Annex 6: Why individuals, markets and
governments fail to prepare adequately for ageing (relevant throughout
the report)
110. In a world of perfectly informed consumers,
well-functioning insurance markets, and far-sighted government,
the growing number of older voters and consumers would get what
they wanted (given a sustainable 'dependency' ratio). However,
individuals can never know exactly how long they are going to
live, and because people are naturally ill-disposed to thinking
about getting older, part of people's failure to prepare for older
age derives from simple human nature. This is an inherent problem
for policy-making: not every issue related to ageing can be solved
through the provision of more information.
Individuals' lack of preparedness
for ageing
111. Nevertheless, our population is far from
perfectly informed about ageing. The Pensions Commission led by
Lord Turner of Ecchinswell (the Turner Commission) found that
people, on average, are unaware of or do not believe the projected
increases in life expectancy, or even the best estimates of current
life expectancy. In 2005, 30 to 39 year olds underestimated their
own life expectancy by at least six years.[113]
Ipsos MORI told us that "assumptions (based on little knowledge),
a fear of the unknown, denial, and negative connotations of being
a 'pensioner' mean that we put off our financial planning until
we are forced to".[114]
112. People tend to deny the likelihood that
adverse life events or disability will affect them, and men are
more likely to misjudge the risks associated with old age.[115]
In particular, people are very unwilling to contemplate and provide
for future disability or mental illness, even to the limited extent
of adapting their houses to be suitable for older life.
113. Ipsos MORI found that generally, there is
low awareness of, and there are common misconceptions about, who
is responsible for looking after older people in need. The public
often struggle to distinguish between social care services and
health services provided by the NHS. Many assume that the state
will provide for them in later life, meaning that people, particularly
in younger age groups, generally give little thought to planning
for their old age.[116]
Furthermore, individuals often have a residual faith that their
family will look after them in old age.[117]
A presumption of substantial and growing levels of informal family
care may not be realistic in a world in which the next generation
of carers might need to remain in work, particularly in order
to finance their own retirement (see Annex 5).[118]
114. People often do not act in their best interests.
The Turner Commission identified procrastination, the power of
inertia, poor understanding of risk and people's tendency to shy
away from complexity as important factors in people's decisions
on saving, or failure to save.[119]
Market failures
115. Markets are failing to provide what is needed
in the fields of long-term care insurance, pensions, and specialist
housing for older people. The reasons for this market failure
are related to the weaknesses in consumer knowledge and behaviour
explored above. Although an insurer may know the likelihood that
a person entering care today will stay for a certain length of
time, such probabilities might change substantially over the period
of an insurance contract, especially if the contract is entered
into prudently early.[120]
Medical progress might reduce the likelihood of people developing
dementia, for example, but separate medical advances might increase
the likelihood of an individual surviving disease but in a disabled
state, with their care costs rising sharply as a result.[121]
These factors make insurers very reluctant to offer long-term
care products, with the result that markets for elderly people's
healthcare insurance tend to be unaffordable. As of July 2011,
no major financial services providers offered pre-funded insurance
against social care costs.[122]
116. People suffer from a similar dearth of information
when trying to decide which pension products they should take
up. Pensions are associated with longevity risks (individuals
do not know how many years they will need a pension for) as well
as investment risks (individuals do not know how large their pension
will grow). Many employers used to take on both of these types
of risk when they promised a specified pension linked to an employee's
final salary. But these risks eventually overwhelmed firms' capacity
or willingness to provide such pensions (see Annex 8). Paul Johnson,
Director, Institute for Fiscal Studies (IFS), explained: "We
have moved from a world where the state, which is pretty good
at bearing these kinds of risks ... was bearing most of the risk,
through a period when employers were bearing most of the risk,
to a situation for the current working generation where individuals
are bearing most of the risk, and they are probably least well
set up for bearing that risk".[123]
As individuals become aware of the increased risk that is falling
on their shoulders, this situation may not be politically or practically
sustainable. The incomplete capacity of individuals to make good
decisions for the long term, and of markets to cope with the uncertainties
and risks of old age, is the fundamental reason why the Government
have to take a leading role in helping the country to adapt to
and plan for its ageing population.
Government progress
117. Successive governments have attempted to
respond to the challenges posed by people living longer lives.
Both the Turner Commission and the Commission on Funding of Care
and Support (the Dilnot Commission) analysed some of the issues
and presented ways forward.[124]
Their proposals involved shifting more responsibility onto individuals
and nudging or incentivising individuals to prepare financially
for a longer life. Both reports showed what can be achieved by
good analysis, impartially conducted, which engages public attention.[125]
The Government have begun also to analyse problems related to
the sustainability of services for older people at the local level.[126]
However, neither the Turner Commission nor the Dilnot Commission
recommendations have yet come to full fruition. Legislation based
on the Turner Commission's pension plans was passed by Parliament
in 2008, but is only just beginning to be implemented.
