If you don’t know who’s paying, it’s probably you.


victomlessThe last few days have seen a reality check on who’s paying for the long term care of our elderly. Now I read this morning a report by the Resolution Foundation on who’s  paying for the deficit reduction plans for Defined Benefit pensions (hint- it isn’t the shareholder).

There is a simple truth at work here. If you don’t know who’s paying – it’s probably you!

As with care so with pensions

In the case of care, if the costs of residential and home care for the elderly, aren’t met from within the family unit, they call on local authorities, the NHS and ultimately on general taxation. The cost of funding is felt in closed libraries, the loss of cottage hospitals – all kinds of little projects that councils and the NHS have to cut back on. In the end, the cost is born by a future generation of tax-payer who must put up with less or pay more.

Resolution found that

“by far the biggest driver of the increase in non-wage payment increase in 2016 – was employer pension contributions”

That those picking up the tab are unlikely to be those benefiting

“With 85 per cent of DB schemes closed to new members and 35 percent also closed to future accrual, the population with most to gain from closing scheme deficits is likely to have limited overlap with the population affected by any reduction in dividend payments, investment or pay”

That the bill is (in part) being picked up by current workers

With the £19 billion relative increase in DB deficit payments that we have identified in 2016 being roughly equivalent to 2.5 per cent of the UK’s total wage bill, the implication is that such employer contributions are lowering average employee pay by between 0.2 per cent and 0.3 per cent.

And that

in the region of 10 per cent of the £19 billion elevation in special (deficit) payments can be directly associated with lower hourly pay

Resolution admits to not having completed the research on where the rest of the impact falls, but it does not appear to have hit dividend payments or executive pay.

It concludes

there is a significant negative effect (with a coefficient of 0.22 per cent) for those who have never been members when we concentrate on employees in the bottom quarter of the pay distribution

In short, the people paying for pension deficits, include those who have never paid for them – to a significant degree.

The clever win , the ignorant lose

What is clear both from the Resolution report on pension funding shortfall and from what is emerging about social care funding shortfalls, is that costs that are incurred by the better off (those who live long enough to fully enjoy DB pensions are also major beneficiaries of residential and home care) are being born by all parts of the workforce and indeed the wider society.

Those who instinctively opposed Conservative manifesto pledges, should be careful to think what the alternative of those with wealth meeting their costs actually is.

Those who are driving our defined benefit schemes along the grind-path to buy-out, should be aware of the wider impact of doing so on the workforce. I don’t here just mean the Pensions Regulator, the immediate enforcers of deficit reduction plans, but the PPF (with the extortionate levy which should be included in any “special contribution” calculation).

The ultimate beneficiaries of the pre-funding of defined benefit funding are

  1. the shareholder who is released from balance sheet misery
  2. the buy-out insurer (or PPF where deficit funding can be afforded)
  3. the DB scheme member whose interests are prioritised.

Arbitrary funding policies make matters worse

The arbitrary apportionment of cost of both pension scheme liabilities and long term care funding is made worse by the lack of consistency with which subsidisation is applied.

Let’s take first long-term care. There is ample research (see below) that the extent a family can seek relief from the direct cost of an elderly member falling into dependency is a post-code lottery. Steve Webb is rightly talking in a BBC article this morning about the disparity between Authorities in the application of cost deferment, but the Kings Foundation has found more worrying disparities between Authorities willingness to pay against the means test.

These reports point to growing skill among those wealthy and educated enough to know, to work of “game” the system for their own benefit. If you are skilled in understanding care funding, it is possible to get high subsidies, if you are not, you may pay the lot – even if you have relatively little to pay. The situation is analogous to the abuse of Church School education – which is monopolised by the children of the affluent – who wish to get a public school education at someone else’s expense.

As for pension deficits, the speed at which these are paid off depends on the willingness of employers to absorb the pain and their capacity to pass the pain on through low-risk activities such as reductions in pay and benefits to the current workforce. It is clear that employers will do anything within their power, including hugely expensive incentivisation of individual transfers, to get DB pensions off the balance sheet and the immediate expense can be justified to shareholders in terms of improvements to the balance sheet.

But the reality of such de-risking is not just a loss of value to members but a cost to the reward budget. As with care costs, there is a subsidisation of pension de-risking by those who are least likely to benefit.

No victimless crimes

The analogies I am drawing between care costs and DB pension costs are relevant to the current political debate. My general rule is that if you don’t know who’s paying, it’s probably you, applies. The clever people avoid paying and pass the costs on to the ignorant.

