We will now hear oral evidence from Age UK. Before calling the first member of the Committee to ask a question, may I remind Members that questions should be limited to matters within the scope of the Bill? We must stick to the timings in the programme motion agreed by the Committee. Generally, I will interrupt mid-sentence if a session is still continuing at its scheduled finish time. Hon. Members should declare any interest before the start of each panel if that interest is relevant. I welcome the witnesses to our proceedings. Please introduce yourselves.
Jane Vass: Age UK supports the aims of the Bill. We think it will help a lot of people for whom the state pension system has not necessarily worked well in the past, particularly people on low lifetime earnings such as women and the self-employed. There are, however, some issues of concern. As a cost-neutral system, there will be winners and losers and our concern is to ensure that some of those issues are clarified and that people are not penalised. There are also concerns around the illustrative level of the Bill, which is only a little bit above the level of the pension credit guarantee. We are also concerned that the Bill does nothing for the 1.6 million pensioners who are living in poverty.
Sally West: Our concerns are in three areas. The first is about the people who will receive less under the single-tier system than they would under the current system. As Jane said, we know that the Government’s aim is that the reforms are cost neutral. On that basis, if some people are better off under a new system, others will be worse off. The area that we are specifically concerned about is the transition and the people who do not have time to adjust their affairs and have not been able to benefit from automatic enrolment, which is the other side of the pensions agenda. People may get less because savings credit will go and a means-tested system will be less generous. We have heard from people who were expecting to rely on their partner’s contributions and will not be able to and do not have time to readjust their plans. That is one concern.
Our second concern is that the Bill meets its aims and provides a decent platform and certainty. The level and the uprating mechanism going forward are important, because the Bill has an earnings link, yet the impact assessment and the assessments going forward relate to the triple lock. We would like to see the triple lock enshrined in the legislation.
Our third concern, as Jane has mentioned, is those people with low pension incomes, particularly women, who will not be able to benefit from the single-tier system, because they reach state pension age before April 2016. On Second Reading we heard quite a bit about the cohort of women born between 1951 and 1953, who will not be in the single-tier system, whereas men of the same date of birth will be. Age UK has been hearing from a lot of current pensioners who are on low incomes and perhaps have not had many opportunities to save. They tell us that they feel there is a two-tier system, which is unfair. I am happy to elaborate on any of that, but those are our areas of concern.
Jane Vass: I would agree with what Sally said. I would also add that the state pension age reform is dependent on having systems in place to support people as they come up to retirement. In the private pensions arena, it is extremely important that people can get the best possible value from their savings, because that will be an important top-up for their state pension.
Do you find that the majority of people find it difficult to plan for their retirement and their pensions? Do you find that they suddenly work out what they are going to do in the last five or six minutes before it comes up?
Jane Vass: Yes, is the short answer to that. Just to give you one example, people are not always clear about their state pension age, because of the changes. Recent DWP research found that 62% of women thought their state pension age was earlier than it actually was. If you cannot get that across clearly, it makes it incredibly difficult to plan generally.
Sally West: In terms of the single tier, one of the challenges is communication. People who have heard about the single tier think that everyone is going to get £144 a week, and as you are well aware, that will not be the case. Many will get more, because they have already built up high amounts, and others will get less because of contracting out, which is hugely complicated. Although we will eventually have a simple system, the transition will take quite a time. A lot will need to be done to help people understand what the reforms will mean generally, and specifically what they will mean for individuals, because it may be that people could be doing things to make sure their record is complete.
Sally West: We have not specifically looked at those. We didn’t have much evidence about bereavement payments and the changes for working age people, including bereaved parents. We have little evidence from the people who contact us. Although people will come to us when they are in their 50s, we didn’t really have any evidence. The only thing that tends to be raised with us is the matter of pensioners who aren’t able to get the bereavement payment now, so we didn’t respond to the consultation. We feel it is better to leave that area to others.
Sally West: It is currently 30 years of contributions and we will be moving to 35. One of the issues is that things keep changing. Not long ago, people needed 40 years of contributions; from 2010, it has been 30 years; and now we are looking at 35 years. A general message is to try to get—hopefully—some consensus around the Bill and not keep having these changes that mean people have to reconsider their plans. We want certainty out of the pension reform.
On having to have more contributions for the full pension, some people in the 30-years category will be disappointed. In the context of trade-offs, if it has to be cost-neutral, then perhaps that is not our greatest concern. But there is a really important issue about making sure people are aware that it is 35 years and, if there are things they can do to keep up their record, they need information about that.
