The Effects Of Reforms To The Work Capability Assessment For Incapacity Benefits

5th November 2023

1 More than 3 million working-age adults in the UK receive health-related benefits. The government has announced plans to first tighten, and then scrap entirely, the Work Capability Assessment - one of the two assessments used for determining eligibility to these benefits.

2. The short-term reform to tighten the Work Capability Assessment will mean some individuals who would previously have been judged as unable to work will lose out on £390 a month and have to carry out work-related activities to keep receiving benefits. This may deliver some savings for the government, although previous reforms of a similar nature have been less effective at doing this than expected.

3. The proposal to scrap the Work Capability Assessment entirely is a more radical change. It would mean moving to a system without a benefit explicitly related to an individual's capacity for work. The idea is that breaking the link between ability to work and benefit entitlement will encourage individuals with health conditions to move into employment.

4. As a result of this second reform, some working-age people currently receiving health-related benefits because of having limited capability to work would lose them if they are not judged to have a disability that leads to extra costs associated with their daily living. Others who can work and are already receiving health-related benefits because they are judged to have such costs could qualify for additional benefits under the changes.

5. We estimate that, before accounting for any change in behaviour, 320,000 individuals will see their entitlements rise, typically by £390 per month (£1.5 billion a year additional spending), and 520,000 will see them fall by the same amount (£2.4 billion a year less spending). Overall, this would be a £900 million spending cut. For context, official figures suggest that, in real terms, spending on benefits for working-age individuals with health conditions is forecast to rise by £11.9 billion from £61.6 billion in 2023-24 to £73.5 billion in 2027-28.

6. Scrapping the Work Capability Assessment would change people's financial incentives to work - with 1.8 million seeing their incentives strengthened and 440,000 seeing them weakened. Within Jobcentres, work coaches would need to decide the extent to which individuals should engage in work-related activities as a condition of receiving their benefits. This could help more people into paid work, but it comes with the risk of requirements being inconsistently applied and the potential for hardship if they are applied inappropriately.

7. The reform would base benefit entitlement on the assessment of mobility and ability to do daily living tasks that is used for PIP eligibility - the part of the system that has been growing most quickly for years. This runs the risk of faster growth in spending on health-related benefits in the future.

Background
The UK social security system contains two types of benefits aimed at working-age individuals who are disabled or have health-related conditions.

The first of these is incapacity benefits - principally the ‘health element' of universal credit (UC-health), which is both means-tested and based on an assessment of a person's incapacity for work.1 In order to be eligible, an individual must be part of a family with low income (the means test) and also judged unable to work or to carry out work-related activity (also known as having limited capability for work or work-related activity - LCWRA)2 . If these criteria are met then the claimant has an extra £390 per month (£4,681 per year) added to their universal credit entitlement. In addition, they are excused from various requirements to be actively seeking work.

The second type of health-related benefits is disability benefits, with the major one for working-age people being personal independence payment (PIP). PIP is non-means-tested and is intended to compensate individuals for higher disability-associated living costs.3 Eligibility for PIP is unrelated to a recipient's income or ability to work, and depends solely on their assessed inability to do certain tasks (such as dress themselves or get around), which is deemed to generate extra costs. PIP claimants are entitled to between £117 and £749 per month (between £1,399 and £8,983 annually), with the precise amount depending on the severity of their disability.

The differences in criteria mean that it is possible for an individual to be entitled to only incapacity benefits, only disability benefits, or both at the same time. For example, an individual with a spouse who has a high income would be ineligible for incapacity benefits since they are means-tested, even if they had limited capability for work or work-related activity. Alternatively, an individual might have limited capability for work or work-related activity but not incur substantial additional costs in their daily life due to disability, entitling them to incapacity benefits but not disability benefits. As of November 2022, there were 500,000 working-age adults receiving incapacity benefits only, 1.3 million adults receiving disability benefits only, and 1.3 million adults receiving both incapacity and disability benefits (Department for Work and Pensions, 2023b).

There are two upcoming reforms to health-related benefits. The first proposes changes to the assessment used to determine eligibility for incapacity benefits, effectively tightening the criteria. The second is a much more fundamental change to how we support individuals with disabilities or health conditions. We predominantly focus on the latter here, since this would be a permanent and more radical change. But we first offer a few thoughts on the first reform.

2. Tightening the Work Capability Assessment
In September 2023, the government announced a consultation on potential changes to the Work Capability Assessment, the assessment used to decide whether individuals are entitled to incapacity benefits. At a time when the number of claimants and the amount of spending are rising substantially, these reforms would, in short, raise the level of incapacity needed in order to be judged as having limited capability for work or work-related activity. This would be done by changing the assessment relating to mobilising, continence and social engagement; and by restricting or abolishing entirely the ‘substantial risk' criterion, which grants eligibility in cases where it is judged that not awarding LCWRA would create a substantial risk to mental or physical health.