118. United Kingdom pension policy has adopted
an unusual path.[127]
Some countries, such as Australia or the Netherlands, either require
employers to make pension contributions or make membership of
occupational pensions virtually compulsory through collective
bargaining.[128] The
UK has never had a universal wage-related national pension scheme
and the Government are currently proposing to incorporate the
modest existing earnings-related state pension into a new single-tier
flat rate pension (see Annex 8). The Government are not seeking
to make membership of private schemes compulsory. Instead, they
are working to incentivise individuals to join a regulated pattern
of private schemes. In this regard, the UK's system is perhaps
nearest to the one that has evolved in New Zealand.[129]
With regard to social care, while other countries have introduced
compulsory social insurance for long-term care, England's attempt
to kick-start a private market in long-term care insurance, by
the Government taking on the catastrophic risks associated with
care (as recommended by the Dilnot Commission), will be highly
innovative.[130] The
UK with pensions, and England with long-term care, are following
their own untried and as yet uncompleted paths to support an ageing
population. While this does not mean that these paths are misguided,
these evolving strategies need to be kept under careful review
to see if they are working. According to the European Commission's
most recent set of projections on ageing pressures for member
states, the additional spending pressure faced by the UK between
2010 and 2060 (3.3 per cent of GDP) will be slightly below the
EU average (3.9 per cent of GDP); this is likely to be due at
least partially to the measures already taken on state pensions
by successive governments.[131]
Government failure
119. In other ways, however, successive governments
have failed to meet the challenges posed by an ageing population.
The Committee heard how democratic governments are ill-equipped
for long-term, joined-up thinking on this issue (see Annex 18).
In particular, successive UK governments have struggled to deliver
the necessary adaptations to long-standing public service delivery
structures. As we explore in Annexes 12 and 13, long-embedded
structural designs and divisions, such as the split between healthcare
and social care, can become extremely difficult to change.
120. The incapacity of individuals and markets
to be able to respond efficiently to an ageing future has been
exacerbated by a coterminous failure by the state to adapt its
institutions. The Government have begun to respond with the help
of independent reviews like those conducted by the Turner and
Dilnot Commissions, as well as through their own internal analyses
and local experiments. But the Turner and Dilnot Commissions'
recommendations are not yet fully implemented, and much wider
public policy changes are also required (see Annexes 8 to 17).
The whole mechanism through which the Government manage the process
of adaptation to ageing needs to go much further and faster (see
Annex 18).
113 A New Pension Settlement for the Twenty-First
Century. The Second Report of the Pensions Commission, 2005,
pages 90, 94. Back
114
Ipsos MORI. Back
115
Dr Joan Costa-Font, LSE. Back
116
Ipsos MORI. Back
117
Ipsos MORI. Dr Joan Costa-Font put the relative unpopularity of
long-term care insurance schemes in Europe down to the fact that
the provision of care for elderly dependants has traditionally
been a family duty in most European countries. Back
118
The Central Government's (DoH, DWP and DCLG) written evidence
related how the numbers of disabled older people receiving informal
care are projected approximately to double over the next 20 years
if the probability of receiving this care remains constant. Professor
Sarah Harper told us that children of parents needing support
will often arrange for their own care to be substituted by others
(Q 96). Dr Joan Costa-Font, Family ties and the crowding out
of long-term care insurance, Oxford Review of Economic Policy
2010, Vol 26(4) pp. 691-712. Professor Sarah Harper told us that
children of parents needing support will often arrange for their
own care to be substituted by others (Q 96). Back
119
Pensions: Challenges and Choices - The First Report of the
Pensions Commission, 2004; Professor Nicholas Barr, London
School of Economics and Political Science (LSE). Back
120
Professor Nicholas Barr, LSE. Back
121
Professor Nicholas Barr, LSE. Back
122
Fairer Care Funding - The Report of the Commission on
Funding of Care and Support (the Dilnot Commission), July
2011. Back
123
Q 585 Back
124
Pensions: Challenges and Choices - The First Report of the
Pensions Commission, 2004; Fairer Care Funding - The Report
of the Commission on Funding of Care and Support, 2011. Back
125
The Government have attempted continued engagement and communication
with the public over pensions reform in particular, through TV,
press and digital advertising and an Automatic Enrolment and
Pensions Language Guide; Central Government (DoH, DWP and
DCLG), written evidence. Back
126
Sir Bob Kerslake, described in supplementary written evidence
the community budgets initiative, which has involved civil servants
being seconded to work with four pilot areas in order to help
them develop new models for delivery of services that can improve
services at lower costs. Back
127
N. Barr and P. Diamond, Reforming pensions: principles and
policy choices; Pension: Challenges and Choices - The First
Report of the Pensions Commission, 2004 pp. 27-56. Back
128
The Netherlands pension summary, website of the European Actuarial
& Consultancy Services network (EURACS); 'Sweden', website
of Pension Funds Online. Q 466, Q 472, Q 479, QQ 486-487, Q489,
Q494 (Professor Noel Whiteside, Professor of Comparative Public
Policy, University of Warwick). OECD, Pensions at a Glance,
2011. Back
129
Q 486 (Professor Noel Whiteside); Professor Noel Whiteside, supplementary
written evidence; Reform. Back
130
Helga Riedel, Private compulsory long-term care insurance in
Germany'; Tony Sheldon, Netherlands: long term care paid
by compulsory insurance, British Medical Journal. Back
131
OBR, Fiscal sustainability report, July 2012, p73. Back
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