In terms of the minimum period, again we have had change. It was a quarter of your working life; it went down to a minimum of one year; and now it is going back to seven to 10. That is another concern—it is chopping and changing again—so let us hope the reforms will be more long term. The problem is that you get cliff edges. If it is 10 years, there will be people with nine years and people with 10 years. However, where people have a couple of years, because they have worked here and then spent most of their life abroad, we have fewer concerns.
Sally West: We hope it will be. One of the advantages of what is being put forward, compared with the current system, is that it will be simpler for people to understand. As I said before, the transition is going to be quite complicated, but if people can understand more what pension they are heading for, that helps to get the public support that will keep a pension system in place. It is a big problem with the additional pension scheme—the state second pension. Very few people really understand that, so when there were changes that cut back or perhaps improved it, there wasn’t a great deal of public understanding. So one advantage of a simpler system, hopefully, will be that people have more of a stake in it and will want to protect the system they understand.
I want to ask for your views on the position of those with derived and inherited rights to the state pension, and whether you think protections for them are sufficient? Do you have any suggestions in that area, or any concerns?
Sally West: We absolutely agree that it is right that people have individual entitlements to pension provision. Clearly, it was more of an issue for women, and many women reaching state pension age now have a full contribution record. We welcome the protection for people who pay the reduced rate. It is sometimes called the married woman’s stamp. However, we have big concerns about the couples who planned their life on the understanding that they would receive a pension—the woman receiving a pension on the partner’s contributions—and they don’t have time to rearrange those plans. For example, unless a married woman has about 16 years in her own right, she will be worse off as a married woman under the new system. If she is widowed, she will need 25 or 26 years.
We have been hearing from couples who say, “Well, we have really planned on the basis of what we would get”. That is normally where they don’t have children, so they don’t get credits for having children. People who have spent a lot of time on very low wages or doing voluntary work—I recently spoke to a Church minister who said, “It’s like my wife is part of the package”. She’s done work for the Church, cared for the family and doesn’t have much of a contribution record. He was concerned about the impact on people in that situation.
There should be some transitional arrangements to allow people time to plan. The Work and Pensions Committee suggested a 15-year transition, and I think something along that line—because the whole point of the Bill is to give people certainty and help them to plan. I have spoken to a few people who thought they’d done just that. They had planned very carefully, but potentially they will now find that those plans have gone awry and they don’t have many years left to change the situation.
You rightly said that some pensioners will receive a bigger pension than others. Do you have any concerns about the starting level of the STP, which the Government say will be set above the pension credit standard minimum guarantee, which is £135.40 per week for a single person? If you do have concerns about the starting level, what do you think it should be set at? If you think it should be set at a higher level, how do you see the increased costs being met?
Sally West: It is a question of balances, isn’t it? We know that the level will be above the pension credit guarantee, but if it is only £1 or so above, it could float people off means-tested benefits and possibly some of the passported benefits like the cold weather payment. Again, picking up a Work and Pensions Committee suggestion, perhaps it should be set at something like 5% above the pension credit guarantee level, so there is that difference and those people will be better off as a result; and to provide a decent platform for saving.
In terms of cost, that is a difficult one. Generally, where we make suggestions, they are possibly ones that increase the cost of pensions. We are concerned that the increased national insurance that the Treasury will receive as a result of the abolition of contracting out is not taken into account in the general cost-neutral basis. Looking to the long term, our country still spends a relatively small proportion of our GDP on, say, pensions compared with many other countries, so we wouldn’t necessarily say that, going forward, we would have to have a cost-neutral system.
Sally West: There is a lot of agreement that we want to have systems that reduce the level of means-testing because of the complexity of the process, the problems of incomplete take-up and the difficulties of disincentives to save or the fact that people get to retirement and say, “Why did I bother? I am no better off.” Having said that, the pension credit and the more generous pensioner mean-tested benefits over the past few years have been a really important driver for the reduction in pensioner poverty. So there is always a balance.
The reforms will about halve the proportion of people receiving pension credit under the single tier, both short term and going forward, but it is of concern to us that most of that reduction in entitlement is because the pension credit system may be made less generous by removing the savings credit, rather than because of the increased single tier. We know that there will be some transitional arrangements to help with housing costs, which are also linked to the savings credit. We would be very interested to see those arrangements, and the issues about passporting benefits.
