Tag: pensions

The decision not to compensate the WASPI women

The government has decided not to compensate women who have lost several years’ pensions because of the shift to equal pension ages.  The main complaint that has been addressed (notably, the decision of the Ombudsman on this issue) is focused on a specific question: were the women properly informed about the change in their entitlement?  The Ombudsman’s judgment was that some notices came late, or not at all, and so that there was maladministration.

That, however, is only part of the issue, and not (in my view) the greatest matter of concern.  The problem lies not so much in the 1995 Act, which set about equalising pension ages, as the 2011 Act, which both speeded up the timetable and further increased the pension age.  (The notices of this went out in 2012 and 2013). The effect of that Act was that women who were at that point aged (roughly) 56-58 years was that, even if they were perfectly informed, they were given less than five years, and possibly as little as two, to make alternative financial arrangements.

Parliament decided to save money at these women’s expense. There are two key objections to this.  One is that the government took away a property right – the pension that they had paid for.   The other is the breach of a fairly long-standing principle in public service, that of ‘promissory estoppel’: that people make plans and commitments guided by the advice of government and officials, and that they have the right to expect that official promises will be held to.   The bad faith, not the lack of information, is the main reason the WASPI women have been so indignant.

 

A cut in Winter Fuel Payment is a cut in the basic pension

The Winter Fuel Payment has always come over as a little odd.  It’s not a cold weather payment – the weather is irrelevant.  It’s not really a winter payment – it’s based on the situtation in September.  It’s not actually a payment for fuel – people are free to spend it on whatever they think appropriate, and while some people will use it to pay for a little more fuel, it’s unusual to use even most of it for that.

The proposal to abolish WFP is essentially, then, a proposal to cut the income of pensioners, currently by up to £300 a year.  That cut is not self-evidently justified, because it reveals a somewhat distorted view of priorities, but it’s not fundamental either.  If the government really wanted to rethink the distribution of income to pensioners, it would make far more sense to tax the state pension (that would only affect those pensioners who had combined income from state pension and other sources above the tax threshold).   They’re not doing that, because they came to office with an undertaking not to increase personal tax rates.  Taking the money directly from pensioners may be different from tax, but it ends up in the same place.

I’ve been more concerned by a set of ill-informed public comments about the WFP.  Taking them one by one: why should rich pensioners get anything? The immediate answer to that is really simple. Pensions aren’t income-related.  All pensions go to richer pensioners as well as poorer ones.  I’ve already explained that the Winter Fuel Payment is not really tied either to winter or to fuel. The cut in WFP is nothing more, and nothing less, than a cut in pensions. 

The second question: why can’t they just claim Pension Credit?  To which the answer is: Have you looked at Pension Credit? It’s not as complicated as Universal Credit, which is a blessing, but it’s still difficult to decipher. (For example, entitlement is still expressed in weekly amounts, but pension payments are often monthly.  It becomes more complicated if Savings Credit is included: at that point, it becomes difficult to work out when people become entitled, and when they cease to be.)  Like other income-tested benefits, PC has consistently failed to reach hundreds of thousands of people who are in principle entitled.   The last estimate (2022) was that PC was received by 63% of the people entitled, and not received by 37%.

That is also the answer to the third question: why don’t we just means-test WFP?  The basic reason is again obvious. Every means-test calls for more details and more complexity.  In their heyday, there were literally thousands  of separate means-tests. (Consider, for example, the awful mess we’ve got into with local authority means-tests for residential care – but that at least relates to very large financial payments.)  We already have one, comprehensive means-test for everyone with an income.  It’s the tax system. Why create yet another complex, burdensome process to do the same job?

Means tests all fail to some degree.   It’s far, far more difficult to work out who is entitled and who is not if the assessment relies on a test of income or other resources. That is not a reason never to have any means test, because considerable numbers of people depend on the payments – but we do need to decide whether it wouldn’t better to go for simpler, broader eligibility criteria for benefits with a mass role.  I’d be in favour, for example, for a guaranteed minimum state pension, so that everyone who received a partial pension and had no occupational pension got the state pension automatically made up to a set level.

This blog is not, however, here to offer you a vision of the shining city of the future.  If WFP is so feeble, why should we keep it?  Does it matter?  Here are three reasons.

