................................................................................ ON THE RECORD RECORDED FROM TRANSMISSION BBC-1 DATE: 3.3.96
................................................................................ JOHN HUMPHRYS: Good Afternoon. We cannot afford the Welfare State to continue as it is - or so the politicians tell us. So what's the Government doing to protect us when we're old? I'll be talking to the Social Security Secretary, PETER LILLEY. That's after the News read by MOIRA STUART. NEWS HUMPHRYS: Mr Lilley, you've made clear that Welfare has got to be reformed and clearly dealing with the elderly is absolutely central to that. You've got to make sure, haven't you, that the burden of looking after people, long-term care of old people, doesn't continue to rise? PETER LILLEY MP: Well we've got to accept that there will be more elderly people and they'll need to be cared for. I can well understand the feelings of people like the lady you interviewed, who have worked and saved all their lives, resent finding all their capital absorbed when in the same residential home there may be someone who's managed to squander the money, never saved in the first place, or worse still found some devious way round meeting that cost and I think the Chancellor is right to double the capital limits, the amount that people can keep, in fact treble the minimum they can keep. But what we are going to do is issue a consultation paper before Easter, we hope, which will set out various ways which we could encourage better provision to enable people to cope and prepare for this risk before they ever enter residential care. So we will build on the success that we have had on pensions of persuading people to build up funded provision, to make actual genuine savings and investments for their old age and we are more advanced in that than any other country in Europe. HUMPHRYS: But part of your long-term aim is to reduce the long-term burden on the State. LILLEY: Yes or on the taxpayer. HUMPHRYS: On the taxpayer, on us precisely. And that is what you have got to do because eventually it isn't going to become...non viable is it. We are not going to be able to do it. LILLEY: Well we are better placed there than most other countries in Europe. Countries in Europe tend to use this year's tax revenues to pay for this year's pensions. They don't actually save or set aside anything for the future. We by contrast, have persuaded the bulk of the population, the working population, to opt out of the State Earnings Rated Pension Scheme and actually invest in private schemes. HUMPHRYS: Just stay if you will with long-term care for the elderly.... LILLEY: Can I just point out a contrast...I think.... HUMPHRYS: I want to come to pensions.....but long-term care of the elderly is what we're talking about at the moment. LILLEY: This is what we've got to build on. But when people opt out of the State Pension Scheme into private schemes, their money is actually saved and invested. It does go into industry, it builds up assets to pay for their pensions. Likewise, it should be possible, in preparing for long-term care, for people to prepare, and that's an eminently insurable risk and it's a huge cost for some people who go into long-term care and stay there for a long time but....because it can cost ten, twenty thousand pounds a year for the care but the average amount of time people stay in is two or three years, very variable, between different people. And only one in six actually of us do tend to go into long-term care at the end of our lives. So we ought, as it were, all six of us, to spread the risk over the population at large by encouraging insurance schemes and the like. HUMPHRYS: Right, so that is the ideal, that we should all be insured, all of us, against going into a home when we get old. LILLEY: To make specific provision, it can be insurance provision or savings provision as people wish and we want to have the right tax system, the right set of incentives for people to do so. HUMPHRYS: It's going to have to be compulsory then
isn't it. LILLEY: No, not necessarily because it is increasingly attractive for people to do so if you get a market going and if you have the right incentives. We will be looking in particular at partnership schemes where if people do make specific provision for say fifty thousand pounds worth of care, and then subsequently stay in longer and need more help, then they will be able to keep substantially more a commensurate amount of their assets free and get free help at that point. HUMPHRYS: You say it's becoming increasingly attractive, two and a half thousand people in Britain at the moment are insured, that's miniscule. LILLEY: Well sorry, we haven't yet even launched our discussion paper, let alone made any...(interruption)...but these schemes that I'm talking about don't exist and we will, the Chancellor announced the plan to consider them and consult about them in his budget, we will be issuing a consultation paper, then we hope to get such schemes under way. They will give a kick start to the insurance market which is already beginning to think about this in a much more constructive way than they ever have done in the past. HUMPHRYS: Well may be, I mean they do exist in the United States and two per cent of the population of the United States take advantage of them, they've been there for a very long time and there are lots of what they call products on the market. LILLEY: Well I don't think beyond two states they have the sort of schemes that we are thinking about and we have perhaps a population that's more responsive to the sort of incentives that I'm thinking of. HUMPHRYS: On the contrary, in the United States they are well used to buying insurance, they have to do it for their own health, so they're very well used to it, we're not. LILLEY: Perhaps that's why they don't want to take anything on top of that. We're not considering changing the National Health Service's financial arrangements. HUMPHRYS: Of course, what's going to be in this consultation paper then. What will you be looking at? LILLEY: Well one of the things we will be looking at is the sort of partnership scheme where anyone who does make specific provision, probably through an insurance policy to meet a fixed amount of care say, say fifty thousand pounds or two years or something, if they then stay in longer than that, and therefore haven't got insurance care after that, then they will be able to protect that amount of assets on top of their sixteen thousand pounds and if they are drawn down to that level, get help much earlier than would otherwise be the case. HUMPHRYS: The danger's going to be though, isn't it, that the premiums will be very high because so many people will say this is a relatively small risk, one in six as it stands at the moment, as you've been saying and the temptation will be to say: "I know the State will take care of me, if I don't do it, so I'll let him do that"....risk. LILLEY: It shouldn't be huge because if it's spread over a number of people then we each only