There is a balance between means-testing and non-means-testing, but it would be unfortunate if people reaching state pension age just after 2016 are potentially quite a bit worse off than somebody with a low income who reached state pension age just before 2016. They will, of course, not have had an opportunity to be in automatic enrolment for many or, indeed, any years. It is important to look at the transition arrangements. I understand that transition arrangements increase complexity, but we have to accept that there will be a fair amount of complexity in that transitional period. It is about the balance between fairness and complexity.
Sally West: It depends very much on your circumstances. People with very low incomes will still be able to claim the pension credit guarantee. People with somewhat higher incomes will probably be taken above means-tested benefits. An advantage will be that they will not need the savings credit, because they will have a higher state pension as a basis and more opportunities to save for automatic enrolment. It will be the people in the first few years of the single tier who perhaps have a small amount of pension saving and have a basic pension or the equivalent of a basic pension who, because they lose the savings credit, will find they are worse off than somebody in the same situation who reached state pension age the year before. That is when it’s always difficult, because people say, “I am in almost the same situation as my neighbour. I have a small amount of private pension, and I thought I was going to get more out of this new single-tier system and I realise I am worse off.” That is where there needs to be more consideration of the transition.
Do you think there are other groups of pensioners who will be affected by this? Can you specify some groups of pensioners who will be badly hit by this?
Sally West: It will be the people who have small amounts of private pensions and small amounts of savings, because in a sense the savings credit was introduced to help those who had made some savings—not the very poorest, but those who had a little bit. They will turn around and say, “Why did I bother saving?” It is a complicated area, and relatively few people understand quite how it works. It has a role in topping up the income of those who have made some provision but have perhaps not been able to build up high pensions, because they have had low earnings throughout their lives.
Can I ask you about the future increases in state pension age? Do you think the current timetable gives people sufficient time to adjust to the future changes?
Jane Vass: As I have said, it does take an awfully long time for people to get the message about their own state pension age. Generally speaking, the research we have done suggests that people need at least 10 years. There is also the question about the level of change. For example, you might say that if pension age increases by so much, people should have 10 years, but if it increases more steeply, people may need longer, because the stakes are higher. There are all those issues to take into account, as well as, for example, what is happening in the employment market and to healthy life expectancies around the country.
You may have touched on this broadly in some of your evidence, but what other groups will face the most difficulty with the increase in the pension age? You have dealt with individuals and couples, but what other groups do you believe will face difficulty?
Jane Vass: Carers are a particular issue. Research we have done suggests that in 2011-12, 300,000 people left the work force to undertake caring duties. That particular group may not be able to work longer. There will be people in some parts of the country whose employment possibilities are lower than elsewhere. Another group is those with particular health conditions. At the moment, around two thirds of people already work right up to pension age, although some of those people may be in a position financially to retire early because they have good pensions; but in many cases stopping work comes upon them rather than being a result of a planned decision.
May I turn briefly to the private pension aspects of the Bill, before returning to the state pension issue? Age UK has, as I understand it, a very clear position on the transfer of small stranded pension pots. Will you comment on the Government’s proposals regarding small pot transfer?
Jane Vass: First, we are very pleased that the issue has been picked up. We have been very concerned about it for several years now, as we could see the number of small pots increasing. Having said that, our preference was very much for an aggregator scheme model, where money would be transferred into a sort of collecting box at the end of each employment, rather than going from employment to employment to employment, because that seemed a rather simpler system to work out. The main concern we have with the model of the pot following the member from employment to employment is the question of minimum standards. It is possible, for example, that someone might be in one job, in a very good scheme, and actually get automatically transferred into one with high charges or poor investment practices. For that reason, if the pot-follows-member model does go ahead, we think it is essential that there should be minimum standards for schemes, to encourage better practice in the market.
Jane Vass: I can pick that up. It is actually very easy to lose track of a small pension, because if you move from a job or move house, paperwork might not follow you. So, first, it is easy to lose track of it and, secondly, the costs potentially are high. In some schemes, for example, the charges may be higher for a stranded pot; in the worst cases, because of problems with the tax laws, it might be quite difficult to get your money out. So there are a number of issues that are likely to cause problems, meaning that this is a question that has to be tackled.
Sally, Age UK calls for current and future older people to have sufficient income from state and private sources to live comfortably. What do you think is sufficient income, and what do you think the split between state and private sources should be? Secondly, do you think the combination of the new single-tier pension and the introduction of auto-enrolment effectively incentivises the non-state element of savings and meets your requirement of measures to maximise private savings?
