Written evidence from StepChange Debt Charity BPI0067

StepChange Debt Charity welcomes this call for evidence on the adequacy of benefits. In 2022, over half a million people contacted StepChange seeking debt advice or guidance with their problem debt. Over 187,000 people completed a full debt advice session with StepChange’s telephone and online advice service. Around one-third of StepChange’s clients receive Universal Credit (UC) and one-half any social security payment (including Child Benefit).

In this response to the committee, we draw on evidence from StepChange’s advice service and research with clients to:

• highlight evidence of the inadequacy of working-age benefits and the impact of inadequate support on outcomes for people struggling with problem debt;
• draw attention to problems in the system of deductions from UC that further reduce working-age benefits below an adequate level and set out solutions;
• note the existence of credible, evidence-informed measures of minimum income that should be used to inform the level of working-age benefits; and
• set out StepChange’s support for an independent body to gather evidence and advise ministers on the level of working-age benefits.

Response to call for evidence questions

What ‘essentials’ should working-age benefits in the UK cover? Are current working-age benefit levels sufficient to cover those needs?

The amount of working age benefit levels rests on what we understand to be a decent standard of living. While there is no one universally accepted standard of adequacy, there are a number of deeply researched measures of minimum income, each of which provide insight into the relative adequacy of benefits. We would point to two measures in particular, the Minimum Income Standard, which produces budget standards based on what members of the public think is a minimum acceptable standard of living (and informs the Living Wage), and the Social Metrics Commission, a non-partisan commission that examined the question of how best to measure the number of people who have insufficient material resources to meet their needs.[1]

Debt advice can also provide insight into the minimum resources needed to make ends meet. The regulated debt advice process involves taking an inventory of a client’s minimum expenses (which includes essential costs of living and ongoing priority bill payments but excludes debt repayments) using the Standard Financial Statement (SFS) tool developed by the Money and Pensions Advice Service.[2] The SFS categories are based on observation of what people with low incomes actually spend and provide an adjustable benchmark intended to reflect a minimum living standard. While the SFS and the MIS are distinct and separate, the SFS broadly aligns with the MIS, although there are differences across expenditure categories.[3] 

The SFS reflects the importance of household structure and needs in shaping the minimum needs of households. Variation in essential spending is driven by the number of adults and children in a household, a range of factors like the presence or otherwise of illness or disability, and impact of external factors that affect costs such as the influence of geography on tenancy type and housing costs. Understanding the actual needs of households is essential in providing effective debt advice that leads to good outcomes. One simple insight that can be drawn from the advice budgeting process is that working-age benefits must be well-designed across a range of elements (rather than providing ‘flat-rate’ payments per household) to meet the minimum needs of households in different circumstances.

In debt advice, the concept of ‘deficit budgets’ is used to describe those whose income is less than their essential outgoings following the SFS budgeting process. Over 50% of clients with negative budgets receive UC. Our client data shows some client groups have a disproportionate number of deficit budget clients compared to all StepChange clients. This includes:

• Single parents and single people without children
• Renters
• Clients with additional vulnerabilities
• Clients who are unemployed, unable to work because of illness or disability, on zero-hour contracts or students
• Clients from some minority ethnic groups
• Clients aged 49 and over

Clients with deficit budgets are more likely to have ‘priority’ arrears (like council tax, energy and rent arrears) and about as likely as other clients to have ‘non-priority’ debts (like credit card, retail credit and overdraft debts).

