April 25, 2017 Tom Murray

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THIS ARTICLE WAS ORIGINALLY COMMISSIONED AND PUBLISHED IN THE  February 2017 EDITION OF THE INVESTMENT LIFE & PENSIONS MONEYFACTS PUBLICATION.

 

Joined-up thinking

 

The recent call from Aon for Long Term Care to be handled by the same government department that manages pensions, in order to ensure joined up thinking across both policy areas, is an excellent idea. Given that long term care is overwhelmingly an issue of old age and that pension savings are to provide for one’s needs post-retirement, the effect of initiatives in one area should always be considered by those who are implementing policy within the other.

 

Despite some industry voices demurring, there are undoubtedly some conflicts in policy strategy for the elderly. Auto-enrolment was brought in to increase the amount of people saving for retirement and yet pensions freedom, by allowing people to cash in their pension savings the minute they hit retirement age is reducing the amount of money available in the later years of retirement. A significant amount of people are using their pensions to fund a lifestyle in retirement that is completely unsustainable.

 

Analysis shows that most people underestimate the amount of time they will live. Therefore they always underestimate the amount of money they will require to support themselves in retirement. Add to this the increasing dependency ratio in the UK, which will likely worsen more rapidly due to a sharp reduction in immigrants who are generally younger than the population average, and it becomes easy to forecast that the state will find it very difficult to step in and provide the support needed when people run out of money after enjoying the early stage of their retirement.

 

This will lead to a huge problem in supporting the lifestyle of the retired segment of the population. A single department is far more likely to come up with more holistic solutions to the problem of the amount of support that people will need in their later stages of their retirement, as it will factor in all the issues and therefore provide a clearer picture of the likely needs of the population.

 

Current policies incoherent

 

Currently, the spread of responsibilities for different aspects of old age across government departments has meant that some policies are actively working against each other. As was pointed out by Aon when they made their proposal, the current strategy is actively encouraging retirees to spend their retirement savings early. This is because if you still have savings when you need care, they will be taken by the care providers, whereas if you have consumed all your savings, then the state has to cover the costs.

 

Thus we are simulataneously pushing pension savings higher by the auto-enrolment process in order to enable pensioners to support themselves after they finish working and at the same time allowing them to have full access to this money in the early, and usually healthy, stage of their retirement, whilst local government, who hold responsibility for the long term care system, has an approach which actively endourages people to dissipate that money prior to the point where they need care. These contradictions completely counteract the ulimate goal of Government strategy, i.e. to increase the self-sufficiency of the population in retirement and therefore reduce the burden on tax payers, both national and local, in future years.

 

Local control can’t implement national strategy

 

This is further exacerbated by the delegation of responsibility for the provision of care services to local government. Local councils are struggling in an environment where they are having to provide increasing levels of care on budgets that are shrinking from years of successive cuts in the monies provided from central government. The Local Government Association (LGS) says councils across Britain will receive £2.2 billion less to run local services in 2017/18 than last year. In the face of such large cuts, it is inevitable that the ability of the council to provide long-term care is going to be greatly diminished.

 

In that light, Surrey Council’s recent proposal to hold a referendum in the borough for a 15% increase in their local community charge in order to maintain current levels of long term care shows just how desperate the situation has become. Councils are notoriously reluctant to hike community charges, given the electoral unpopularity such a move normally brings. Yet Surrey Council clearly feel they have no choice, if they are to continue to fulfill their obligation to provide the services needed by an ageing population.

 

So whilst the national government is taking credit for the freedom they are giving to pensioners to spend after a lifetime working, those dealing with the issues of pensioners who move into later retirement and need support that they can’t personally afford, are getting increasingly desperate. Up to now, long term care has been very much on the back-burner when it comes to Government policy initiatives. Now, at last, Surrey Council’s proposal is pushing the issue to the top of the political agenda.

 

Absence of the experts

 

The ageing of the population is set to be a constant factor going forward. Brexit, whatever its other merits, will increase this problem. As immigrants are generally younger, restricting the numbers arriving in the UK will speed up the deterioration in the dependency ratio.

 

That being the case, one has to ask oneself why the life and pensions industry hasn’t stepped forward to come up with innovative solutions to the long term care crisis. There are some long-term care products available but it is clear that they are not being pushed as a major component of life planning, despite the fact that the cost of providing long-term care is exploding and the need for it is growing exponentially.