Sally West: Thank you for that question. The sufficient or adequate income question is a really difficult and quite subjective one. If we are looking at a minimum acceptable income, which might be, say, income to avoid poverty, we are probably looking at something around the pension credit rate. That seems to be more or less in tune with the work that the Joseph Rowntree Foundation has done and the definition of poverty as 60% of median income. We would like people to be able to exceed that. In a sense, that is the basis and that is what the single-tier state pension would do. One might need a decent income—perhaps the same again—from private pensions, but it is a hard one.
In the past, we did some research about the difference between a very minimum income and an adequate income, but we have not done anything on that recently. It also depends on what your expectations are and what your previous incomes was; people often talk about two-thirds replacement, so it depends on what you had before.
Where people have the opportunity to build up private provision or additional provision, a state pension of a little bit over the minimum guarantee—say £140 or £150—is a good basis for building up private provision, but it very much depends on what opportunities you have to do that. If, for example, you have been on very low income all your life—if you have been a carer, or you have been disabled—it is very difficult to build up the private provision on top of that. If you have reasonable earnings, particularly with automatic enrolment—we have been very supportive of that—that will give people more opportunities to head for the income they would want.
Would it be fair to say that sufficient income is broadly what the new single-tier pension aims to achieve, and the comfortable living aspiration will depend on the amount of private savings, through auto-enrolment and other occupational schemes and so on? Is that broadly what the Age UK position is moving towards with the Bill’s changes?
Sally West: The proposed pension, being just above the minimum guarantee, means in effect that that basic plank of income is provided by a state non-means-tested pension. That provides the platform for saving and makes it easier for people to build up a decent income. If you are relying on only the state pension, you are, in a sense, in the same position as somebody who is relying on means-tested benefits and claims the benefits they are entitled to.
It is certainly a better foundation and a clearer foundation for future saving. How people will be affected depends not only on their circumstances, but on where they are in their working life. Somebody who is some distance away from retirement or the state pension age has more opportunities to save and build up private pensions; hopefully they will have a clearer view of what the state will provide. Somebody who is very close to state pension age does not have the opportunities to change, so if they are not heading for a decent income, or, if they are affected by some of the changes, there is little they can do.
With the Chair’s permission, I will pick up a few points that have been mentioned so far. May I start, Jane and Sally, with the issue of the Pensions Bill being cost-neutral? Would you care to comment on the increased national insurance contributions, from the end of contracting out, going to the Treasury every year from 2016? Do you believe that, in that context, this is a cost-neutral Bill, or does it include a transfer of several billion pounds a year to the Treasury?
Is your understanding of the Bill as it stands that the Government are committed to making sure that that money is put back into the pensions system?
That is something for the Committee to tease out a little more. I was fascinated by your observations on the potential impact, with some groups—married women and widows—being perhaps worse off, and your elaborating on who the winners and losers are. Can you say a little more about that? You mentioned, for example, married women, who would need 16 years of contributions in their own right not to be worse off under the new system.
Sally West: It also applies to married men and civil partners. The issue for civil partners is different, because civil partnerships have been in place only since 2005, so people have had fewer years to be able to plan. I have heard from at least one man who has been affected, but I will talk about married women. Currently, a married woman could receive a state pension of £66 a week based on her husband’s contributions once he reaches state pension age. If she has 15 or 16 years of contributions, that would give her a single-tier pension of about the same amount, because, as you know, each year is about £4.11 on the £144 basis. So she will not be worse off. She will not be better off under the single tier, but she will not be worse off as a married woman.
If the woman is divorced or widowed, her pension of £60-something will stay the same under the single tier. Under the current system, it could be increased to a maximum, before basic pension, of about £110. So, again, if she has a record that gives her a pension equivalent to £110, she would not be worse off. She would not be better off under the single tier, but it is fair to say that people in that situation are protected. For people who paid the married woman’s stamp, that is very much what the transitional provision does. Where women have paid that stamp, because they were expecting to put it on the husband’s contributions, there is protection for the married woman’s pension and also in bereavement. In the transitional period it is important to look at the situation for people who are not covered by that.
That is really helpful. Can I ask both of you to elaborate on the means-testing aspect? I was struck by what you said about the projections for a reduction in means-tested entitlement. Are we looking at the abolition of the savings credit being the driver, rather than the move to the single-tier pension? Is that a fair assessment of what your evidence has shown?
