The Implications of Welfare Reform

1. Graham Mowat Head of Budgeting Support and Indebtedness - DWP 18th October 2013 The Implications of Welfare Reform

2. Contents • Welfare Reform • What is Welfare Reform? • What’s changing – Universal Credit • Preparing for Universal Credit • Financial Products, Budgeting Support (Money Advice) & Alternative Payment Arrangements • Indebtedness Strategy • Over Indebtedness as a Social Justice priority • Credit Union Expansion Programme • Legal High Cost Credit • Alternatives - Credit Unions

3. Overview (1) The Reform Story • The Welfare Reform Act introduces the most fundamental reforms to the social security system for 60 years. It aims for a simpler, fairer benefits system and to ensure work pays. • Money needs to be targeted more effectively; we have to ensure that support continues to be available to those who need it most. Employment must be an aspiration for everyone who is able to work. • Our services need to change to reflect the diversity and complexity of the issues that many people in society face today, requiring more joined-up working across government and beyond. “A system that was originally designed to support the poorest in society is now trapping them in the very condition it was supposed to alleviate”Iain Duncan-Smith, Secretary of State for Work and Pensions

4. Overview (2) The Reform Story • We are introducing greater fairness to the welfare and pensions systems by making work pay and reinvigorating incentives to save for retirement, whilst protecting the most vulnerable – disabled people and pensioners. • The nation’s finances also need to be put on a more sustainable footing – while this means making difficult decisions on tax and spending, we believe it is possible to do this and help people lift themselves out of poverty, and stay out of poverty, through work and saving backed by the right support and encouragement. • Our Reforms aim to: - ensure people are better off in work than on benefits; - provide unconditional support for disabled people that need it; - prepare the long-term unemployed for the world of work; - ensure people receive a fairer pension and are encouraged to save for retirement; - support separating families.

5. What’s changing? Universal Credit • Universal Credit replaces six main benefits, creating a simpler, single monthly payment for people in work or out of work. • Universal Credit is formed around a new ‘claimant commitment’ which sets out what is expected in return for assistance, taking into account personal circumstances and capability to earn. Those who break the commitment will face firm but fair penalties. • Claimants will be able to apply for their benefit online. Nearly 80 per cent of benefit claimants already use the internet, but telephone and other support services will be available if needed. • As claimants earn more money, financial support will be withdrawn at a slower rate than is the case under the current system. Universal Credit will be paid monthly. • A single payment will be made to a household rather than an individual. In exceptional circumstances, payments can be split within the household.

6. Universal Credit Personal Budgeting Support – Overview Claimants managing their money

7. Budgeting Accounts • 75% of people are paid earnings monthly in arrears. Monthly payment of benefit will prepare households for the reality of budgeting on a monthly income, will ease the transition into work, and will make it easier for households to take advantage of cheaper tariffs for essential costs such as utility bills. • The majority of Universal Credit claimants will continue to be paid through mainstream current or basic accounts. • Having access to a transactional account will enable claimants to make electronic payments out of the account – such as Direct Debits or standing orders – for bills such as rent, gas and electricity. • Up to 1.3 million potential UC claimants currently do not use a transactional bank account to manage their benefit payments. Most of these individuals currently use a Post Office Card account (POCa) which does not offer transactional facilities. • We are looking at ways to make accounts with budgeting functionality, such as ‘jam jar’ accounts, more widely available. We are consulting with financial providers across the private, social and third sectors and considering the best ways to make these types of products more available.

8. Money advice • Money advice will include: • Online budgeting tools for claimants who can help themselves - such as those offered by Money Advice Service and Citizens Advice. • Advice services offered by external organisations for those who need more support with, for example, getting a bank account or doing a monthly budget plan. • Advice will be delivered through online, telephone and face-to-face channels by expert providers at a national and local level through the Local Support Services framwork. • A personal planner is available on gov.uk to help claimants understand and prepare for financial changes arising from the introduction of Universal Credit. It asks claimants a set of questions about their readiness for claiming Universal Credit and, depending on the answers given, sets out an individual action plan. • We are also trialing the new concept of a Budgeting Club for new and existing claimants. This will provide face to face practical help to claimants, initially in a group setting and subsequently on a one to one basis if needed.

9. Alternative Payment Arrangements • For a minority of claimants, alternative payment arrangements may be required; these might include • paying the rent directly to the landlord • making more frequent than monthly payments • splitting the payment within the household • We will also have the option to make rent payments direct to the landlord if a claimant reaches a certain level of rent arrears. • These alternative payment arrangements will be considered on a case by case basis and assessed on their individual merits. • When considering alternative payment arrangements, a series of Tier 1 and Tier 2 factors indicating potential support needs will be used to help to decide if these arrangements are appropriate to an individual. • The decision about whether an alternative payment arrangement is suitable will be made by a UC adviser through the PBS process. Information from a third party i.e. the claimants’ representative, their caseworker and / or their landlord can be used to inform a decision.