 

The difficulty is that the majority of the public refuse to see how it is relevant to them. They would rather turn a blind eye to the problem than spend time pondering the fact that they will almost certainly require care if they live long enough. A good analogy is motoring. Most people do not believe that they will ever be involved in an accident and so if, left to their own devices, would happily do without insurance. Hence the intervention of government to compel the purchase of a minimum level of third party insurance to cover that situation, a law which has been in place since 1930 and which actually attracts little opposition.

 

Compulsory protection?

 

The refusal of people to think about becoming infirm in the future lies behind the reluctance of the industry to get further involved. It is a difficult sell to persuade people to protect themselves against something that lies so far in the future and which the majority of people are reluctant to believe they will ever need. Previous attempts have involved the launching of innovative products which failed to take hold as they were expensive and far too many people believed they could get away with not thinking about the need for long term care.

 

If any consideration was given by people to the possibility of ending up in a care home, the value of their house was usually seen as solving the problem. This is despite the fact that many are also relying on the value of their hosue to provide income in retirement and also to form the bulk of any inheritance they are planning to deliver to their children. The ongoing decrease in the number of people owning their own homes means that this solution is going to play a decreasingly small part in the solution as time goes on.

Ostrich tactics don’t work

 

 

If we keep burying our head in the sand and hoping the problem will resolve itself, then we are risking a major crisis, one that is entirely foreseeable. On its own, moving responsibility for long term care to the same department as pensions isn’t a complete solution. But it would create a single authority which could engage with the life and pensions industry and other stakeholders to create a unified strategy. This would address all the issues of old age holistically, including how to fund care for those who reach the point where living independently is no longer feasible and who do not have the benefit of relatives to provide care in the home for them.

 

A comprehensive strategy to address the whole area of retirement could encourage the government to abandon the current approach of enticing people into the glamourous world of investing and get them to nudge the public more towards the area of protection. Protection was originally seen as the primary solution to the issues that arise with retirement, as was recognised by the previous compulsion to purchase annuties with one’s pension saving, which essentially insured people against outliving their savings. Indeed, it has particular benefits when it comes to trying to protect against an unknowable level of individual risk. To use a cliché, by pushing the sexier world of investments as the solution and abandoning protection, it feels like the government has currently thrown the baby out with the bathwater.

 

Ironically, when private pensions were first introduced, far less people lived long enough to require moving into a care home. Now, with longevity increasing at a faster rate than healthy life expectancy, increasing amounts of us are faced with the prospect of requiring care provision towards the end of our lives. Therefore it makes sense to create a wide pool of insurance from which those who live longer are maintained. The Life and Pensions industry has the ability to create and run such a scheme for the government, yet it is currently locked into helping the lower and middle income earners save relatively small amounts in a pension, which will produce relatively small pension pots that will not be sufficient to provide them with anything like a good pension in their old age.

 

Leveraging auto-enrolment framework

 

It is clear that the current approach will not provide a broad solution for the ageing population of the UK. A single department with responsibility for pensions and long-term care is a good idea. But more is needed. Local councils may be best to run care homes, but the overall strategy should be run at national level. An issue this important to the future should be nationally directed. People who have worked and contributed to the state all their life should not be subject to a postcode lottery towards the end of their life to cover their position when they are at their most vulnerable.

 

The UK life and pensions sector is easily capable of providing the support for a national strategy of provding long term care protection for the public. Auto-enrolment has already provided an infrastructure which could be used to form the backbone of the process. The private life and pensions providers have brought their experience and ingenuity to the provision of products which fulfill this need. Given that it is already in place, could a policy of nudging people into buying protection for long-term care over the course of their working lives not succeed? Given the scale of the costs involved, only a long paying in period and a pooled approach could make the cost manageable for those on lower incomes.

 

It would not be simple to arrange. But the resourcefulness and experience of the industry should be able to devise the kinds of products that would increase the amount of private provision for long-term care and reduce the overall dependency on the taxpayer. The current approach of blaming the local councils and hoping for the best just can’t be sustained.

long term care plans, auto enrolment, Long Term Care

Tom Murray

Tom is Head of Product Strategy at Exaxe with primary responsibility of overseeing product direction. Tom has extensive experience of managing web based insurance software from conceptual design through to commercial release and beyond. Tom has been leading the development of the Exaxe Internet insurance architecture since August 1999.

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