Auto-enrolment-style contributions could hold the key to solving the UK’s growing social care crisis, according to the sponsors of a report into the funding shortfall for care in later life.
The UK’s current system will collapse by 2029 without reforms, according to a stark warning from law firm Irwin Mitchell and the Centre for Economics and Business Research. The report highlights that by 2025 1m people will have dementia in the UK, while a further 1.8m over-65s will need nursing and social care.
There is already a funding shortfall anticipated to reach £1.5bn for 2020-21 and £3.5bn in just five years, with residential care costing £34,944 a year on average.
If you have dementia you get no help at all, unless you have no money. However, if you have cancer, the NHS will cover your costs. This illness lottery is grossly unfair
Ros Altmann, Conservative peer
Only around the top 10 per cent of retired households by income will be able to afford to pay for nursing homes from their income, the report highlighted. Care home capacity is also an urgent issue.
Those applying for help with costs face “the meanest of all means tests”, according to former pensions minister Ros Altmann, who called the crisis “the biggest failure of policy in our lifetimes”.
Auto-enrolment solution mooted
Irwin Mitchell, which commissioned the report from the CEBR, has suggested that auto-enrolment could be extended to cover some of this shortfall.
Penny Cogher, pensions partner, said: “A simple, cheap, and readily available solution for long-term care savings would be to expand the existing auto-enrolment framework run through defined contribution schemes so that it covers long-term care savings.”
In getting to grips with increased contributions, she suggested that the UK could learn and borrow from successful messaging employed in the Netherlands of ‘working four days a week for current income and one for future income’.
Ms Cogher suggested the policy could be phased in, starting from a low percentage of salary: “These figures can then gradually increase, as they have for auto-enrolment for pension savings.”
She said funds could be overseen by providers such as master trusts, and released after a GP letter or as a lump sum on death.
Collective insurance helps with behavioural bias
While the need for urgent reform is readily apparent, experts have mixed views on the Irwin Mitchell approach.
“It is great to see an innovative idea and concept from Irwin Mitchell. This will hopefully stimulate debate and further creativity from the professional advice sector, including the potential for extending the use of the Lisa or further employer-led initiatives,” said Andy Cumming, head of advice at Close Brothers Asset Management.
However, Steve Webb, partner at Lane Clark & Peacock, warned that the proposals could have a detrimental impact on the success of auto-enrolment itself, especially for younger savers.
“Either there would be a complex separate opt-out for the care element, or younger people who were not interested in saving for care might also opt out of pensions,” he said. “We know that people are not saving enough for pensions, and diverting potential pension saving into a ring-fenced care fund seems like a bad idea.”
Sir Steve said the solution to the care crisis lies instead in collective insurance products, given the unpredictability of care costs.
“Tax breaks for care insurance products, perhaps funded from pension lump sums or a charge on property could be a much more efficient and attractive option,” he said.
Rachael Griffin, tax and financial planning expert at Quilter, agreed that taxation should be the target, pointing to a Quilter survey showing that 55 per cent of UK adults say people should be taxed while they are working to contribute to the state cost of care.
Several experts noted that defined contribution saving rates are already too low to meet most savers’ retirement expectations, while the fact that only 20 per cent of over-80s require care creates a behavioural bias against saving.
Malcolm McLean, senior consultant, Barnett Waddingham, noted: “A small increase in auto-enrolment would, in most instances, hardly scratch the surface.”
Integration of health and care
Kay Ingram, director of public policy at LEBC, said her preferred solution is to “adopt similar proposals to those in the Dilnot Report and already embodied in the Care Act”, capping the maximum any individual would need to pay for care during their lifetime.
She said the current cap of £72,000 should be raised to around £100,000 to include crucial costs left out of the previous proposal.
“This would give clarity and take away the worry that a lengthy spell in care could wipe out a person’s entire savings. The cap would mean the individual retains the incentive to save,” she said.
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Ms Ingram also highlighted the fractured nature of care in the UK, with different services supplied by the NHS, Department for Work and Pensions and local authorities.
Baroness Altmann agreed: “Currently, if you have dementia you get no help at all, unless you have no money. However, if you have cancer, the NHS will cover your costs.
“This illness lottery is grossly unfair and makes no sense in today’s world. It is a relic from the days of Beveridge and integration of health and care is urgently needed.”
