A Policy Error

The best argument for the House of Lords, Professor Prem Sikka, Lord Sikka, writes:

The Labour government has made a policy error in denying Winter Fuel Payments (WFP) of between £100 and £300 to millions of UK pensioners. Instead of listening to hard-pressed pensioners, it is spinning and getting into more trouble. The policy is a death sentence of thousands of pensioners. Many legislators are concerned and the government is facing a crucial vote next week on the legislation.

On 29th July 2024, Chancellor Rachel Reeves abolished tax-free universal WFP without any consultation or warning. The abolition was not in the election manifesto. No impact assessment has been produced. It coincided with at least 10% or £150 price hike in average annual household energy bills from October and another price hike in expected in January 2025.

The background is that the government claims to have found a £21.9bn black hole in public finances inherited from the Conservative government. The planned 2024-25 government spend is £1,226bn. The government responded by restricting WFP only to those on pension credits or other means-tested benefits. Currently WFP is received by about 12.6m pensioners, and about 10m would become ineligible to receive it.

The government claimed that the new policy will save £1.4bn, which in the overall government spending context is insignificant. The policy of universal WFP was introduced in 1997 to alleviate pensioner poverty. Today, the average state pension is between £9,000 and £9,500 a year, which is less than 50% of the national minimum wage. Some 1.4m pensioners supplement their pension by claiming Pension Credit. Another 880,000 are eligible but don’t claim as they can’t negotiate the bureaucracy. Some £2.2bn went unclaimed last year. Despite extra benefits, nearly 2.2m pensioners live in poverty. Last winter, despite the universal WFP nearly 5,000 pensioners died from cold weather. Each year, around 68,000 senior citizens die in poverty.

The government has not provided any evidence to show that £1.4bn saving will actually be achieved. The alleged savings take no account of the cost of administering means-testing and resolving disputes, extra pressures on doctors and hospitals because of greater illness, and the loss of economic activity resulting in erosion of pensioner incomes. The government is now urging 880,000 eligible pensioners to claim Pension Credit and qualify for WFP. The average pension credit is around £75 a week or £3,900 a year. It is means-tested and in general can only be claimed by single pensioners with weekly income below £218.15 (£11,336 a year) and couples with income less than £332.95. Those qualifying for Pension credit can also get council tax, housing benefit, Warm Home Discount and free TV licences. If all 880,000 claim it, the total cost is expected to be around £4bn. The government savings depend on relatively few additional pensioners claiming pension credit and WFP.

The current take-up of pension credit is around 61.5% of eligible pensioners. Perhaps, with lots of media coverage the rate might rise to 70% but that still means that many of the 880,000 will not claim and will be impoverished. Then there are those just above the £11,336 threshold but not now eligible to received WFP. Age UK estimates that two million pensioners could be affected. Another estimate is that five out of six or 1.6m pensioners living below the poverty line will lose WFP and also be forced to pay higher energy bills.

The government policy does not achieve the financial objectives and hurts the poorest. The government did not have to target the pensioners as it had numerous other choices. These included borrowing, higher taxes on the rich, reversing national insurance cuts by the last Conservative government, reducing corporate subsidies, ending support for foreign wars, adding WFP to the state pension and thus ensuring that better-off pensioners paid income tax on its appropriate marginal rates and denying WFP to those paying income tax at higher (40%) and additional (45%) marginal rates. Successive governments handed £895bn of quantitative easing (QE) to speculators to City speculators. This boosted the financial assets and pensions of the richest 10% of households by between £128,000 and £322,000 per household. No government has sought to tax these gains. But the government apparently can’t find £1.4bn. Poorest are the easy target.

The policy is poorly researched. The elderly tend to feel cold more and generally need heating for longer periods, resulting in higher bills. That is especially so for seniors living in Northern England, North Wales and Scotland. So, the WFP cut will erode a greater proportion of their incomes. Many disabled and sick pensioners use energy to charge wheelchairs and domestic medical equipment but will lose WFP, resulting in loss of mobility. People can’t dip into other incomes and savings to survive. More than two in five of the poorest pensioners (1m people) have no private pension to top-up their state pension, and 11% of pensioners (1.3m  people) have no savings at all. Pensioner deaths due to cold will increase.

In justifying the policy, ministers have claimed that “If we hadn’t taken that action we’d have seen a run on the pound”. The Prime Minister said that the cut “will stabilise the economy and fix the foundations”. In private briefings, Ministers are telling legislators that continuation of universal WFP would have resulted in spike in interest rates. No independent commentator or City institution has supported such claims.

Another nonsensical line of attack by the chancellor is that due to the triple-lock state pension increased by £900 last year, and therefore pensioners can afford to lose WFP and pay higher energy bills. This totally ignores the context and not all pensioners got a £900 increase. The current rates of state pension are as follows: For the pre-April 2016 retirees, the state pension is £169.50 per week or around £9,000 a year. Only 75% of the pre-2016 retirees receive the full amount i.e. nearly 2.4m people, mostly women miss out. For post-2016 retirees, the state pension is £221.20 a week or £11,500 a year. Only 51% of the post-2016 retirees receive the full state pension, i.e. nearly 1.7m, mostly women do not receive the full amount. About 6m people live in fuel poverty. Some 2.3m households already owe over £1,200 on average and total energy debt is over £3bn. Higher energy prices and lower pensioner income means that fuel poverty and energy debts will increase. Besides, pension rises come after the rise in cost-of-living and are already spent. The chancellor does not advocate means-testing of corporations before handing any subsidies or tax perks.

So soon after the two-child benefit and condemning children to poverty, the government has targeted pensioners. The House of Commons will vote on 10th September on the legislation to restrict WFP. With a 174 majority the government is likely to win the vote, especially as it has a record of bullying dissenters. For example, it withdrew the whip from seven MPs for voting against the two-child benefit cap, arguably a major reason for child poverty. The same tactics are likely to silence others. The authoritarian approach can’t hide the folly of the WFP policy. Every time a pensioner dies from cold, poverty and hunger, newspaper headlines will remind people of the harsh government policy. This will be repeated for the next five years, will alienate people and damage the government’s electoral chances. Rather than defending, the government needs to reverse its policy. At the very least, it needs to defer the policy, hold consultations and consider alternatives before inflicting poverty on poorer pensioners.