Direct Payments system

Speech by Lord Freud, Minister for Welfare Reform.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The Rt Hon Lord Freud

I last stood before you a little over a year ago to discuss issues of interest to you and your colleagues in the industry. Changes to Housing Benefit in the social sector, Universal Credit, and Direct Payments.

This year, while I don’t want to repeat myself, I suspect you are keen to hear the latest about some of these things.

And last time we spoke I promised you that the Direct Payment system wouldn’t undermine your finances, and that we would provide you with the support you need to manage these changes.

Today I will update you with the latest information on where we are with the projects and how we expect to deal with rent arrears in Universal Credit.

I think it’s important to remind ourselves that Universal Credit will roll out over four years to 2017. This is a very gradual process.

We’ve just launched the pathfinder in parts of the northwest. We are starting with new jobseekers – people who are currently handling their own rent payments.

So while in some ways Universal Credit is here and happening, we do have time still to work together with you to make sure that all your concerns about direct payments are addressed.

The key to making direct payments work will be our ongoing collaboration with you.

So your views about your tenants’ ability to cope with direct payments will be central to the decision on who to pay the rent to and we will work closely with you when we are assessing someone’s capabilities before they are moved onto Universal Credit.

If we collectively determine that someone will not be able to manage with direct payments – for instance, because of alcohol or drug dependency or learning difficulties - then we will keep them on managed payments direct to the landlord.

Even with this safety net in place, I know you have concerns about what happens to you if your tenant falls into arrears.

Even though the findings from the demonstration projects have so far been positive, I don’t intend to understate the risks.

We have therefore taken the decision that once the arrears reach the equivalent of two months rent, we will switch to managed payments to the landlord.

So this is a guarantee to you that, if you inform us that two months of arrears have built up, we will move the claimant to managed payments.

We will publish guidance on how this will operate in principle shortly. And we will continue to learn from the demonstration projects to make sure this approach is working as we intend.

This is valuable protection, but we are also looking at going further and we have decided that if one month of arrears builds up we will intervene and review our initial decision on direct payments, including if arrears build up over time to the equivalent of one month’s rent.

Options at this point could include a reassessment of the individual’s financial capability, a possible move to managed payments, or possibly extra support to get the individual on the right track, to prevent the accumulation of further arrears.

I believe that this strikes the right balance between ensuring that both the tenant and landlord are protected, but also gives individuals some time to get to grips with direct payments, instead of assuming failure at the first hurdle and giving up. This would defeat the purpose of this important policy.

I know there are also questions about the processes that will be in place for paying back any arrears that tenants accrue.

We have decided to provide additional protection for landlords by accelerating the rate at which we recover the arrears for those switched back to managed payments.

Typically, if a claimant is not repaying other debts we would expect to recoup the rent arrears from tenants hitting the two month trigger point within six to nine months. This will help ensure that landlords’ cash flows are protected.

I am also clear that for the majority of claimants managed rent payments should not be permanent.

Once arrears have been paid, we will look to return tenants to direct payments, with the right support in place. We don’t want non-payment of rent to be a way out of direct payments.

We are considering the best way to approach this. Our current thinking is that in most cases, following the tenant being offered budgeting support he or she will be able to return to direct payments within six months of the arrears being paid off.

Drawing on the evidence from the extension of the Demonstration Projects and from the Universal Credit Pathfinder, we will consider what else might be done to address consistent underpayment of rent, balanced against the importance of keeping the system simple and efficient to administer.

We want to work with you as a sector to get this early intervention right and practical to operate.

I know there have been concerns expressed, not only by landlords, about how vulnerable people will manage with direct payments. And this is exactly why we are running the Demonstration Projects and learning all we can about who will need extra support, what that support will need to be, and who should be exempted from direct payments.

We are not underestimating the challenge. But we have developed an overall approach that, alongside our plans for gradual, managed migration of claimants on to Universal Credit over time, meets our objectives without undue risk.

In May I announced the extension of the Demonstration Projects for another six months, to the end of the year. We’ve found the projects to be incredibly valuable for informing our thinking about how individuals will manage their direct payments, and it makes sense to take advantage of this opportunity and continue learning.

