IPPR Welfare to Work conference

A speech by Lord David Freud, Minister for Welfare Reform.

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

The Rt Hon Lord Freud


Good morning.

Today I would like to talk you through the next steps of the Government’s welfare reforms in the UK.

In fact, I should really define that as the next three and a half steps - because having worked through the main principles involved in re-shaping the welfare state, we are already looking ahead to the next set of reforms needed to ensure we deliver a coherent welfare strategy long into the future.

Some of you will already be familiar with the three steps I’m referring to:

  • making work pay through the introduction of Universal Credit
  • re-thinking our approach to inactive benefits
  • and re-inventing welfare to work with one of the biggest work programmes this country has even seen.

These are major milestones on the road to welfare reform, but we don’t intend to stop there.

This is why we have already started thinking about the interaction between the public sector welfare system and the “shadow” welfare system that exists in the private sector in terms of statutory sick pay and occupational health.

This is the next step on the journey of welfare reform.

However, it is a still a half-step since Dame Carol Black and David Frost were only recently commissioned to complete a review of the Sickness Absence regime.


I’ll go through each step in turn, but I want to make one very important point first.

Taken together, these reforms represent the most radical and far-reaching restructure of the welfare system witnessed in this country for generations.

Yet despite the scale of change, the interesting part is that there is such a great deal of continuity and consensus around the specific measures.

This reflects the fact that while these reforms are radical, they are not revolutionary.

In many areas, we are building on the work of others who recognised that the existing welfare system is not fit for purpose.

That includes the previous Government, which fully recognised that the benefits system was far too complicated, horribly inefficient and prone to creating perverse incentives that bred welfare dependency and poverty.

Overseas examples

However, it also includes the lessons we’ve learned and best practice from other countries such as Australia, The Netherlands and the USA.

For example:

  • re-thinking work as a positive thing in and of itself for the individual - even before we think about issues of poverty or social mobility
  • taking a new tack on long-term benefits, because the lessons learned elsewhere show that massive cash transfers simply can’t address underlying problems
  • and of course, we are also looking at how we can do more to support people before they hit crisis point by taking a more structured approach those who look like they might be on the path toward long-term sickness.

That is why there is so much consensus around many of the proposals we are putting forward today.

Universal Credit

To give you an idea of what I mean by political consensus, I’ll start with the Universal Credit.

For years, every time Government has tried to pull a lever in the benefit system, they have had to contend with multiple cliff edges.

Years of adding layer upon layer to the benefits system created a maze of complexity. This in turn has created all sorts of perverse disincentives to work, including the nonsense of the 16hr cut-off.

Ministers of every stripe have tried to smooth out the taper, but the sheer complexity of the system made it a Sisyphean task.

The Universal Credit is the first really concerted attempt to start simplifying the benefit system we have seen in years.

The key benefit is that a single taper will finally make sure that work pays - even for those at the bottom end of the pay scale looking to take on extra hours or a modestly paid job.

By linking tax and benefits in real time, the single taper will mean claimants see a real difference in their pocket when they do work.

Another key point to note about the Universal Credit is that we probably couldn’t do it all if it wasn’t for the fact so much support was already being delivered through the tax credit system.

Conceptually, the link between tax and benefits is already established, so here again we are building on what has gone before.

However, there is another reason too.

The Universal Credit is set to cost some £2 billion over the Spending Review period. But if the current system weren’t so complex and inefficient, the final cost would be significantly higher.

Of course, in the long run I believe that the Universal Credit will create a step-shift in attitudes toward work and benefits, in which case it will effectively pay for itself.

However, we do still have a major challenge is ensuring that we maintain the simplicity we need to keep the whole system operating efficiently - and reducing fraud and error in the process.

The Universal Credit marks a radical departure from the previous maze of risk and reward which meant that so many people genuinely did not know if they would be better off in work.

In fact, it often takes Jobcentre Plus advisors quite a long time to figure it out - and they are experts in the 8,700 pages of Guidance that are used to help them navigate the benefits system.

No wonder simplifying the benefit system commands such broad support.

However, it is only one area where our “radical” reforms build on concepts that were already widely supported before we arrived in Government.

Incapacity Benefits / Employment and Support Allowance / Work Capability Assessment

Take our approach to incapacity benefits.

The Coalition Government is determined to support those who have been abandoned to a life on long-term benefits.

This is why we will start the national roll-out of incapacity benefits reassessment next month having made a start in Burnley and Aberdeen.

However, here again, large-scale reassessment was on the cards before last May, because the previous administration also recognised we had a major problem with long-term incapacity benefits.

Indeed, the problem has been becoming ever more apparent since the 1980s when we opened the door to runaway incapacity benefits and forgot to close it.

As a result, today there are 2.6 million working age people claiming incapacity benefits - of which some 850,000 have been claiming for a decade.

This level of inactivity is a massive brake on growth and economically very inefficient.

That is why we are embarking on this large-scale reassessment of those on incapacity benefits using the Work Capability Assessment, which will take in some 1.5 million people over the next three years.

For many people, reassessment will mark a major milestone in transforming their lives.

Instead of being labelled “incapable” and abandoned, for the many people who can work, the reassessment will be the starting point of a journey back toward the workplace and away from the invidious cycle of welfare dependency and inter-generational poverty.

This is not just important for the economy or for the benefits bill - this is also crucial for the individual.