Some would argue that the answer is in social insurance but as with pensions, so with long-term care, social insurance can all too easily be gamed by those who have, at the expense of those who haven’t.

The current system of means testing long term care has been changed not by the shift in the means test from £23,500 to £100,000 but by the removal of the Cameron/Dilnot cap of £72,000 meaning that those with most to pay now have most to lose. This is undoubtedly fairer and though there is a lot of detail to be decided upon, it’s very much more transparent.

With transparency comes many benefits. At the moment, opacity is benefiting the clever and the rich, in the future we will pay for what we use, with a bar of £100k below which the inheritance cannot fall.

Many poor people will look at the bar and laugh at it as unattainable. For them long-term care need now have no fear. It is theirs by right.


In the few hours between publishing this blog this morning and publishing an update, the Conservative position has changed. As with National Insurance for the self employed. As for the review of pension tax relief, it seems that finding an owner for our long-term care costs, is back in the sidings of general taxation.


Further reading

Resolution Foundation – The Pay Deficit – http://www.resolutionfoundation.org/app/uploads/2017/05/The-pay-deficit.pdf

BBC article on arbitrary apportionment of care costs; http://www.bbc.co.uk/news/election-2017-39995648

The Local Government Association 2016 State of the Nation report on social care funding:  http://www.local.gov.uk/documents/10180/7632544/1+24+ASCF+state+of+the+nation+2016_WEB.pdf/e5943f2d-4dbd-41a8-b73e-da0c7209ec12

The King’s Fund is a highly (probably the most) credible think-tank commentator on the issue: https://www.kingsfund.org.uk/topics/social-care  – for their publications see: https://www.kingsfund.org.uk/publications/?f%5B0%5D=im_field_health_topic%3A27 .

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to If you don’t know who’s paying, it’s probably you.

  1. Colin Meech says:

    The fake austerity of the Tories is coming home to roost! If you can create £485bn of debt free mony for banks and others you can do the same for public services or other needs we have. The Bank of England’s money creation powers are only for the financial elites and Tory Party donors. Now they want your Mum and Dads house.

  2. Adam Saunders says:

    The issues around funding of Social Care are very complex. In essence, Local Authorities have funded the bulk of Social Care for those who can’t afford to pay for it themselves (an awful lot of people). Most Social Care is to help people live at home, very few people ever end up in residential care. Because Local Authorities fund most Social Care for those who have the most need, how Local Authorities are funded is a major issue. Their funding has been halved in many cases since the Conservative austerity agenda was introduced. Now the plan is, that instead of receiving a central Government Grant they will get nothing from Central Government and instead get to keep their income from rates and Council Tax etc to pay for things. So, local income pays for local costs. The difficulty is, that some areas of the country are wealthy and the residents are majority self-funding from their income (not capital) for social care, so there is high income for the local authority and little expenditure. Other areas of the country have very few self funders and very limited income from rates etc, so low income for the local authority but high expenditure.

    That, coupled with the announcement about the inclusion of house value in charging policies for care at home means that people who are ‘Just About Managing’ living in poorer areas with limited income in older age, may well end up owing £50,000 of the value of the their £150,000 home to the state. The home that they were hoping to leave to their children, who don’t have £50,000 to pay the cost, so have to sell the home instead and then spend the rest of their lives in hideously expensive rented accommodation (because they can never earn enough to get the required deposit). In wealthier areas, people will probably be able to meet the costs of home care from their income and so there will never be a charge against their £500,000+ value home.

    What is being proposed may seem ‘fair’ on the face of it, but it is going to bring into being a geographical disparity of wealth between the haves and have-nots that will be breath-taking in its impact and disturbing in how far the wealthy few are prepared to go to protect that wealth, at the expense of the ‘Just About Managing’ (who won’t be ‘Just About Managing’ for very much longer).

  3. henry tapper says:

    I’d be very interested to see geographical splits. Down South every available country house is now offering flats for the elderly with various levels of care. I suspect we’re outsourcing the problem as we can afford to, I would be interested to see a comparison to the North East

  4. jpklawlor says:

    I’m not sure how the volte face by the Tories demonstrates their negotiation skills for the forthcoming Brexit talks.

  5. henry tapper says:

    9 u-turns suggests flexibility and agility but not “strong and stable” – less Yorkie Bar – more Cadbury’s Flake

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