This weekend, we had a street party in my Oxford neighbourhood as part of the Great Get Together to honour the memory of Jo Cox, the MP who was killed last year. For some of us with busy lives, it was the first chance we’d had to have a proper discussion with people we normally only have time to greet with a cheery “hello” and head on. No surprise, the recent election, the politics of Brexit, the fire in London, multiple terrorist activities were among the many diverse conversations had over tea and cake. But, somewhat surprisingly, what to do about the British social care system came up several times as well. The Government’s “dementia tax” is still fresh in people’s memories. One comment made: “so many of these issues are inter-connected and a bit overwhelming,” reminded me of a recent opinion column in the Financial Times.
The column by Merryn Sommerset Webb, Editor-in-Chief of MoneyWeek, brought up a very interesting point about one of the myriad issues that bear some indirect impact on the financing of social care in the U.K. Specifically, she re-visits the idea of capping the annual cost of actively managed investment funds and the impact that would have on the ability of more people to self fund their social care needs. Before the market was de-regulated in 1980, annual fees associated with active management of investment funds were in the 0.375-0.5 percent range based on restrictions from the 1958 Prevention of Fraud Act. But, since 1980, fees have steadily risen. Now, in the EU, annual fees in the active fund management industry range from 1.44 to 1.96 percent. This is substantially higher than the fees seen in the U.S. where several large firms have driven down the standard fee structure to a small fraction of what it is here.
So, why is this? Market analysts (see Auther, November 15, 2015) suggest that investors pay little attention to fund management costs, the industry perpetuates the idea that higher fees mean better managers (although there is no evidence of this), and there is very little price competition outside the passive part of the fund industry. (There is a whole other debate about the wisdom of actively managing ones retirement savings hoping to beat the market or passively putting them into index funds. Although the debate is beyond the scope of this blog, it is becoming more important as the UK moves from defined benefit to defined contribution pensions.)
In her editorial column, Webb provides a quick calculation of how much more a hypothetical retiree would have to pay their own social care costs if fees were reduced from 1.5 to 0.75 (a rate still higher than in 1980 and still higher than in the U.S. today). In this example, the person saving £300 a month for forty years will have at the end £24,200 instead of £20,000 in retirement income. The £4,200 in freed up cash would go a long way toward covering future social care costs.
The proposal to either improve fee structure transparency so that competition is encouraged and/or cap costs on active fund management is consistent with the Government’s claim that it will only step in when the market is not working. Clearly, this is the situation here. Regulators intervened when competition did not keep costs under control in the pension industry and have capped fees for a number of pension products: namely, stakeholder pensions and default funds associated with auto-enrollment work place pension schemes. The reasons for market failure may be somewhat different, but regulation would produce the same results—more money available for retirement needs.
The Government needs to find new ways to finance social care. Adding to the pressure of an ageing of the population are the unintended consequences on local council social care budgets of the rise in living wages from £7.20 to £7.50. Analysis of Skills for Care revealed that 43 percent of care workers (341,000 aged 25 and over) earn less than the new living wage. The increase alone is expected to cost local councils £360 million in the next year. The UK-based asset management sector, on the other hand, had an average profit margin of 36%. But, under the current Government’s promise of cutting corporate taxes, there is no taxation-related way to get at that healthy profit margin to support care costs that impact us all.
Although this idea does not solve the immediate problems facing the social care area, like the additional £360 million local councils need to find to pay care workers, it’s the sort of smart policy-making changes that would ease the future public share of responsibility. Government needs to strengthen both its short-range and long-range visions about how to take care of an ageing population and help an ageing population take care of itself. As we know, small changes over a long period of time can produce large effects. Indeed, many of the future solutions we need to consider rest on this principle.
References
“Number crunchers lift lid on investment choice” Financial Times by John Auther, November 15, 2015.
About the Author
Dr Laurel Hixon brings over two decades of health policy and applied health care research experience to OIPA. She has had academic research appointments in both the U.S. and Australia. She has written extensively about health and long-term care financing and reform
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