Work And Pensions Select Committee Inquiry Into Tackling Pensioner Poverty
Response From Dr. Ros Altmann, Independent Pensions Policy Expert
by Dr. Ros Altmann
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- What more does DWP need to do to address pensioner poverty? Are there specific groups who are more vulnerable to facing poverty in old age?
The Government’s main policy for addressing pensioner poverty has been via pension credit. This does not actually deal properly with the problem due to low levels of take-up. The take-up problems are a function of many factors, including older people not wanting to tell the ‘authorities’ all about their income, pride, lack of awareness and the complexity of the system. Groups at risk are those who live alone, or are infirm but struggling to manage on their own, perhaps those who cannot read. Older single female pensioners are particularly at risk, but newly retired males or females who have become unwell and don’t know how to claim their entitlements are also extremely vulnerable.
Government needs to radically reform the system, to ensure that pensioner poverty is properly tackled. The simplest, most reliable, fairest and most comprehensive way to do this is to pay a flat-rate resident’s pension to all those over age 70 or 75, above the pension credit level. Say £140pw. In order to do this, it would be possible to redeploy existing spending on pensions to cover the costs – and of course there would be significant administrative cost savings from ending the means test for most older people (defining old as over 70 or 75). Those younger pensioners who need it could still claim pension credit as now, but older people would not need to do so, they would be paid as of right. Around half of pensioners are entitled anyway, it can be taxed back from higher income groups and this would finally end the means test and poverty for almost all older people, be properly fair to women and other groups who are let down by the gaps in the national insurance system.
- Impact of the financial crisis on pensioner poverty – for example on savings income and on older people nearing retirement.
The financial crisis has already had and will continue to have a very negative impact on pensioners and will worsen pensioner poverty. Policy for the crisis – including bringing down interest rates – has almost entirely ignored the plight of older people, indeed aggressive interest rate cuts are little different from cutting the state pension. A pensioner with £10,000 of savings will have lost £10pw as a result of falling rates. Those coming up to retirement are finding the value of their pension savings has plummeted and the cost of buying an annuity has increased, so the pension they were expecting is simply not there for them. Many pensioners are struggling to make ends meet as savings income falls and are cutting back on their spending. Official statistics show that 9 million pensioners in 2007 received investment income, they will all have lost out. The inflation rate they face, meanwhile, has continued to soar, so in real terms they are considerably worse off. Food and drink inflation is still over 10%, household expenses inflation is over 14%, council tax keeps rising, which will all mean more pensioners in poverty. Pension credit still assumes that poorest pensioners are earning over 10% interest on any savings above £6,000. They are not earning anything like that amount, so their pension credit savings credit is far less than it should be if the 10% assumption had been revised to reflect the new reality.
Is “lifestyling” enough to mitigate the effects?
Lifestyling may mitigate the effects of stock market falls, but is a blunt instrument which may not work and has not prevented most pension funds from losing money. Some lifestyle funds switched into corporate bonds, rather than gilts, whose value has also fallen. Anyway, many pensioners are in balanced or managed funds without lifestyling, so they have suffered the full force of the falls.
What is the potential impact of the financial crisis on annuity rates?
Annuity rates will worsen as gilt yields fall and insurers struggle to back annuity books with safer assets. Insurers have lost heavily on the bank bonds and asset backed securities they bought, instead of gilts. Also, as more defined benefit schemes close, bulk annuity deals will worsen annuity rates for individual annuity purchasers over time.
How will the financial crisis impact upon the numbers of pension credit claims?
It is inevitable that the loss of private pension income will lead to an increase in those eligible for pension credit. Not all of them will claim, but the number of claimants is likely to rise as people retire without much other income apart from their state pension.
- Benefits take-up – why do some people not take up their entitlement to benefits (e.g. Pension Credit, Housing Benefit, Council Tax Benefit) and how can take up rates be improved?
Many older people are too proud to claim, or do not like having to tell the authorities about every aspect of their finances, or are unaware of their entitlements. The system is hugely complex so that most people do not understand it.
- Basic State Pension – will the 2010 changes create a fairer state pension system?
The system will be slightly fairer, but still won’t be fair.
- no comment
- Are lump sum payments, such as the Winter Fuel Payment, an appropriate way of addressing pensioner poverty?
Gimmicks such as winter fuel payments do not address pensioner poverty properly at all. Even those who live in Spain all winter or those who are very well off and therefore do not need these payments, can receive them. Such universal benefits do not help poorer pensioners specifically, they are available to everyone. They cost over £2billion a year and the money would be better spent improving the state pension
- Is the Government’s programme of welfare reform the right approach for supporting pensioners who wish to continue working?
No, Government policy desperately needs to encourage older workers to stay in the labour force, but policy is acting as a barrier instead. Age discrimination legislation stops at age 65 and the pension credit earnings disregard is still just £5pw, so that poorer and older workers can be penalized by policy decisions which count against them. This must change as soon as possible.