10. Alternative Payment Arrangements – Consideration Factors

11. Over- indebtedness: What we know • Those on low incomes are at greatest risk of debt 1 • Over-indebtedness in low income households is most often a result of inadequate or poorly managed income (e.g. due to insecure/low paid jobs, lack of savings) rather than excessive consumption 2 • Those whose incomes are persistently low or fluctuating – whether in or out of work – are likely to fall further into debt in order to meet day-to-day expenses: • by using sources of credit with higher charges • through lack access to mainstream credit • Triggers of over-indebtedness: life shocks (relationship breakdown, having children, loss of employment), large unexpected expenditure shocks, onset of ill health2. Over-indebtedness can sometimes be associated with dynamics of family functioning: financial issues can be one of the sources of strain for couple relationships3. • There is a strong link between over-indebtedness and mental ill-health2 • Sustained work is likely to be key to avoiding problems with indebtedness • But there is also evidence that over-indebtedness can be a barrier to work4 • Evidence that problem debt can be as a result of relatively small debts spiralling • Source: • JRF (2012). Poverty: the role of institutions, behaviours and culture. • JRF (2010). Credit and debt in low-income families. • E.g. DfE (2010).Relationships Matter: Understanding the Needs of Adults (Particularly Parents) Regarding Relationship Support. RR 233. • Manchester City Council (2010). A study of financial inclusion and worklessness in Manchester: how to improve support for people with money problems to obtain and sustain employment.

12. Financial Inclusion - tackling Over-indebtedness DWP is working in partnership with the Money Advice Service to provide people with appropriate budgeting and debt advice at key points in their lives when they may experience financial shocks. Shocks Becoming a carer Redundancy Relationship breakdown Bereavement Becoming disabled Having a baby Retirement Moving house Falling ill People who contact DWP to claim a benefit as a result of these life events will be given information about where to go to access help with money to adjust to their new circumstances and avoid or deal with debt.

13. Tackling Over-indebtedness • Segmentation: we are working with Social Justice analysts to better understand how debt affects those facing multiple disadvantage. • Agreed cross-Government debt narrative: the cross-Government group on debt and financial inclusion is working on a debt narrative. • Media campaign: we are currently working with the Money Advice Service to ensure that any cross-Government media work we undertake aligns with their communications plans. • Joined-up messaging at local level: this involves looking at how local Government services (for example GPs) can signpost people to debt and money management advice. • Work to tackle the poverty premium: Social Justice analysts are developing a research proposal on understanding the poverty premium. • Undertaking work in the Social Justice team and Child Poverty Unit to raise awareness of the role debt plays in driving disadvantage and disincentivising work.

14. Legal High Cost Credit • Bristol University report for BIS • FCA’s Proposals for the new consumer credit regulation • Cross Government action in train • OFT already progressing compliance issues • Useful recent debate in Lords • BIS-led summit with Payday lenders – 1st July • Discussion at the Social Justice Cabinet Committee – 8th July • Archbishop of Canterbury’s mission • Reference of payday lending industry to the Competition Commission • FCA Consumer Credit Consultation – 3 October

15. Before 2006 – Limited involvement between DWP and CUs After 2006- Significant involvement and significant progress £113m of funding between 2006 and 2012 DWP contracted with over 150 CUs to deliver financial services including affordable credit 610k loans made worth over £275m, saved £245m in interest 40% borrowers also began to save 2012- Feasibility Study identified challenges and opportunities for the CU sector Financial Inclusion - DWP and Credit Unions

16. The report said CUs can and should expand, modernise and become financially self sustainable Government needs to support that change by: Making available funding of up to £38m to March 2015 Consultation on the maximum rate cap To receive funds CUs must demonstrate specific commitments and make financial contributions towards some products Background- Feasibility Report

17. DWP Credit Union Expansion Project • Following a tender exercise, a contract has been awarded to the Association of British Credit Unions Ltd (ABCUL) to deliver the expansion project. • The Feasibility Study also showed that at present even the best credit unions struggle to meet the operating costs of making small loans to people on lower incomes. • HMT consultation on the increase ran until March 2013. Majority of the responses were in favour of the proposed increase to 3% per calendar month; and in credit unions retaining the current exemption to the Consumer Credit Act. • HMT have confirmed that they intend to lay the Statutory Instrument to raise the rate cap from 2% pcm to 3% in October, and for that change to come into effect in April 2014.

18. DWP Credit Union Expansion Project - Objectives • The Project has set out very clear objectives: • Enable credit unions joining the Project to reduce costs and become financially sustainable by 2015 • Eliminate the need for further Government funding of credit unions after March 2015 • Increase access to financial services to 500,000 more people on lower incomes by March 2015 • Increase access to financial services to 1 million more people on low incomes by March 2019 • Save low income consumers £1 billion in loan interest payments by March 2019