In our research with clients, we find that those who rely on working-age benefits are at high risk of hardship and destitution. In research published in 2020, we found that 30% of our debt advice clients who receive working-age benefits had had fewer than two meals a day for two or more days in the past month and that 19% of clients had lacked appropriate clothing or footwear for the weather.[4] Separately, participants in our research with clients with deficit budgets who received UC cited cutting back to the point hardship. For example, one interviewee told us he “stopped eating properly for a while”, while another said he prioritised food, but this meant he built up rent arrears.[5]

Single parents are over-represented among StepChange clients: one in four StepChange clients are single parents, almost twice the proportion of single parent households in the general population. In research into the experience of single parents struggling with debt, jointly conducted with Gingerbread, we found that problem debt among single parents was most commonly driven by poverty and income insecurity, compounded by the inadequate level of working-age benefit payments.[6] In-work poverty was common because working-age benefits (including support with childcare costs) did not close the gap in adequacy for parents working part-time (and/or with low-paying work). The majority of single parents we surveyed had recently gone without meals to make ends meet.

StepChange research into the experience of clients with deficit budgets casts light on the budgeting dilemmas experienced by people with insufficient income to make ends meet. Deficit budget clients spend a much higher proportion of their income on essentials on average compared to other clients and are often engaged in a juggling act, caught between making payments on debts, buying essentials, or cutting back.[7] For most clients in this situation, living with a negative budget caused anxiety, stress and health problems. These factors, in turn, undermine the ability of people who are struggling to cope and access help and support and, in turn, compound financial difficulty and hardship.

People who rely on working-age benefits and are unable to make ends meet often resolve budgeting dilemmas by borrowing using unsecured credit. In YouGov polling commissioned by StepChange conducted in January this year, 25% of those receiving means-tested benefits had used credit to pay for essentials within the past 12 months (compared to 15% of those who do not receive means-tested benefits).[8] Debt repayments often subsequently become an additional burden, compounding financial difficulty hardship.[9] 16% of UK adults receiving one or more means-tested benefits meet StepChange’s definition of ‘severe problem debt’ compared to 7% of those not receiving means-tested benefits.

Beyond contributing to hardship and problem debt, the impact of inadequate working-age benefit payments on the lives of those affected is significant. For example, our research with families with dependent children shows that periods of hardship can have a real impact on the mental and physical health of both parents and children.[10] They can undermine children’s relationships with their peers and their school experiences, risking impacts that have an on-going effect that lasts throughout the child’s life. In our research, clients also often speak about the stigma of receiving benefits driven by negative public perceptions of working age benefits. Alongside anxiety and stress linked to financial difficulty, stigma is an additional factor contributing to low wellbeing and mental health problems that also affects their ability to cope and take steps to manage their situation.

In light of our experience as a debt advice provider, our view is that working age benefits should meet the minimum needs of those who access support. Failing to provide sufficient support not only causes hardship and long-term negative impacts on both adults and children, but tends to cause and compound financial difficulty and debt problems that deepen and amplify those negative impacts. Alongside other social costs of poverty, problem debt driven by low income has a high cost to society.[11] In setting the level of benefits, policy makers should have regard for the needs of households based on a credible, well-evidenced methodology.

What is the role of i) the benefit cap; ii) repayments; iii) sanctions on the adequacy of benefits? 

StepChange has raised concerns about the impact of deductions from UC on claimants and made recommendations on reforms.[12] In our most recent work, we drew attention to the problems caused by deductions from UC to repay benefit overpayments. Over £1 billion is currently deducted each year this way.

We found that clients with a deduction in place for an overpayment were more likely to have an additional vulnerability to their financial difficulty and more likely to have a negative budget compared to our clients overall. Our findings indicate that the Department for Work and Pensions (DWP) cannot safely make automated deductions without an unacceptably high risk of causing hardship: 98% of StepChange clients who had experienced a deduction for an overpayment had been unable to afford essentials as a result.

In the recent past, advocacy by StepChange alongside wider sector organisations has led to reductions of the cap on deductions from UC from 40% of the standards allowance to 25%, alongside an extension of the period over which UC advances are repaid from 12 to 24 months. These steps have helped claimants but left fundamental problems with the system of deductions from UC unaddressed.

