Pensions

Cynics would suggest that the sobriquet “silly season” should apply to the 12 months preceding any General Election. Traditionalists would apply the nickname to August and the couple of weeks which fall either side of that most balmy of months. However, this year has been something of an exception. While we are enduring a US-style election marathon, a number of very weighty issues have been dealt with in a very serious manner.

Not least, the latest cause for political concern, long-term care.

As is so often the case these days, one of the most balanced expositions was produced by a House of Commons select committee. While acknowledging the issue should be debated, the MPs on the committee counselled against short-term panic measures. They tried to put the issue into perspective and refused to evacuate the intellectual high ground in the face of a demographic timebomb.

Despite – or indeed because of – the select committee’s views, long-term care will be discussed both before and after the forthcoming Election.

Because of the strange bi-partisan approach which is being adopted to the role of the state in meeting social needs, much of the debate will centre around the extent to which long-term care is an individual issue or yet another item of social expenditure which should be placed at the door of employers.

Long-term care is something of a misnomer. In truth, a relatively small proportion of the population need long-term care. Many of those that do, are of working age and suffering from the effects of a major accident or debilitating disease. However, the current political wranglings are concerned with that group requiring intensive medical supervision in retirement.

Only a minority is involved and their requirement for intensive care tends to persist for a very short period; what is actually involved here is short-term intensive care some long time in the future.

The issue was brought to public attention by the need of some retired folk to sell their houses in order to finance intensive care. The debate reached scandalous proportions when it was suggested that the other spouse might still be living in the house at the time. Because one of the Prime Minister’s cardinal aims was to see wealth cascade through the generations, the sight of part of that prospective inheritance, namely the family home, being liquidated was a far from edifying spectacle for him.

The 1995 Budget contained some provisions that eased the burden in the short term for those who were faced with the prospect of selling their home in order to finance care. More importantly, however, the Budget marked the commencement of the current debate. Even though government pronouncements on the subject have not been met with universal acclaim, ministers and their civil servants have fulfilled a useful role in flushing out a number of practical considerations.

Alarm bells must start ringing in the minds of finance directors when the government identifies a challenge which it thinks the rest of us should meet. As the tentacles of the welfare state retract, needs still have to be met. In the face of the personal pension debacle, governments realise there is a limit to the extent to which individuals are able to fend for themselves, particularly where long-term financial priorities are concerned.

Although the voluntary approach still applies to pension provision, other economic and social burdens have been placed squarely on the shoulders of the employer.

Anyone who has witnessed the American experience can appreciate the open-ended nature of providing former employees with access to self-elective post-retirement benefits. The cost of post-retirement medical benefits in the US has escalated exponentially. Those UK employers who have traditionally provided access to convalescence or care facilities have been withdrawing from such provisions as quickly as they can.

Occupational pension schemes were viewed by some commentators as the most natural financiers of long-term care. However, a little further thought showed most people require most of their pension for most of their retirement. Their kitties were insufficiently small to finance a low start pension that could swell in later years to meet the cost of long-term care. What is more, some of those who might have made the biggest sacrifice in the early years of retirement might never require the long-term care which their sacrifice had been intended to finance.

If pension schemes cannot provide, are insurance policies any better?

Some of the regulatory authorities have been expressing concern at the way in which long-term care policies might be sold to those who are already over-stretched financially. However, once the market settles down and competitive premium scales emerge, insurance could have a significant role to play. Indeed, the government has already suggested that it may open its coffers slightly more generously if an individual has met some costs from insurance.

For the more well-healed among us, however, saving and investment may be more appropriate than insurance.

There is no limit to the number of eventualities against which one can insure. Unless these eventualities are immediate or have a significant likelihood of occurring, turning oneself into an insurance company by accumulating assets which can be used to meet all eventualities may be a more sensible approach. What is more, to the extent that we do not need to call on these resources, Major’s wealth cascade will not be staunched.

The real answer to so many of these concerns lies within the provision of an adequate pension. If we can ensure that everyone, irrespective of their career pattern, can look forward to a secure and realistic income in retirement, so many other potential problems simply evaporate. Pensioners will no longer require bus passes. Retired folk will no longer require subsidised housing and all that may be required for the financing of intensive care late in life could be some form of catastrophe insurance that will kick in after a fairly lengthy waiting period. This is not to say that transport undertakings should refrain from offering cheap fares. Such fares should, however, be influenced by the need to make efficient utilisation of resources rather than as a sop to those above a certain age who it is falsely assumed cannot pay the economic price just because of their age.

Alan Pickering is senior pensions consultant with Watson Wyatt Partners.