This extension will help us further develop the support needed for moving people onto Universal Credit. We will also be able to marry what we learn through these projects with what we are learning from the Universal Credit pathfinder as it progresses.

So what have we learned so far from the Demonstration Projects?

The headline finding from our last evaluation was that from the over 6000 tenants making direct payments, rent collection rates stood at 94% on average and the level of rent arrears is currently running at 7%.

I know many of you will have concerns about what these numbers appear to say. But it is important to recognise that, should this be replicated in the national roll-out of Universal Credit, it will not mean that 7% of total rental income is at risk.

That’s because housing benefit tenants of working age only account for only 30% of housing association tenants. And around one third of these tenants will likely be on managed payments from the outset of their claims.

So for Universal Credit this limits your rental income that will be at risk of arrears. And that level of arrears will be mitigated by the fact that we will operate an accelerated recovery system under Universal Credit.

This low level of debt will be mitigated even further by improved arrangements for the 10% of tenants who receive Housing Benefit for only part of their rent. Currently, Housing Benefit can be paid to the landlord but Tax Credits cannot.

With Universal Credit replacing both Housing Benefit and tax credit a greater proportion of tenants will be able to have the whole of their rent paid to their landlord should they fall into arrears.

But more importantly perhaps is what landlords involved in the pilots have been telling us.

They tell us that they had not realised how little they actually know about their tenants. That getting tenants to share their problems and concerns can be difficult. That building trust and a rapport with the tenant is very important but can be difficult. That we can’t easily predict who will struggle with direct payments and who will manage well.

One example of this last point is a tenant with previous drug and alcohol issues who was also an ex-offender and did not have a bank account.

We would have probably assumed this would be a difficult case to manage. But actually some relatively light touch assistance with opening a bank account has enabled him to manage the transition very well.

The added confidence gained from becoming more financially literate also helped him to develop a small business as a window cleaner, reducing his need to rely on the welfare system.

We’ve certainly found that our Direct Payment landlords have embraced the need to develop new skills as they move towards a new model of “support and collection” for rent.

But of course, this takes time and effort and we acknowledge that this is a huge change in culture for both landlords and tenants.

Universal Credit is a big change for all of us. We in DWP need to continue working with you as landlords, with claimant support groups and with tenants to achieve that cultural shift, and that process is well on its way.

The Local Support Services Framework, published in February, is the framework for how we will work with local partners to deliver support for people as Universal Credit rolls out. The type of support that is best delivered locally and face to face, such as with budgeting and help to get online.

It is critical that you are involved in this process so that you know what services will be available in your area for you and your tenants.

We are arranging for landlords who are participating in the demonstration projects to feed their experience and learning into our development of the Framework.

Looking ahead, we are also considering what more could be done now to make the transition to direct payments smoother in addition to the continued learning from the demonstration projects I’ve mentioned.

We want to explore with landlords whether we should be moving the more able claimants on to direct payments early, as a step closer to work readiness they can take today.

This would give landlords the chance to start to scale up preparation activities and rent collection capabilities as they start to move tenants earlier to Direct Payments.

We could focus efforts on those claimants who are work ready. We estimate, for instance, that 80% of tenants in the Social Rented Sector currently receiving their Jobseekers Allowance and Income Support are expected to pay their rent on time when they move to UC.

With your help, we could start to identify and support some of these claimants with an early move onto direct payments.

As a final point, I think it’s worth reflecting on the powerful transformation that Universal Credit will bring to the benefits system.

For too long the benefit system has effectively institutionalised claimants. And while this has happened over time and with the best intentions, what we are left with is claimants who have become accustomed to the benefits system looking after important aspects of their daily lives, like paying rent.

Alongside this the complexity of the current system, and the uncertainties around whether it pays to work have made stepping off benefits and into work virtually impossible for many claimants.

The work of the demonstration projects, and the work you will be supporting when your claimants move onto direct payments are important parts of this transformation of the welfare state. I consider Housing Associations to be among our strongest allies in the process.

I hope the further information I’ve given you today will help for your planning and alleviate some concerns.

The way we are approaching the entire Universal Credit project - learning as we go and adapting based on what we learn – will help ensure that together, we get it right.

I look forward to continuing to work with you as we take this critical work forward.

Published 27 June 2013