The centre-left think-tank, IPPR, has cracked the UK’s pensions and long-term care funding problems. That’s the message in its report ‘A New Contract for Retirement’, which formed the basis of its conference held in London recently.
IPPR’s recommendations for pensions are:
o Raising the level of state pension to that of the minimum income guarantee;
o Indexing the state pension to earnings levels as opposed to retail price inflation’
o Phasing out the second state pension; and
o Raising the state pension age to 67 by 2030.
Peter Robinson, IPPR’s senior economist, reassured the audience that these represent “a pragmatic solution, not one derived from an ideological bent”. They would simplify the state pension arrangements and at the same time ensure adequacy with little need for means testing – something fiercely resented by the public. The overall costs to the Exchequer would rise to 6% of GDP by 2050, the same as the projected costs of the government’s settlement including the pension credit. Nor do they involve a further extension of compulsion.
On long-term care for the elderly, IPPR believes government policy for England and Wales is flawed. It is illogical, it claims, to distinguish between acute and long-term healthcare, and the key issue is the separation of free nursing care from personal care individuals must pay for. IPPR says that not only is having to pay for personal care unfair, but the dividing line between nursing and personal care can be blurred, complicating case management.
IPPR accepts that making personal care free would come at a cost, but its extensive modelling puts this at 0.3% of GDP by 2050, a sum it says can be generated by abolishing equity-based individual savings accounts (ISAs), reducing the value of age-related tax allowances and aligning National Insurance contributions with the threshold for higher-rate income tax. These are all fiscally progressive reforms consistent with the government’s other policy objectives.
From the other presentations and the discussion sessions, it was clear there is a great deal of frustration among think-tanks, charities, care groups and healthcare providers over the lack of progress in resolving the funding crisis that looms on the distant horizon. There is no shortage of new ideas either.
Adrian Boulding, director of pensions strategy at Legal & General, commenting on stakeholder pensions (around 800,000 of which have been sold since their introduction in April 2001), suggested better incentives to get people started down the stakeholder route, easing of regulation to simplify advice requirements and the ability of employers to promote their schemes. He also advocated a ‘citizen’s’ state pension, the level of which would be unrelated to national insurance contributions.
Other speakers stressed the importance of the role played by employers, including Peter Thompson, chairman of the National Association of Pension Funds, who recommended that employers should be able to make pension scheme membership compulsory. Ian Reynolds, representing the actuarial profession, put forward that an independent body along the lines of the Monetary Policy Committee (that determines interest rates) should control pensions policy.
Desmond le Grys of the Continuing Care Conference offered several ideas for long-term care. He thought the potential problem of stimulating demand by allowing free personal care could be addressed by stringent eligibility rules. If costs turn out to be well within budget, the rules can be relaxed progressively until a balance is achieved. Releasing equity from the homes of elderly people is one way of making capital available to individuals for long-term care. Currently, equity release plans offer dubious value since around 30% of the capital released disappears in commissions and other charges. Le Grys suggested that schemes could be run by local authorities in partnership with the financial services industry, which would provide technical expertise and administration.
Finally, Le Grys offered the view that long-term care insurance could be made cheaper by relaxing the solvency requirements insurers have to meet. Currently, reserving has to be based on a worst-case scenario. Better, he said, that reserving should be on a ‘best estimate’ basis according to current knowledge and data, with the government acting as reinsurer of last resort.
Such innovations, however, were largely lost on the politicians – Jim Purnell MP (Labour) David Willetts MP (Conservative and Shadow Secretary of State for Work and Pensions) and Steve Webb (Liberal Democrats). Rounding up the conference, they spoke at length but failed to light any beacons for change. It is all just too difficult, it seems.
IPPR wants to see a stable, affordable system for pensions and long-term care, one that is backed by public support. And herein, of course, lies the problem. Setting up arrangements that avert difficulties that, as most people see them, are way into the future means making sacrifices for succeeding generations. And that is virtually certain to be a vote loser.