Pension Funds Insider

Pension Funds Insider brings the latest pensions news and industry insights; from investment and governance updates to new mandate appointments and pensions regulatory information.

Funding the last third

Image for Funding the last third pension funds

How the financial services sector can do more to help fund the last third of our lives.

For several years now, I and a growing number of others have been arguing for an integrated approach to funding the last third of our life, from age 60 to 90 roughly speaking. While some progress has been made on funding for retirement, adult social care remains neglected.

In 2011 the Dilnot Commission said nobody should have to pay more than £35,000 for their own care costs during their lifetime. Provision for a cap was enshrined in the 2014 Care Act. In 2013 the government decided £35,000 was unaffordable and should be doubled; but that still meant many people would have to sell their home when they went into care. In 2015 commencement of the cap was deferred to 2020.

The Conservative 2017 election manifesto took the opposite approach and proposed a floor of £100,000 on assets, including homes, above which you’d have to pay. That proved politically toxic too, so it was dropped.

So nothing changed: we still have means-testing, which is widely resented and creates a disincentive to save. We still have massive cross-subsidisation by self-funders of those residents funded by local authorities, who can generally only cover about 60% of the actual cost. And we still have a rampant pandemic, which has exposed the fragility of the entire sector.

In the early 1980s a combination of cuts to local authority budgets and financial incentives for the private sector created a new care home industry, which for a while was very profitable. As is the way with government incentives however, a series of relentless cutbacks and further attrition of local authority funding, exacerbated by debt servicing and profit extraction by owners, led to closures.

We are left with a broken system that is inadequate, unfair, and unsustainable. In short, we have a market failure. A national debate about social care is long overdue. Three years ago we were promised a Green Paper on care for older people. It hasn’t appeared. Politicians have failed to focus, adrift on a tide of unmet promises.

I have argued for a Later Life Commission to address the key issues politicians shy away from, including the emotional factor of the resident’s own home and deferred payment agreements with local authorities; inheritance; taxation; post-retirement national insurance contributions; long-term insurance; and deferred annuities.

But it may already be too late for that now. As with the train companies, the crisis is so acute that even a Conservative peer, Baroness Altmann – who knows a thing or two about long-term funding – has argued that nationalisation may be necessary. Integration of adult social care with the National Health Service seems highly desirable.

At a national level it would be easier to combine saving for retirement via a pension with insuring against the risk of requiring significant social care (particularly admission to a care home), and at the same time pool the longevity risk. At the individual level it will always be too expensive for the majority to manage successfully – even if suitable investment vehicles were available.

Care homes are not the only channel for provision of social care, of course; though around 10% of us will spend the last few years of our lives in a care home. A far higher proportion will require varying levels of support to continue living at home. Again we see the need for holistic planning.
Pay-as-you-go funding will not solve the present crisis though. Here’s where defined benefit pension schemes could step in. There is a dire shortage of long-term fixed-interest investments. New issues of long-dated index-linked gilts are oversubscribed; gilt yields in general are very poor and even negative; and the DMO refuses to issue CPI-linked gilts to match CPI-linked pension liabilities.

Defined benefit schemes might invest in social care: either directly, or indirectly via Care Bonds: a new long-term asset subcategory. The money could fund construction and operation of high-quality care homes, with future redemption from individual retirement savings and insurance payouts, and oversight from a Later Life Commission.

Besides fulfilling an un-met need for solid long-term pension scheme investment, this would help to plug the gap in social care provision – and it ticks the S in ESG. It might interest the Pension Protection Fund too.

A couple of other ‘s’ words are relevant: ‘sustainable’ and ‘satisfactory’ – the latter not commonly encountered in political discourse, but crucial in solidifying a consensus across all generations. The FCA is on the case, setting out in FS20/12 this week why intergenerational difference is an important issue and where the financial services sector can do more.
Ian Neale, Director, Aries Insight