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April 27th, 2011

The Dilnot Commission on long term care funding should not overlook the possibility of co-evolution between pensions and care

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Estimated reading time: 5 minutes

Blog Admin

April 27th, 2011

The Dilnot Commission on long term care funding should not overlook the possibility of co-evolution between pensions and care

1 comment

Estimated reading time: 5 minutes

The government’s intended reform of the pension system has garnered much commentary in recent months. Craig Berry looks at the work of the Dilnot Commission on another element of policy for the elderly, social care, and finds that there may be opportunities for it to be partnered with the pensions system, giving significant benefits to those of retirement age.

The Dilnot Commission was established by the government in July 2010 to make recommendations on the funding system for formal social care in England. It will report in the summer, and a white paper is expected by the end of the year. There is no doubt that the Commission is addressing some very significant issues around the fairness and sustainability of the current system, and as such its recommendations are eagerly awaited.

Yet there is a danger that in rigidly demarcating a set of care services in need of a new funding settlement, the Commission will overlook the potential efficiencies that exist between the care system for older people and related arms of the welfare state. For example, the possibility of co-evolution between the pensions system – through which individuals and society fund retirement more generally – and the care funding system does not seem to be under review by the Commission. There is no specific reference to pensions on the Commission’s website or in its terms of reference, determined by the government.

The care system now confronts a range of ‘frontiers’ in delivery. Firstly, the boundary between health and care provision is by nature permeable, and it is hard to imagine an efficient and cost-effective care system that does not provide for closer integration of health and care. Secondly, care services cannot be cleanly distinguished from a range of other ‘universal’ services such as housing and transport which enable daily life. Thirdly, informal carers make an immense contribution to the provision of care in the UK, the value of which far outweighs any of the services whose funding the Dilnot Commission is reviewing.

These frontiers are not accidents of policy development, but instead derive from the nature of care provision. Care is not in itself an intervention, such as medical care or housing provision, but should instead be seen as a ‘type’ of intervention. Care needs are amorphous, subjective and often intimate. There are clear grounds for an enhanced professionalisation of care delivery in meeting some needs, but it will also be necessary to empower individuals and their families to address needs as they arise.

This is where pensions come in; we can conceive of the somewhat arbitrary distinction between retirement funding (i.e. pensions) and care funding for older people as another frontier of the care system. The partnership model likely to be proposed by the Dilnot Commission (first proposed by the King’s Fund) seems to assume that an individual’s care needs can be quantified, to create a given ‘package’ of services required to meet those needs. The state will agree to fund a certain proportion of this package, and the individual will top it up by various means. Yet the amorphous nature of care means that the contributions made by individuals to the costs of care cannot be conceived as contributions towards an identifiable (and quantifiable) pot, but rather as more generally funding the personal expenses which care needs give rise to.

As such, care costs for the individual are and will remain to some extent indistinguishable from the general cost of living in later life. This is not simply an exercise in definition; it is also likely that redefined as part of general retirement funding, funding long term care for older people would play a more meaningful role in retirement planning by individuals. In terms of the Commission’s remit, we have been here before: the Pensions Commission chaired by Adair Turner, upon which most of the recent pensions reforms have been based, focused narrowly on pensions and neglected to consider cost of living in later life more generally.

There are, of course, some very specific ways in which the pensions system and long term care for older people could be brought together. The first is the annuities market. An annuity is the insurance product that individuals with ‘defined contribution’ pensions saving purchase upon retirement, providing a regular income for life. The only annuities that are currently available for care costs are immediate needs annuities. These products generally exist to cover the costs of residential care, and they are funded not using pension savings but rather the sale of one’s home. They prevent individuals running out of funds through which to fund residential care, but recipients usually die before realising the full value of the product. Disability linked annuities have also been proposed, whereby the annuity payment varies as care needs come about and the cost of living rises. It may also be possible to design accelerated life insurance – a life assurance product which converts into a disability linked annuity should care needs arise before death.

Yet there are significant supply-side and demand-side barriers to the emergence of these annuity products. Moreover, they do not in themselves provide mechanisms through which people can save for care costs in later life. The co-evolution of pensions and care should not mean that pension pots should simply be used to fund care. Rather, mechanisms for pensions saving could also be used to enable saving for care. Ironically, it is one of the aforementioned Pensions Commission’s ideas that could help in this regard. Based on Turner’s recommendations, the government will from 2012 introduce a state-backed, low-cost occupational pensions saving vehicle for low-to-median earners, with minimum employer contributions, now known as NEST. People will be auto-enrolled by their employers into NEST schemes or equivalents. Is it possible that NEST could be used to enable the accumulation of assets to be used specifically to cover care costs? The accumulated funds could be combined with pensions saving at retirement to purchase a pre-funded care insurance product, or retained in the scheme and used to purchase an immediate needs annuity at a later point, or even used to fund enrollment fees into the previous government’s proposed National Care Service.

It is of course unlikely that employers or the government would be willing to contribute directly to care savings in the way that they contribute to pensions saving, or that auto-enrolment would be permissible to the same extent. However, simply the fact that NEST schemes will be low-cost, simple and trustworthy will boost retirement savings – it seems anomalous to not allow savings specifically for care to be boosted in a similar way. People already erroneously assume that National Insurance contributions should pay for their care; it seems likely that future generations will assume that NEST contributions should cover care costs as well as general retirement costs. There can be no magic wand to fix the care funding system, but the possibility of piggy-backing on pensions reform is an opportunity to make progress that should not be missed.

This article is based on the longer paper ‘Past caring? Widening the debate on funding long term care’ (to be published by the International Longevity Centre-UK in May 2011).

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