One of the key reasons given for this change was the rise in numbers working from home, and the opportunity this might provide for people with health conditions to get into paid work. It is not clear, though, that disabled individuals have particularly benefited from this shift, with the increase in the proportion of disabled workers working from home almost identical to the change for non-disabled workers (Murphy, 2023, figure 5). If as a result of this reform, fewer individuals end up being judged as eligible for incapacity benefits, then the government will see some savings. But these will be limited as the changes, at least initially, will only apply to new claims and scheduled reassessments. Moreover, reforms in this spirit have often failed to deliver significant savings (Office for Budget Responsibility, 2019), and this one may apply for just five years. This is because the second reform - to which we turn now - proposes more fundamental changes which will supersede the first.

3. What are the White Paper reforms?
In March 2023 the government published a health and disability White Paper, which set out a number of reforms to health-related benefits (Department for Work and Pensions, 2023a). Some of these are aimed at supporting people with health conditions to get into, and remain in, employment, while others look to improve the experience for individuals applying for and receiving these benefits. The proposals include incentives for businesses to purchase occupational health services as well as increased work coach support within Jobcentres for those in ill health. But arguably the most important reform - and the focus of this report – is the proposed removal of the Work Capability Assessment (WCA), the assessment used to judge whether applicants to UC-health are fit to work, and its replacement with the PIP assessment.

This would be a radical change. It implies moving to a system with only cost-related benefits, one of which is means-tested and one which is not – and no benefits that are explicitly conditioned on inability to work. The objective of this change is to encourage individuals with health conditions to move towards work, by removing the link between benefit eligibility and ability to work. The reform is due to be applied to new benefit claims from 2026–27, with existing claimants being reassessed no earlier than 2029.

In the remainder of this report, we explore the potential effects of this change, considering who might win and lose, and how different groups' incentives would be affected.

4. Who are the winners and losers?
We begin by identifying the number of individuals who might gain or lose from the plan to remove the WCA, assuming no change in behaviour in response to the reform (we explore the effect on incentives in the next section). The available data here are somewhat limited, and so these estimates – derived from administrative data from the Department for Work and Pensions (DWP) and survey data – should be seen as broadly illustrative.4 Our methodological approach is outlined in the appendix.

The main potential beneficiaries from the reform are those who are receiving PIP, claiming universal credit, but not currently receiving the health element of UC. These are people who receive cost-related benefits but do not receive incapacity-related benefits, so a change making both benefits cost-related leads to them automatically receiving UC-health as well as PIP.5 We estimate that around 320,000 people are in this category and their additional entitlements could cost up to £1.5 billion per year.

The main potential losers from the reform are those currently receiving the health element of universal credit, meaning they are judged as having limited capability to work, but not receiving PIP. This may be because they are judged to have a disability that impedes their ability to work but does not create additional costs day to day, or it may be because the individual has not made a claim for PIP despite being eligible. Since they do not receive cost-related benefits, they would not be eligible for any health-related benefits under the White Paper reforms. As a result, they would no longer receive UC-health (£390 per month). This would be the case for approximately 520,000 individuals, saving the government up to £2.4 billion per year. Some of these 520,000 individuals would continue to receive UC-health despite not qualifying for PIP.

For a large number of individuals, the reform would have no immediate effect in terms of their benefit income. This is true for all those already receiving both PIP and the health element of universal credit. Since they already receive cost-related benefits, they would keep both benefits following the reform, the only difference being that now their eligibility for UC-health is due to their PIP assessment rather than to the WCA. These individuals number roughly 1.3 million. There are also around 900,000 individuals who receive PIP but do not claim UC, and the reform has no immediate effect on these people either.

We now briefly examine the incomes of those affected. Figure 1 shows the fraction of working-age families across the income distribution that receive a health benefit (incapacity or disability) and a means-tested benefit – broadly, the type of families that are affected by this reform.6 Generally, affected families are in the bottom half of the income distribution. Families higher up the income distribution are much less likely to be affected due to both being in better health and not satisfying the means test – indeed, these two things are related: Banks, Karjalainen and Waters (2023) show that disability rates are much higher for those with low levels of education (and thus, on average, income). The average affected family has a net household income of £29,200 per year, and 19% have an income of under £15,000.7 (These figures exaggerate the extent to which receipt occurs further up the income distribution, since when placing households in income deciles there is no adjustment made to account for the additional living costs associated with disability – the costs that PIP is explicitly designed to address.) At £390 per month (£4,681 per year), UC-health therefore represents a substantial fraction of income for many of those set to be affected by the reform.

Read the full report HERE
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