Six pilot schemes will test direct payment of housing benefit to tenants. Here, Nick Duxbury leaps into the future to reveal to welfare reform minister Lord David Freud what the results might be
Dear Lord Freud
Almost two years have now passed since you agreed to set up a six-landlord pilot scheme to test drive plans to introduce direct payments of universal credit to benefit claimants from next month. The results are now in.
When we answered your call for volunteers at the National Housing Federation conference in 2011, we did so having already accepted the government’s apparent committment to direct payments. We resolved to grasp the opportunity to adapt our expertise and meet the challenges this presented. We have done this with open minds and to the best of our abilities and are keen to share our findings with you.
Broadly, I am pleased to say we have demonstrated that councils and housing associations can make direct payments work. But this has come at a price.
Even before the pilot, one of our biggest fears as a council - apart from the impact on our residents, of course - was that paying the housing portion of the universal credit direct to tenants rather than landlords would result in increased administration costs at a time when the government has imposed heavy cuts on our budget. I am afraid to say these fears have been realised; the management costs associated with collecting rent have risen significantly.
The first problem we encountered arose from the monthly, rather than fortnightly benefit payments. This has been a real challenge for many of our tenants who are simply not practised at managing large, upfront payments over a whole month. While your intention to prepare claimants for the monthly wage they would receive in the workplace is commendable, the reality is that many tenants have struggled to control their finances in this way. As a result our expertise and advice has been heavily relied upon at a time when our resources are stretched. I need not remind you that we were forced to close a number of our advice centres a few years ago after budgetary cutbacks. We have now had to re-open them due to high demand for this help. This has resulted in another expense for the council. I therefore recommend a staggered approach to monthly payments.
Second, rent arrears have increased. Not as much as some in the sector predicted, I concede, but enough that our income has been dented. The problem with switching benefit payments back to landlords in the event of arrears is that, in most cases, this action is too little too late. One lesson that has emerged is that you appear to have underestimated the number of vulnerable people who should be exempt from direct payment. We have found that if a tenancy breaks down, it was usually within the first year and the tenant is often from the same high-risk groups: young people, people who have come from institutions and those with unsettled backgrounds. I urge you to revise your expectations about how many people should be exempt from direct payment. It is also worth highlighting that many of these vulnerable young people find themselves increasingly reliant on benefits because, despite all the ‘nudges’ they have received towards employment, there are so few jobs available. Even back in 2011, unemployment was beginning to soar - I don’t need to tell you that this situation has far from improved.
Third, the increase in rent arrears has resulted in a surge in evictions. This is not something the council takes lightly. As you know, our sector has an excellent track record of helping people maintain their tenancies and keep their homes, except in extreme circumstances. We have not altered our approach, but have simply been presented with many more extreme circumstances. The court process involved in evicting tenants has also been costly.
Perhaps the most notable cost, however, has been the cost to society. As the media has reported widely, homelessness is rising (though, again, not as substantially as many expected - mostly as a result of our excellent management). Rents have increased in the private rented sector, where landlords are much more ruthless about evictions than us, contributing to the problem. I am deeply concerned by this, and will be interested to see the results of the pilots outside London given your assurances that increased homlessness would not be a likely outcome of benefit reform.
All these additional costs to the council have had a serious impact on our budget and they have also had two unforeseen impacts that are most regrettable. To cover the extra administration and management costs incurred as a result of direct payments we have been forced to increase rents. We have also had to reduce our development programme. When we received our housing revenue account debt allocation we had hoped to use our extra debt capacity to build badly needed affordable housing in the borough. Instead, we have been forced to divert the cash back into managing tenants.
While these are very significant concerns, it has not been all doom and gloom. The good news is that most of the lenders to housing associations in our borough have not increased the price of loans substantially as a result of direct payment. This was a major fear. Although some lenders have increased costs to match perceived risk, these are usually just the banks that have been slow to adapt to change.
Taking part in the direct payment pilot scheme has forced us to innovate and adapt our services. As a result we have become even stronger at what we do best: housing management. I would argue that we have forged a new kind of relationship with our tenants and that, on the whole, they have benefitted from increased financial inclusion and empowerment.
Joe Bloggs OBE
Chief executive, London Borough of Random Council