People receiving UC are often struggling with debt. YouGov polling commissioned by StepChange in January 2023 found that 19% of UK adults receiving one or more means-tested benefits were behind on at least one priority bill (energy, council tax or housing payments) compared to 5% of those not receiving means-tested benefits.[13] The shortfall in adequacy of benefits and the importance of supporting claimants affected by debt problems means it is vital that any arrangement to deduct debt repayments from UC is well-designed.

To understand why the present system of deductions from UC falls short, it is helpful to analyse that system through the prism of responsible debt collection practices:

• Broadly, anyone struggling with debt should be supported to budget and prioritise their expenses in order to determine what they can afford to repay, if anything, towards their debts. Debts are then separated into ‘priority’ and ‘non-priority’ debts. Priority debts are those where non-payment of arrears would lead to unacceptable negative consequences (for example, eviction from a home or disconnection of energy). Non-priority debts are those such as unsecured credit like credit card debt where consequences are less severe.
• Priority debts are repaid first. If someone has no surplus income, responsible priority creditors should agree to pause repayments but that is not always the case. Once agreements are in place with priority creditors, any surplus income can be used to repay non-priority debts. (In practice, there is more to the process of debt advice, such as income maximisation where appropriate and the role of statutory debt solutions.)

This process seeks to help people struggling with debt to stabilise their situation, ensure they have enough income to make ends meet and promote sustainable debt repayments and good outcomes. Ignoring these principles through poorly designed or aggressive debt collection practices tends to be counter-productive, driving stress, harmful coping patterns and poor outcomes.

Assessed against these principles, there are four principal problems with the present system of deductions from UC:

• First, deductions for government debts like UC advances and benefit overpayments are made without an assessment of the affordability of repayment. This means such deductions are made without regard to the ability of claimants to meet essential expenses like food, rent and utility bills.
• Second, deductions for debts like UC advances and overpayments are made without an assessment of whether there are other priority debts that should be repaid first in the best interests of the claimant. The priority order in which deductions are made, in fact, puts repayment of UC advances (though not benefit overpayments) above deductions for ‘third-party’ priority debts like rent arrears.
• Third, ‘last resort’ deductions for third party debts can be made by creditors who have not taken sufficient steps to engage with and support claimants. Third-party deductions are most commonly made for court fines, rent and council tax arrears, followed by water and energy arrears. Good practice and statutory guidance for rent, council tax, water and energy arrears requires that, before taking enforcement action, creditors take steps such as making referrals to free debt advice, providing time to make applications for benefits and seeking to agree an affordable repayment plan based on an income and expenditure assessment.[14]

Third-party deductions may nevertheless be attached to UC payments without the consent of claimants without any confirmation that these steps have been pursued.[15] DWP requires that there is ‘a threat of enforcement action’ but does not require the above steps to support claimants. This means that it is too easy for creditors to attach deductions, whether or not it is in the interests of claimants, and discourages responsible debt collection practices.

• Finally, third-party deductions are made at rates that can be too high. Most third-party deductions are set at 5% of the standard allowance: from £15 to £29 per month (depending on the household)—a significant amount for people who often cannot afford the basics. This is up to twice the amount that was deducted for such repayments from legacy benefits (£3.70 a week, or around £16 each month) and means that older or larger households have higher deductions, regardless of the size of their debt or the repayment a creditor is willing to accept.

Separately, deductions for housing arrears can be made at from 10% to 20% of the standard allowance (up from 5% of the legacy Housing Allowance payment). Forthcoming research from StepChange shows that landlords, however, often accept lower repayments than this outside the deductions system. Setting the minimum repayment too high therefore incentivises higher repayments than may be appropriate and discourages proper affordability assessments.

Applying principles of good debt collection practices to the system of deductions from UC points to six steps to reform the system:

1. To protect the adequacy of UC payments, the cap on deductions from the standard allowance should be set at the lowest possible level that allows for essential priority deductions to be made in the claimant’s interest. StepChange, alongside sector organisations, has proposed the cap should be set at 15% of the standard allowance.
2. Deductions for overpayments and UC advances should be limited to 5% of the standard allowance (within the 15% cap). This would bring such deductions much closer to a safer level and best practice in responsible debt collection.

