Ready for Ageing? - Select Committee on Public Service and Demographic Change Contents


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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