Financing a fairer society
Welfare is changing—enter “Rainy Day” resilience tools
This article was produced in association with Legal & General
Boomers vs millennials, workers vs pensioners, urbanites vs those living in the country—in 2016 you could be forgiven for thinking that there is more that divides us than unites us. And it really has nothing to do with the outcome of the EU referendum.
We’ve been trying to bridge, paper-over, manage or even repair these divides for decades. What, if anything, is different now? To alter slightly a William Jefferson Clinton aphorism, “it’s the inequality, stupid.” 21st century levels of wealth inequality are pushing each divide out, damaging our society and our economy.
Divisions impact peoples’ lives. There are many events that can destabilise a family’s finances; health, ageing, relationship status changes, the list is as long as it is varied, but the danger of each of these things is amplified in an already divided society. In an era of high consumer debt, low savings and a less secure labour market, these changes in circumstance can suddenly push a family’s income from prosperity to below the poverty line.
Macmillan Cancer Support research shows that 83 per cent of those diagnosed with cancer suffer a net loss of around £570 a month over the course of their illness.
Despite paying their National Insurance contributions, people earning average wages can soon find their income drops to less than £100 per week; is this a good deal for working people?
Research shows that people tend to overestimate the help that the state provides. Most state support for out-of-work people will grow only marginally in the next couple of years. As the welfare state changes for working people, families need to put in place their own resilience planning.
A resilience toolkit will, of course, include the support offered by the state, but it should also include other tools provided by other organisations. A key part of financing a fairer society is supporting families to build their resilience planning. Resilient families don’t get left behind. That is why we have been working with think tanks, with politicians of all parties, with our customers and with government, to design a set of “Rainy Day” resilience tools.
These are new social insurance schemes, jointly delivered by government and companies like L&G. This system could not only reduce some of the cost to taxpayers but it could also help raise the level of pay-outs to claimants, possibly by as much as two or three times.
For example, a Rainy Day Guarantee could provide a person who earns, say, £27,000 a year with £900 a month (40 per cent of their take home pay) instead of the £404 a month which is currently paid by the state. The cost of this could be as little as 0.5 per cent of earnings, or £11 a month on average.
An insurance system is much more practical than people saving £11 a month, where with interest rates close to zero per cent, it would take nearly three years to build up £400.
The administrative plumbing for a Rainy Day system already exists, in the greatest IT project you’ve never heard of, the auto-enrolment system, which links up employers, pension providers, employees and the government.
Financing a fairer society should not just address the concerns of people who are working, it should support people of all ages. However, we have built an inter-generationally unfair society. The great divides of our time are between the old and the young; between the defined benefit and the defined contribution pensioners; between the baby-boomers and their offspring; between the sandwich generation and their parents.
In the UK, there are 20 million over 50s, there are generations within generations. Grandparents now take care of their parents as well as their grandchildren. Intergenerational inequality could do as much damage to our society as income inequality.
There has been a tendency in public policy and in financial services to lump all of the seniors in together, particularly the over 65s. There is one thing for sure—there is no such person as the average British pensioner. The sector and the government needs to realise this and build a suite of policies and products to support the needs and ambitions of the over 50s.
It’s not just about supporting the ambitions of people in the decumulation phase; for those on the road to retirement, there are significant obstacles in their way. Given that only 47 per cent of people had a private pension up to 2012, many in their 40s and 50s have inadequate retirement savings. Retirees are also carrying debt over into their retirement. It remains to be seen whether the government will continue with the Osborne pensions agenda, which has already had a significant impact on the finances of the elderly. The introduction of the Lifetime ISA is to be welcomed but it should be remembered that savers will miss out on an employer contribution if they try to use it instead of an auto-enrolled product.
Auto-enrolment is a big success, getting 12 million people to save for retirement for the first time. It is also a great example of the government, employers, providers and consumers working together—one we should not forget when shaping policy.
In the DB world, where income levels can vary, a pension will be an important part, but not the only part, of peoples’ income in retirement. We need the same sort of resilience planning in retirement that we do for our working age.
Retirement income is already part-funded by state entitlement, workplace pension, and for some people, from their property, in terms of either rental income or equity release.
While home ownership rates have taken a dip recently, the biggest asset that many people own as they transition out of full time employment is their home. In 1981, fewer than half of the over 75s owned their own home (47.1 per cent), since then this has increased dramatically to 75.6 per cent. The figure is even higher among the 65-74s at 78.6 per cent.
Resilience planning at this stage in a person’s life is not only about income, it can also be about the care and support they need to get the most from life. With care costs running to nearly £40,000 a year with nursing care, for the current generation of very elderly people, using housing equity to pay care costs seems logical.
Housing equity can be one part of resilience, but a fairer society needs more.
Real financial resilience, the kind that can help families to stay above the poverty line when a crisis hits or that supports better retirements, needs a big, bold partnership, just like the one that delivered workplace pensions.
We think this partnership should have four big goals:
- Bigger and better workplace pensions, with employers and employees gradually contributing more into existing schemes;
- A good value set of Rainy Day products that bring back the contributory principle for working people.
- Encouraging greater use of lifetime mortgages as part of retirement resilience
- Looking again at care costs.
If we are going to tear down the divisions between young and old, rich and poor, strong and vulnerable, then we need to set about building a big, bold partnership to finance a fairer society. I’m optimistic that this can be delivered—as a nation we’ve faced bigger challenges, we just need to pull together.
With the support of Legal & General, Prospect hosted a series of events on financial resilience at the 2016 Conservative party conference and the 2016 SNP party conference. Andy Davis, Prospect’s Finance Editor, chaired the discussions. Speakers included: John Glen MP, PPS to the Chancellor of the Exchequer; George Kerevan MP, member of the Treasury Select Committee; Dr Paul Monaghan MP, Vice Chair of the APPG on Debt and Personal Finance; Jackie Noakes, Managing Director of Savings, Legal and General; Ted Hart, Head of Public Affairs and Policy; Josephine Cumbo, Pensions Correspondent, Financial Times; Sharon Bell, Head of StepChange Debt Charity Scotland; Jane Vass, Director of Policy and Research, Age UK; David Willetts, Executive Chair, Resolution Foundation; and Yvonne MacDermid OBE, Chief Executive of MoneyAdvice Scotland.
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