First, the principle.  The cut in WFP is a cut in pensions.  Is that merited?  Pensions in the UK are markedly lower than pensions in many of the countries we’d use as comparators – which is why the ‘triple lock’ has been used, however slowly, to bump them up a wee bit.  WFP is another way.

Second, the value of having a distinct benefit.  Benefits don’t work too well when they cover multiple contingencies.  Technically, cash benefits are ‘fungible’ – they mix together in different ways for different people.  The best and most effective way to be able to respond to particular circumstances is to have a stand-alone benefit that can be added to other income.  That’s the mechanism that the government is set to destroy.  WFP is the only system that is available to distribute benefits to everyone.  If we wanted in the future to make a lump sum available to pensioners  (and why not – we did it for the banks), this is the administrative mechanism you’d need to use.  An old rule about tax: don’t burn your instruments. You never know when you’ll need them.

Third, the economics.  WFP (and pensions overall) are not ‘public spending’.  If they’re paid out of tax, the amount of money in the economy is just the same afterwards as it was before.  Pensions are ‘transfer payments’, which mainly affect who is going to spend the money. The state does not spend the money; pensioners do.   The abolition of WFP is, crudely put, a cut in the disposable income of pensioners. That is also a cut in the financing of economic activites that the money would otherwise have been spent on.   Far too many people in the UK are destitute.  Markets don’t work if people don’t have the money to spend in them. There is a powerful case for increasing benefits overall.

In praise of the triple lock

The ‘triple lock’ is the name given to a commitment to maintain and improve the value of state pensions.  The table comes from a recent report by the Institute for Fiscal Studies.

Table 1. Triple lock indexation since its introduction

In the course of the last twelve years, this has meant that pensions have increased by a nominal 60%, while if they had only increased by inflation, they would be up 42%. Putting that  another way, pensions have risen by 12.7% over inflation (that is, 160/142), which in real terms is 1% a year.

One might suppose that ratcheting pensions up, however slowly, was a praiseworthy thing to do, but the principle has come under fire from those who claim that it represents an unsustainable commitment. The criticism has been fed by the IFS report, which argues that it creates ‘uncertainty’ about the future value of state pensions, and that if it is left in place till 2050, it will increase the value of the state Pension from about 25% of median earnings to something between 26% and 32%.

The first of these arguments is, frankly, codswallop.  The benefits  system is in a parlous state: the main ‘uncertainty’ it is creating is whether or not people will be able to eat.  Improving the value of the pension does not increase uncertainty; it reduces it.   If we are genuinely concerned about the narrower problem of how people plan their pensions for the future, the main ‘uncertainties’ come from the govenment’s eccentric reliance on means-testing and the desperate problem of paying for social care.

The second argument invites the obvious retort – so what?  A modest increase in the value of pensions, relative to the median wage, is surely a good thing.  The UK’s treatment of pensioners is, by international statndards, parsimonious.  Consider this graph from the OECD.  It puts the percentage of GDP spent on pensions in the UK at 5.1%.  The Office for Budget Responsibility, which works on a slightly different set of definitions and takes into account a few extra benefits,  estimates that this year, the percentage will be – try not to be too shocked – 5.3%.

https://data.oecd.org/socialexp/pension-spending.htm

The  State Pension provides, at best, a modest basic income.  The (somewhat limited) success of the triple lock is something to applaud, not to denigrate.  One might wish that the the same approach could be taken for the painfully inadequate benefits offered to people of working age.

The WASPI women are going to have to be compensated, regardless of who wins the election

There is one fascinating exception to the failure of the parties to engage with fundamental issues: that is, the position of the WASPI women, two and a half million women who have had their expected retirement dates delayed and their pension entitlements radically cut.  This is yet another legacy of bad policy decisions taken in recent years.  It has led, however, to Labour and the SNP making a commitment to compensate the women for the loss of rights that have been earned through contributory benefits.

The current position of the UK government has some parallels with the behaviour of Glasgow Council, which persistently underpaid women who ought to have had equal pay.  Both of these problems have come about because the public authorities were looking for ways to save money, and they thought that it was easier to do that by taking the money from women, largely because women’s incomes are considered secondary to men’s.  In both cases, the injustice is obvious and palpable.  And in both cases, the main ground for resistance now is simply how much it will cost to set the issue right.

