Auto-enrolment can help solve care crisis

This is one of the main conclusions of ‘Elderly care crisis – at tipping point’, a report from Irwin Mitchell commissioned by the Centre for Economics and Business Research, and presented by Baroness Ros Altmann.

Two themes emerge from the pensions perspective: people need to understand they should save more for their later-life care, and then start saving.

While some short-term solutions are needed, as a longer-term solution it makes sense to extend the pre-existing tax-efficient, and well-respected, auto-enrolment pension regime and its tax system – to introduce as a separate, but connected, care fund for people’s long-term care needs.

While further education is necessary, auto-enrolment advertising campaigns are successful, and the same approach could be used for long-term care

This should start at age 40 for all workers including the self-employed, with contributions initially at the same level as auto-enrolment – at a rate of 1 per cent employer contribution, 1 per cent employee contribution, and 1 per cent tax relief from the government.

Contributions can gradually increase as they have for auto-enrolment. These savings would be the employee’s “own” money for their long-term care.

The money would be held in a defined contribution pension scheme for the individual, but separately from their pension pot. This would be identifiable as their long-term care fund, not accessed on retirement but at point of need, and operated through the authorised DC master trust system – the usual pension vehicle for private sector employers. 

Care savings can be accessed with GP letter

If the individual needs to access their long-term care savings, then a GP’s letter to the master trust releases the funds for the person’s care, including payment to their relatives who are responsible for that care, and so helping to reduce the poverty of some female carers.  

This approach means individuals could end up with large pots overall – of more interest to both providers and individuals. The pensions dashboard could help people monitor their overall later-life savings.

If the worker changes jobs, then in the same way that their pension fund can be transferred to their new employer’s pension scheme, their long-term savings pot can also be moved.

If the individual dies before accessing their fund, it could be paid out as a lump sum death benefit as for a pension benefit, or passed through the savings vehicle to a dependant for their long-term care needs.

As with any individual with DC savings, they should be encouraged to sign an enduing power of attorney.

For employers that use defined benefit pension schemes for auto-enrolment, it is straightforward to set up a separate long-term savings scheme through a pensions master trust.

This solution seems preferable to requiring individuals to buy a commercial insurance product to fund their long-term care needs, the proposal of former pensions minister Steve Webb, who then worked at Royal London.

Annuities are not popular nor trusted savings products. They are relatively costly due to solvency requirements, have limited flexibility, and the insurance company appears to “make a profit” on death.

Government looking at different solution

According to an article in the Mail on Sunday, Matt Hancock, secretary of state for health and social care, is looking at a variation of this auto-enrolment solution – workers over 40 would be taxed 2.5 per cent to help fund the costs of old age care.

This is based on the German system for the over-40s, including pensioners, paying into a ringfenced pot for social care to use to pay carers (including family members), with the aim of reducing the elderly having to sell their home for their later-life care – all part of Prime Minister Boris Johnson’s election promises.  

However, Labour does not support this proposal, so it seems better for the government to take some simple steps to expand the UK’s existing DC auto-enrolment workplace pension system, which does have all-party support, to facilitate later-life saving.

Auto-enrolment is a British success, and schemes are known and trusted savings vehicles provided by employers for their workers. Contributions increased in April 2019, with no exodus of employees.

While further education is necessary, auto-enrolment advertising campaigns are successful, and the same approach could be used for later-life care. People understand the importance of saving for old age, they just do not understand quite how they might need to do this.

The Dutch concept of ‘I work four days a week for me and the last day I work for my pension’ is a great mantra to use.

Even with coronavirus, helping people to help themselves save for their later-life care is an essential next step for the government. As our report shows, there is no time to lose.

Penny Cogher is a partner at Irwin Mitchell