Sally West: Yes, that is what the DWP impact assessment shows. The reduction in entitlement to pension credit is mainly because people will not receive savings credit. So that affects the people who are not on the very poorest income, but who are regularly receiving pension credit guarantee or perhaps are just above the pension credit guarantee. They get a top-up in recognition that they have made some savings—a private pension or some kind of savings. The biggest impact will be on the proportion of people on pension credit, according to the impact assessment.
May I probe a little further on the issue of the automatic transfer and the small pension pots? Do you see any better way of doing that than the Bill currently provides for?
If that were a single scheme, wouldn’t it come to dominate the pensions system and be quite clunky, and difficult or expensive to manage and to move assets around within?
It is helpful to hear the alternative proposition described, because in a sense any of these solutions is imperfect, and we are comparing degrees of imperfection. In the model you describe, you have your pension with your current employer, you have small pots with an aggregator from a set of aggregators, and you have medium-sized pots that are still stranded with your previous firm because they are not too small to be small, but they are not big enough to bother moving. Is that correct? So do you still have a lot of fragmentation?
Jane Vass: Well, you could end up with two, but that would mean that at least one pot would eventually stay in one place. You would potentially have two. Our ideal would be to start with smaller schemes, smaller amounts, and potentially look at the stock of existing savings longer term; so it would be a simplification, but it would cut out the constant moving of increasingly larger sums from scheme to scheme, and potentially from a good scheme to a worse scheme, which is why we favoured the aggregator model. It would also be possible, we felt, for aggregators to drive down charges overall through economies of scale, which we didn’t think were so likely to be achieved in a pot-follows-member route.
Just on that last point: as to the business of economies of scale, I think we would all agree; but doesn’t that argue for an economy of scale of putting all the little pots into one pot, which is easier for the individual to track and easier for them to be aware of, and at the same time gives greater economies of scale? What have the experiences of your members been on that? There are figures showing large numbers of small pots lying around not being looked at, unknown and everything else. Wouldn’t it be simpler just to have one?
Jane Vass: It would be simpler, but as another Member commented, you run the risk of concentration in the marketplace. It might be possible, however, to have a range of aggregators with one specialising in a particular industry segment, so that effectively for the individual it might end up in one scheme without perhaps reducing competition overall.
But the concentration of marketplace risk is a separate issue. That depends on the individual choices that the pensioner has made in each scheme. When they are aggregated together there isn’t an arbitrary decision on suddenly putting the whole lot into, let us say, UK equities. It is just a combination of all the different investments that are there.
Jane Vass: Yes. From an individual’s point of view you might say it would better for everything to end up in one scheme; but from the point of view of the industry wanting to have a range of schemes, or, indeed, offering some choice to employers, who may wish to have links to a particular aggregator, we can see why it might be better to go for a range of aggregators.
Jane Vass: From our point of view, it is very much the interests of the future pensioner. However, the interests of the employer often drive pension decisions in this world, so it is really important to get a sustainable pension system that employers buy into, and that employees buy into as well, over time.
Just to pick up something you’ve said a couple of times, Jane, about the risk of a pension pot being moved from a good scheme to a less good scheme: what evidence do you have that that is more likely than the opposite—that someone could find that their pension is moved from a bad scheme to a good scheme? Don’t you agree that from an individual potential future pensioner’s perspective, they are more likely to be aware of how their scheme is operating and, therefore, be keen to try to influence that, if it is all in one pot rather than a fragmented pot?
Jane Vass: From the point of view of moving to a good scheme, you are absolutely right. However, if the money is automatically transferred and the individual has no choice because the choice of pension scheme is made by the employer, it reduces the competition in the marketplace because the employer is effectively making the decision about the pension scheme. From the point of view of having more competitive—
Order. I am sorry to interrupt you, Ms Vass, but I am afraid that that brings us to the end of the time allotted for the Committee to ask questions of you as witnesses. I thank you very much on behalf of the Committee. We will now hear oral evidence from the TUC.
While the new witnesses come forward, I should mention something that it was remiss of me not to have mentioned before. If Members have any relevant interests related to our panels of witnesses, they should be declared.
I am never quite sure what a declaration of interest is, but the Register of Members’ Financial Interests states that I am the recipient of a small defined benefit pension. If it is remotely relevant, I also chair the all-party group on pensions. If either of those interests is declarable, I am happy to do so.