The WASPI women are set to appeal from the case they lost in the High Court.  They lost that case mainly because they tried to argue that their treatment was discriminatory; that argument failed because as policy intended to equalise the position of men and women is the opposite.  For what it’s worth, however, I think that ultimately they are going to win, because there are other, stronger objections to the policy.  The case has direct parallels with a human rights case taken in the Inter-American Court of Human Rights, in Five Pensioners v Peru.  The decision in that case centred on the suspension of pensions by the Peruvian government.  Disappointingly, the court did not attach much weight to the idea that social security was a human right; but they did think that there was a human right not be be deprived of one’s property, and that a contributory pension was the property of the pensioner, not the government.

The government can’t rely on its power to make the rules for social security.  The DWP’s rules are mainly determined through secondary legislation, but secondary legislation can’t trump human rights or property rights.  That has implications for any future government.  The bill to compensate the WASPI women is going to be presented in due course, and regardless of the political complexion of the government, it is going to have to be paid.

 

Who will get the new pension?

I’m indebted to Gareth Morgan for drawing my attention to a discrepancy in the figures for the new pensions scheme.  Gareth had drawn information from the Sunday Times, which had discovered from an FoI request that “Two-thirds of the people who reach state pension age in 2016-17 will not receive the full pension, according to the DWP.”   The Sunday Times had been told: “For most people who retire next year, the weekly pension will fall short of the headline figure by an average of between £35 and £55 a week … For those who retire in 2020, the average shortfall will be between £15 and £25. I was referring to different information from the DWP, which suggests that 45% of people will get the full rate (I’ve shown the graph here: the numbers are on page 35).  These figures can’t all be right.

NSP

Part of the explanation may be, I think, the apparent disappearance of large numbers of women from the figures in the second report (see figure 24, page 37) – and I’m not at all clear how as few as 20,000 women come to be counted as 27% of all those retiring.  I suspect that the Sunday Times’s figures are more trustworthy than the DWP’s.

Further note, 6th April:  I’ve had an explanation from the DWP.  The totals they presented were rounded to the nearest 10,000, while the percentages were left alone.  That explains how 20,000 gets to be treated as 27% of 90,000.   The huge approximation – on a figure of 20,000, plus or minus 5,000 is 25% in each direction – means, unfortunately, that the figures in the report don’t add up.  The main surprise is that official statistics can be presented with such little regard for the data. 

A small cut or two for pensioners

Today’s Autumn Statement reverses the decision to withdraw large amounts of people’s Tax Credits, but otherwise it doesn’t have much to say about benefits.  Most of the decisions  relate to changes in timing.  Apart from that, there’s a plan to make social renting subject to the same Local Housing Allowance rules as private rented housing and rules to stop some claimants spending more than a month abroad.

The effects of cuts or spending decisions generally appear in the tables of a Blue Book, on pp 112-3.   It’s surprising that two apparently minor tweaks to the ‘Savings Credit’, a complex addition to  the means-tested Pension Credit, are set to save £135m next year.  The Savings Credit currently costs £618m, and goes to 1.15m pensioners (an average of £536); the projected saving is more than 20%.   One of the two tweaks is a small adjustment in the rates:  Paragraph 3.49 states:  ” The Savings Credit threshold will rise to £133.82 for a single pensioner and to £212.97 for a couple (note:  this year’s rates are £126.50 and £201.80), which will reduce the single rate of the Savings Credit maximum by £1.75 to £13.07 and the couple rate by £2.68 to £14.75. ”  The other tweak, in para 1.135, is this:  “by adjusting the Savings Credit threshold, the Pension Credit awards for those currently receiving Savings Credit will be frozen where income is unchanged.”  If this means that people receiving Savings Credit will lose the value of the £4.40 increase in the minimum guarantee, it will affect about 723,000 claimants (the ones who get both the Guarantee Credit and the Savings Credit).  That  could add up to the size of cut the Treasury is talking about – but this money is not actually being saved, it’s just not being spent on some while it is being spent on others.

