Universal Credit has passed its first Coronavirus crisis test – but tougher challenges lie ahead

Universal Credit (UC) has passed its first test of the crisis by coping with an unprecedented surge in demand, but tougher challenges lie ahead in protecting family incomes and helping people back into work, according to a major new report published today (Wednesday).

The report, supported by The Standard Life Foundation, considers how UC has coped during its first economic crisis, how new claimants have coped with UC, and how the system will need to change during the next phase of the crisis. It includes feedback from new UC claimants, taken from a wider survey of the impact of the crisis on workers.

The report notes that UC has faced an unprecedented surge in demand since the crisis began – with more new starts in the first four weeks of the crisis (1.2 million) than during the first nine months of the last recession.

The report says that UC stood up well to this challenge with:

• The new “digital first” IT system meaning UC claims are largely made online, supporting social distancing and consigning queues outside jobcentres to the past, in stark contrast to scenes in the United States in recent weeks;
• The system standing up to the volume of new claims, with the vast majority of average payments being made within 72 hours, and more than 90 per cent being paid in full and on time; and,
• 74 per cent of new claimants reported they were satisfied or very satisfied with the way DWP handled their claim.

Researchers found that only one in three new UC claimants asked for an advance payment, the main way that claimants can bridge the five-week wait for their first payment. There are some good reasons for this, with 45 percent of those surveyed saying they had enough income or savings of their own or of their partner to draw on. However, two in five admitted the decision was driven by being too scared to take-up advance loans for fear of taking on more debt.

While UC has successfully navigated the first phase of this crisis, the report highlights some major challenges to come.

The Foundation says that the challenge families face from the generosity of UC will grow as this crisis goes on. The majority (54 per cent) of new claimants surveyed had less than £1,000 of savings, and 80 percent are concerned about the state of their family finances.

There is also a huge gap between the generosity of UC compared to the Job Retention Scheme (JRS). A typical employee moving onto the JRS retains, on overage, 91 per cent of their net income. That compares to just 53 per cent if they move onto UC, even though the recent £7 billion benefit increases have raised the incomes of the poorest quarter of families by 5 percent on average. This replacement rate is even lower for single people moving onto UC (30 per cent) – who on average lose over two-thirds of their income.

With the UK set to face the highest unemployment in over a quarter of a century, and many households set to spend prolonged periods with UC as their main income source, the Foundation says the Government should prepare UC for the next phase of this crisis by:

• Suspending the capital rules in UC that taper away support for households with £6,000 of savings, and remove it entirely for those £16,000 of savings;
• Delaying repayments of advance loans in UC by six months to make it easier for claimants to bridge the five-week wait for first payments;
• Significantly increasing staffing levels in Jobcentres so that DWP can manage a second claims surge when the JRS is phased out, alongside stepping up `back to work’ support that has rightly been abandoned in recent months;
• Making permanent the £20 increase to UC, which would otherwise expire in April 2021; and,
• Prioritising couples and families with children in any further increases in generosity.

Karl Handscomb, Senior Economist at the Resolution Foundation, said:

“Universal Credit has been on the frontline in fighting the UK’s economic shock. More claims have been processed in the first four weeks of the coronavirus crisis than in the first nine months of the financial crisis.

“The benefits system has proved remarkably resilient in the face of such demand, with three quarters of claimants satisfied with the process. But even tougher challenges lie ahead. The typical employee loses close to half their income if they enter unemployment and move onto benefits. This will pose significant challenges for those facing long periods without work.

“As well as strengthening our safety net, the Government now need to reprioritise labour market programmes to bring down what may be the highest levels of unemployment since the early 1990s.

“Universal Credit has been a success of the crisis so far – but Government should act now so it can repeat those successes in the months and years ahead.”

Mubin Haq, Chief Executive of Standard Life Foundation, said:

“It is a credit to the government that Universal Credit has responded well so far, providing an essential lifeline for many.  However, the move to UC, often results in a significant shock to living standards and a drop in income, particularly for single people and young adults. This shock will affect more of us as the Government’s furlough scheme is reduced.  As the country’s safety net becomes essential to even more households it is vital it continues to adapt so it is fit for purpose.

“This report alongside Standard Life Foundation’s financial impact tracker shows millions are expecting their income to fall over the coming months. The current system penalises those who have modest savings and it is essential the government looks at this again – a system which disincentivises saving amongst some of the lowest income households cannot be right. It is also important that the government commits to retaining the £20 increase on the amount paid beyond April 2021 and reviews again the amounts families need to avoid hardship and increased debt.”

Notes to Editors

• The report draws on a survey of over 6,005 working-age adults (250 of whom had recently claimed UC).
• Standard Life Foundation is an independent charitable foundation supporting strategic work which tackles financial problems and improves living standards. Its focus is improving the lives of people on low-to-middle incomes in the UK. standardlifefoundation.org.uk