Damian Green is a former First Secretary of State, and is MP for Ashford.
Demographics don’t lie. The UK population is aging. A child born in 2018 can reasonably expect to live until at least 91 years of age. Even more striking is the expectation that around 30 per cent of children born today will live to receive a communication (in a form we cannot today imagine) from the monarch on their 100th birthday. While we should celebrate increases in life expectancy, we need to work to ensure that these positive changes in the quantity of life are matched by improvements in the quality of life.
As a Party, we try to rise to this challenge. In government, we have done more than ever before to help people build the resources they need to enjoy later life. Since 2012, our automatic enrolment policy has introduced nine million extra people to pension saving. The reformed State Pension (the ‘New State Pension’) is simpler and fairer; it will ensure that most people will have more money when they retire than they would have had under the old system.
We need to be realistic. Big challenges remain if we want to ensure that everyone has enough money to meet their needs in retirement. The first and perhaps biggest roadblock standing in the way of a decent retirement for all is the fact that people simply aren’t saving enough. According to the Pensions and Lifetime Savings Association (PLSA), only around 50 per cent of savers are currently on track to have sufficient means in retirement. Clearly, this is not good enough.
Part of the problem is that people just do not know how much they will need in later life. This makes it hard for them to plan effectively and save enough each month to achieve the lifestyle they want when they choose to stop working. The PLSA’s solution to this problem is to provide savers with a clear idea of how much they will need each year – in pounds and pence – to live a ‘minimum’, ‘modest’ or ‘comfortable’ lifestyle in retirement.
The PLSA’s Retirement Income Targets, due out in 2019, are grounded on an approach pioneered by Australia. Each target level will be based on a ‘basket of goods’, which will allow savers to compare lifestyles and see how much they cost on an annual basis. This will enable people to make informed long-term savings choices in a way that they are unable to at present. I commend this approach to the Government.
The other great source of uncertainty in later life is, of course, health. Nobody can predict how individual circumstances will change as age takes its course. Nevertheless, what we do know is that an aging population will have a higher demand for social care. A quarter of men and a third of women aged 65 will need care support at some point in their lives.
No matter how well people plan for retirement, if the need for care arises it can easily and quickly erode savings. The average annual cost of care home residence rose by around 10 per cent last year to just under £34,000. If nursing support is required, annual fees can increase to more than £40,000. Care costs of this sort have a serious impact on the adequacy of pension savings and, given that people are already not saving enough for retirement, many could be at real risk of poverty. When it comes to funding care costs, I believe that there are three important strands that the Government needs to consider if it is to offer a sustainable, comprehensive solution: state support, private assets, and individual planning.
The Government needs to give savers certainty about what the state will pay for and the level of support that it will offer. This will make it easier for both people and the Treasury to plan for the costs of care. Beyond state provision, care costs will have to be paid for by individuals. The Government needs to be bold in this area and consider all possible sources of funding, including a small proportion of the housing wealth of the better off.
We didn’t explain our policy on this issue well enough during last year’s general election. However, we cannot escape the fact that for most people their house is their most valuable asset, alongside their pension. If housing is not included in the mix, we risk a situation in which retirees become ‘cash poor’ and ‘asset rich’, which is a sure way of increasing pensioner poverty. The Government should raise awareness of the ways in which people can unlock the value present in their home and use it to support care costs.
To tie this all together, we need to provide information on all of this in an accessible place to allow people to think about retirement income and care costs in the round. I welcome the new Single Financial Guidance Body, which will go live at the end of this year and combine the Money Advice Service, Pension Wise and The Pensions Advisory Service. In my view, this service should incorporate the PLSA’s Retirement Income Targets.
The final piece of the jigsaw is a mid-life ‘financial MOT’ between the ages of 40 and 50. It’s exactly this sort of initiative that will get people thinking about retirement and the sort of lifestyle they want to live in their later years. It would help people plan for all sorts of retirement costs, including social care, and could nudge them to save more. All options for funding care needs should be on the table in these sessions, so that people can make preparations that they feel are best for them.
Fewer old people fall into poverty now, which is a huge social advance. But we need to do better to make sure that older people are not unnecessarily anxious about the extra financial pressures they may face. We also need to make sure that we all make better decisions when we are younger to minimise this anxiety. The Conservative approach is to give people a framework to make the right choices and a safety net to catch them when the best laid plans go awry. Long-term thinking needs to accompany urgent action on these matters.