration in the mid 1970's, but already by the time JW made his application the first steps had been taken in dismantling this pension. By the time JW reached age 70 (in 1987) the special means test free pensions for pensioners of 70 and over had been abolished.
16.6. The UK basic pension granted to JW on his 65th birthday in 1982 would be £32.85 per week, and if he is alive it will still be frozen at this level. Compared with the current level of basic pension of £72.50 this means that his pension is nearly 55% below that enjoyed by pensioners who live in the UK or in the United States of America.
16.7. In the case of Application. 5489/72 Muller v Austria, the Commission observed that
………… a substantial reduction of the amount of the pension could be regarded as affecting the very substance of the right to retain the benefit of the old age insurance system. However, in the present case, this problem does not arise because the difference of which the applicant complains amounts to 97.70 schillings, that is to say approximately 3% of his pension.
16.8. Surely a reduction of 55% in the amount of pension does by any standard affect the very substance of the right to retain the benefit of the old age insurance system. JW will be relying on a means tested benefit to a far greater extent than a pensioner resident in the UK of the same age and with the same contribution history.
16.9. Here is the justification offered by an Appeals Officer of the Department in recent correspondence.
The Human Rights Act 1998
I submit that Article 14 of the Human Rights Act 1998 provides : The enjoyment of the rights and freedoms set forth in this convention shall be secured without discrimination on any ground such as sex, race, colour, language, religion, political or other opinion, national or social origin, association with a national minority, birth or other status. I further submit that the ambit of right states that in order to establish a violation of Article 14 read in conjunction with another substantive article of the Convention , the facts in issue must be shown to fall within the ambit of the latter. If they do not, Article 14 does not and cannot apply.
A person cannot therefore allege a breach of their human rights on discrimination alone. However, you have also stated that the Department is in breach of Article 1 of Protocol No 1 of the Human Rights Act 1998. I submit that Article 1 of Protocol No 1 (protection of property), like many of the Articles, are qualified rights and not absolute rights. Article 1 of Protocol 1 provides : Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. This provision will not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.
I submit that the Social Security legislation does not allow for the payment of any annual increase whilst you are living in Australia.
Claims as Possessions
I also submit that case law states that for a claim to constitute a 'possession' within the meaning of Article 1 of Protocol No1, the appellant must show a legal entitlement to the economic benefit at issue, or a legitimate expectation that the entitlement will materialise. In most cases this involves establishing an entitlement in domestic law, unless that law runs counter to the object and purpose of Article 1 of Protocol No 1. Thus, a procedural device, such as a statute bar, which extinguishes a domestic law entitlement, may have the concurrent effect of extinguishing any 'possession' under Article 1 of Protocol No 1. (Case law quoted in the Sweet and Maxwell publication of Human Rights Practice, compiled by Jessica Simor and Ben Emmerson Q.C. (paragraph 15.010))
Domestic law therefore prevents the payment of annual cost of living increase whilst you are living in Australia. The Department maintains that this statute bar does not run contrary to the purpose of Article 1 of Protocol No 1 and therefore the statute bar also extinguishes your entitlement to annual increases under Article 1 of Protocol No 1.
16.10. From this response, it would seem that:
i. The state pension is a possession, based on the legal right or legitimate expectation of receiving a benefit based on contribution history. This right has accrued to residents in Her Majesty's dominions since 1929, and to all contributors world wide since 1955.
ii. The annual cost of living increase is also a possession, based on the legal right or legitimate expectation of receiving an annual increment.
iii. A pensioner who emigrates to certain countries is dispossessed of this right or expectation, and the annual increment is no longer a possession.
iv. However, if the pensioner decides to move from a "frozen" country to a non-frozen country, then the right or expectation again becomes a possession until and unless he moves again. And if the "frozen" pensioner makes a short term visit to the UK, then the increment once more becomes a possession, but only for a limited time.
16.11. This iniquitous practice destroys the credibility of the UK state pensions scheme. The legislation must be struck down if the social security system is to be regarded truly as complying with the provisions of the Human Rights Act and the European Convention on Human Rights. It is moreover essential that this issue be taken into consideration now when reviewing the Pensions Credit proposals since the new Bill relies on that existing cankered legislation whose legitimacy has been called into question by the granting of leave to seek Judicial Review.
(Request for Judicial Review (Granted) Reference Number: CO-2704-2001
Ruling of October 16th 2001 Mr. Justice Elias Litigant: Anette Carson)
James Nelson
Fellow of the Faculty of Actuaries.
3rd January 2002
Submissions to the DWP and DSS