Safeguards should also be introduced to stop these deductions for claimants based on evidence of hardship risks. StepChange has proposed that these deductions should be stopped where a claimant has no earned income due to evidence in our client data that risks are particularly high for this group. A similar approach would be to use real-time UC data on claimants’ income to stop these deductions if combined income from work (or other sources) and UC fall below a minimum threshold based on household type. This would prevent such deductions pulling income below a minimum level.

3. Priority debt repayments should come first in the deductions priority order, above the repayment of UC advances. (There is precedent for this approach: for legacy benefits such as Income Support or Jobseeker’s Allowance, if three third party deductions were in place, deductions for overpayments would be deferred.)[16]
4. DWP should introduce a mandatory checklist to ensure any third-party deduction made without a claimant’s consent is genuinely a last resort and in the claimant’s interest. Broadly, this should include reasonable steps to communicate and engage with a claimant, time to make any applications for new or increased support, an assessment of affordability using a recognised income and expenditure assessment and referral to free debt advice. DWP should seek to discourage creditors from applying for a deduction if they would not seek repayment outside the deductions system. It should also ensure that creditors give reasonable notice to claimants and provide a route for claimants or their advisors to challenge a deduction or, where appropriate, the rate at which it is made.
5. The 5% rate for deductions (whether third-party or for government debt) should be made more flexible so that creditors may deduct up to 5% of the standard allowance. Specifically, DWP should provide creditors an option to reduce repayments to a minimal level where they are aware that higher repayments will cause hardship. This change would particularly benefit larger households that receive the higher standard allowance payment (so have higher deductions in place) and those struggling with a number of priority arrears. The minimum deduction for housing arrears should also be reduced from 10% to 5% of the standard allowance.
6. DWP should take steps to ensure that claimants’ facing hardship are aware that they can request a reduction in deductions, know how to do so and are encouraged to do so where appropriate. For example, this should include communications with claimants when deductions are first made, notices within the UC journal and online ‘dashboard’ tools to make or request reductions.

Deductions were introduced as a well-intentioned attempt to support claimants to manage their money, but the system has become a muddle that undermines adequacy and subjects people who receive social security payments to harsher and less responsible debt collection practices than those who do not receive support. Reforms to the system would both increase the adequacy of benefits for claimants and support better outcomes for those struggling with debt.

What role could, or should, an independent body undertake in advising Government on benefit policy?

We have described how client evidence from StepChange’s advice service shows that working-age benefits are insufficient to meet need and how this leads to hardship, financial difficulty and problem debt. These impacts in turn have wider negative social consequences and contribute to poor long-term outcomes.

The current approach to setting and funding the level of working age benefits is not working. It is causing harm to people who rely on the social safety net to cope with circumstances or life events beyond their control. The effect of political apathy, and sometimes even hostility to, working age benefits also impacts public perceptions of support and, in turn, the stigma experienced by people who access the social safety net.

In light of these problems, StepChange believes there is an important role for an independent body in advising the government on the appropriate level of working age benefits. In 2019, the Institute for Public Policy Research proposed a Minimum Income Commission to provide the type of institutional guidance provided for the minimum wage by the Low Pay Commission and advise on an appropriate minimum level of support.[17] We note that similar proposals to this recommendation have been put forward by a range of expert organisations.[18]

We support this proposal: a minimum income commission should be tasked with gathering evidence to understand the reasonable minimum needs of households, including those with additional needs arising from illness, disability or other special situations, and making recommendations to ministers on the minimum level of support. Given the extent to which working-age benefits have fallen below an adequate level, a commission could advise government on a sustainable pathway to relink the value of support with the real minimum cost of living. This would provide a publicly transparent source of advice to ministers on adequacy and would, in turn, drive greater accountability and a necessary policy dialogue about both the level of, and sustainable funding for, working-age benefits.

May 2023