Richard Murphy on private pensions

In his blog, and in an earlier report, Richard Murphy makes a blistering attack on the private pensions industry.  Private pensions currently receive £38 billion a year in tax reliefs and subsidies – an amount so large that it pretty much pays for private pensions.  The private pensions industry does what it does at a staggeringly high cost, and it has lost a substantial bite out of money it was supposed to be safeguarding.  Murphy asks:

  1. Why are we investing pensions in this way when there are clearly better options?
  2. Why are we structuring pensions this way when it clearly allows the extraction of excessive fees for poor return from the system?
  3. Why are we subsidising this failure with so much state money – enough, in fact, to represent a third of our real state debt right now?
  4. Why are we tolerating the massive redistribution of wealth from many to a few that this system permits?
  5. Why are we allowing so many funds to be put to idle and non-productive use outside the mainstream economy?
  6. What can we do better?
  7. Why aren’t more people asking these questions?

The sixth question is, of course, the difficult one.  I’ve argued many times that, regardless of the mess caused when benefits are badly designed, setting them right is never an easy option.  Redistributing costs and benefits means that whenever some people are made better off, someone else has to be worse off.  The only way out of the bind is to spend more money, at least enough to protect people from the more serious anomalies; and reshaping the system of subsidies and reliefs will have to be done gradually, to ease the pain.

 

Is independence a threat to pensions?

I was asked by the BBC to comment on a poster produced for the independence debate, which suggests that pensions may be under threat.  My contribution is on the BBC website, here.  Basically, there are three types of provision for pensioners to consider – the state pension, occupational pensions, and further benefits, many of which are under threat anyway. Reorganising occupational pensions might be a nuisance (they’d probably have to be split into English and Scottish schemes to comply with European regulations) but I don’t think there’s a serious risk in any of these categories.

The constraints of the article meant that an interesting aside had to be dropped, but having a blog allows me the indulgence of dropping it in here anyway.  This is the question of what happens to upratings for people who get a pension from the UK but later go to live in Scotland.   The UK government has long refused to uprate benefits for pensioners who live in some other countries, including Australia, New Zealand, Canada, South Africa and some others such as Nigeria or Yemen; there’s a detailed report here.  They argue that the UK does not have a legal agreement to pay upratings in these countries. However, they do pay upratings in the European Union, Turkey and the USA.  Steve Webb, the Pensions Minister, has told a Holyrood committee that there shouldn’t be a problem – and it would be astonishing if the UK government imposed rules for Scotland that treated English pensioners in Scotland worse than Turkey or Israel.

Another scare story, this time about pensions

The Scotsman devotes this morning’s first two pages to concerns about private pensions after independence, under the title Scottish independence: EU deals pensions blow.  It’s prompted by an announcement from the EU that the rules on cross-border pensions will stay as they are.   Under EU rules, cross-border pension schemes have to be fully funded; many UK schemes (about 5000 out of 6300) are currently in deficit.

A scheme doesn’t become a cross-border scheme because it’s paid to someone abroad – many people live abroad now (for example, pensioners living in Ireland and Spain) and receive British pensions.   It’s a cross-border scheme if it is based and operated across boundaries, levying contributions from people in different countries.

There are some issues.  Some pensions firms will have to change the way they operate.   Schemes in deficit will have either to stop taking contributions from people situated abroad, or set up new, independent schemes for each country.  Some people will have to join new pensions schemes, as many people do now when they move jobs; and some of them will find, reflecting the current economic climate, that the terms are less favourable than their current scheme – typically the scheme will offer lower returns, it won’t be salary-related, and and the date of retirement will be later.   It’s a consideration, but it’s hardly decisive for the independence debate.

 

 

It's not quite the end of annuities

There has been some excitement at the thought that pensioners will be able to blow their pension pots on a Lamborghini, rather than buying an annuity. There may be some problems with this arrangement – no doubt the sharks will be circling at the smell of money in the water – but somehow the idea that pensioners will be lining up to buy cars that cost £300,000 and do 11 miles per gallon doesn’t quite square with the experience of most of the older people I’ve ever met.

I can make no great claim to understand the annuities market, but there are reasons to doubt that this week’s Budget has knocked the bottom out of it.  According to the Association of British Insurers, the numbers of people who take out large annuities is very small.  Most pots are limited; many annuities – more than 100,000 a year – are bought for less than £10,000; the median pot is around £20,000.  They explain that an investment of £5000 will typically secure an income of £20 a month.

Much of the trade seems to depend on the idea that someone who is looking for a range of investment options will be able to use part of that money to guarantee a fixed income.   On that basis, the most likely outcome of the change in rules is that, as workplace pensions grow, more people will use part, rather than all, of a pension pot to guarantee an income.  If they like the idea, they can start small and decide later to buy more income.