People need a sense of purpose in life - something that the respected academic, Aaron Antonovsky, explored decades ago where he spoke about the link between “coherence” and health and well-being.

So it is right that we help everyone who can work get the support they need to find that all-important sense of purpose and self-worth.

Work Programme

All of which brings me neatly on to the next step of our welfare reforms - the Work Programme.

Once more, it is plain that work programmes are hardly new.

Indeed, DWP has run dozens of pilots across the country in recent years.

The difference today is that instead of running yet more trials through a bureaucratic maze of employment programmes, we are simply cherry-picking the best ideas that have been shown to work.

So while the new Work Programme is one of the largest welfare to work programmes ever witnessed in this country - conceptually, it is closer to a scaled-up model of the Employment Zone pilots that DWP ran years ago.

Black Box / Payment by Results

As a result, the new Programme boasts two key characteristics:

  • first, it gives providers far greater flexibility to decide what works best for them with a Black Box approach
  • and second, the Work Programme is firmly based on payment by results.

That’s important, because it is very easy to throw an incredible amount of money at these programmes without seeing results.

Under our scheme, if the providers succeed they can earn very good fees.

Depending on the scale of the challenge the jobseeker faces, we will pay anything between £4,000 to £14,000 to the employment specialists - if they can get people into sustainable employment.


Payment by results means that we can reward providers who invest successfully to get people into jobs - especially the hardest to help.

In turn, that means that the providers have an incentive and work with the specialist groups that can deliver the frontline expertise required to achieve the bigger pay-offs.

This price differentiation encourages primes to include specialists in their programme mix and that has been reinforced with the introduction of the Merlin Standard during the bidding process.

By promoting this mix of financial muscle and expert knowledge and combining it with payment by results, we are delivering a good deal for the taxpayer - as well as the jobseeker.

Not only that, but because of the AME-DEL switch - whereby we use the money saved in benefits to fund further payments to the programme - we maximise the opportunities to transform people’s lives and put an end to the capping effect that was a feature of previous programmes.

In other words, money will always be available for successful providers to do more.

This is a model that has huge implications for how we deliver value for money for the taxpayer.

Not just for DWP, but right across Government.

This payment by results framework provides the basis for all sorts of bolt-on support.

For example, DWP is already working closely with the Department of Health and other departments to see how we can utilise payment-by-results in drug recovery.

In the meantime, the Ministry of Justice is already testing a payment-by-results approach in two prisons to see what impact it can make on re-offending rates and there is no reason why we can’t replicate this approach more widely.

So the contracting process for the Work Programme has helped create a toolbox that other parts of the public sector can use and I see this very much as the blueprint for the future of public sector contracting.

Added to that, the Big Society Bank will soon open for business, so with both the tools and funding available, we will see a rapid expansion of the Third Sector in the coming years.

Sickness Absence Review

Universal Credit, incapacity benefit assessment and the work programme represent the starting point for huge reforms.

But as I mentioned earlier, we plan to look at the system in its entirety and that includes the “shadow” welfare system that is funded by the private sector.

This is a vital area, not least because employers spend £8 billion a year on Occupational Sick Pay and Statutory Sick Pay, while the Government spends another £13 billion each year on incapacity benefits and Employment Support Allowance.

There is real potential here to make a dramatic difference - both in economic terms and in terms of the outcomes we achieve for individual jobseekers.

The is one of the reasons the Government has asked Dame Carol Black (National Director for Health and Work) and David Frost (Director General of the British Chamber of Commerce) to undertake a major independent Review into Sickness Absence.

I don’t want to pre-empt the finding of the Review, but what is perfectly clear is that there are significant gains to be made if we can find a better way of supporting people before they fall out of work and into the benefits system.

Well over 600,000 people go on to Employment Support Allowance each year - more than 300,000 from the workplace.

In reality, many of those coming from work get very little support before they reach the 28-week cut-off point for statutory sick pay. That’s bad for them, us, the economy and the taxpayer.

“We’re missing a huge trick”.

However, if we can make a dent in that 300,000 by taking a more structured and holistic approach to people when they are still on sick leave - and put a stopper on the inflow to ESA - the potential savings are vast.

Financial / Moral imperative

The fact is that the old system is simply no longer affordable.

In real terms, the Working Age Welfare Spending has climbed by 54.2 percent over the past decade from £48.4 billion in 1999/2000 to £74.7 billion in 2009/2010.

That is clearly unsustainable.

But by far the bigger problem is that we are failing so many of those the welfare system is supposed to help.


This is the real reason we have such a consensus for change in the country right now.

And this is why I am so excited about the radical welfare reforms we are making today.

Once all the elements fall into place, we will finally have a coherent welfare system in place.

The process is already well underway:

  • Next week sees the start of the national roll-out of incapacity benefit reassessment, which will cover 1.5 million people by 2014
  • The preferred bidders for the Work Programme will also be announced next month and they will get the ball rolling on the new welfare to work drive from June
  • The publication of the Sickness Absence Review will appear toward the end of the year
  • And by 2013, the Universal Credit system will start drawing together the web of several working age benefits under a single taper to make sure that it always pays to work - something that we can all agree is long overdue.

When all the pieces of the jigsaw are fitted together in a few years time, you will finally see the big picture of welfare reform laid out in all its splendour.

That is when we can make a real start and help jobseekers - and the country - move back into sustained and responsible economic growth.

Thank you.

Published 21 March 2011