have to bear one sixth of the cost.... HUMPHRYS: But if we all did it that would be the case... LILLEY: For those who do do it and therefore it should be a matter of a few thousand pounds, perhaps up to ten thousand pounds cost for the premium which spread over a few years for people to accumulate is not impossible. Also for people to take a charge on their houses or whatever, still leaves them with a lot of their capital assets, protected and secure and able to pass on to their decendents if they wish to. HUMPHRYS: You're being a bit optimistic aren't you, outside experts have looked at it and said in the end you are going to have to come up with some sort of compulsion unless you make it clear to people that if they rely on the State they'll get very little indeed. LILLEY: Well if we possibly can I would like to see us relying on the voluntary system rather than compulsion. Even in Germany which is alleged to have a compulsory system they still have means testing of the house, indeed, a rather more Draconian means testing of the house and it's only the medical care which is insured, not the residential care. HUMPHRYS: Right, you said if we possibly can, so you don't rule out compulsion. LILLEY: Well I never say never about anything. But I am starting on the presumption we'll do it as a voluntary process. HUMPHRYS: Alright let's look at pensions now then. Mr Portillo has said that people should expect the real value of their State pensions to decline and I think most people would accept that that is what is happening.... LILLEY: Not the real value but the proportion... HUMPHRYS: Well he went a bit further didn't he. He said the basic State pension would become nugatory, I think was the word that he used, so he was quite clear about what he was talking about there. Does that mean that in the long-term you want all of us to make our own provision for a private pension, some sort of privately funded pension. LILLEY: Indeed, we do compel anybody who is employed to put aside nearly five per cent of their income, either in SERPS or as the bulk of them do, opt out of SERPS and put it into private provision and obviously we've never concealed our desire to see as many people opt out of the SERPS, the State system as can do so with advantage. HUMPHRYS: And many people have done that because you have chipped away at it. But the problem is that as far as private pensions are concerned, private provision is concerned the growth in corporate pension schemes, well that's stopped altogether, the growth in private pensions has pretty well slowed down as well, hasn't it. LILLEY: It's slowed down just recently, though the underlying growth was much greater than we anticipated when orginally we set up the process. HUMPHRYS: That was a spurt though wasn't it, then we had an awful lot of bad publicity, lots of people were being ripped off with them. LILLEY: Then there was the concern about the initial mis-selling, that's now being put right by the Securities and Investment Board and that's given an assurance that anybody who was mis-sold will receive restitution. Now I think that will restore confidence, it will be possible then, effectively for the industry to relaunch itself with greater confidence. At the same time we've undertaken a number of steps to try and reduce the costs, the administrative costs of basic pensions and recently I've been announcing measures to encourage the growth of group personal pensions so that employers, small companies, new companies who don't have their occupational schemes can nonetheless easily, administratively, set up a scheme for their employees with relatively low costs for them, low costs for the employer, perhaps the employer chipping in some money in addition to the amount that the employee chips in and that would cover a greater share of people at work. HUMPHRYS: Signs are that that's not going to be very popular either, because you say a relatively low cost but there will still be cost involved and employers are nervous about taking on extra burdens for perfectly understandable reasons. LILLEY: Well, a good personal pension scheme means that they don't have to take on all the administrative costs, they hand over the administration to an insurance...(interruption)...only what they choose to adopt themselves, if they choose to adopt an extra five per cent of salary going into that scheme, that's up to them, they can measure it and it's part of the renumeration package they offer to attract employees, and that's of course what they want to do. They want to offer the best mix of benefits to their employees so that they get the best type of employees into their firm. HUMPHRYS: But you can't be sure, can you and again many outside experts say that isn't going to be terribly effective, you can't be sure that many more people are now going to start making private provision for themselves. There's absolutely no way you can be certain of that. LILLEY: Well, I think we can, in that the encouraging thing with personal pensions is that more than half of them are now taken out by people below twenty-five, so it's actually the younger people who have been taking them out. The system did encourage them to switch back into the state system because there was a flat rate rebate which became less advantageous as you became older. We're going to introduce an age-related rebate which will make it attractive for people to remain in the private system throughout their working lives and the good news is that though people think the young are all feckless, and so on, a disproportionate number of them have been taking out these policies and we want to build on that and encourage it in future. HUMPHRYS: But we're still taking about relatively small numbers and the burden is still going to remain very high on the State. Aren't you once again, going to have to consider some sort of compulsion here? LILLEY: We do have complulsion . HUMPHRYS: For SERPS yes, but you've been whittling away at SERPS. LILLEY: We've made sure that it's affordable. But we do require every employee in this country to put five per cent of their income into.... HUMPHRYS: Many people aren't employees, plenty of people who are self employed. LILLEY: ... self employed and the self employed obviously often consider their business as their pension and they don't want to make dual provision. We have to consider that, the original decision was that to force them to make savings when they were already saving and investing in their business wasn't necessary, but they do have opportunities and a great many do take advantage of that opportunity to invest separately from their business. HUMPHRYS: But I'm talking about some sort of compulsion to make people make private provision... LILLEY: Bigger compulsion...you're saying bigger compulsion. HUMPHRYS: Alright, if you like, bigger compulsion. LILLEY: We can always consider that. But what one has to do is be honest. It's not a cost-less option to make people save ten per cent instead of five per cent. It means that they have five per cent less to spend. And that..feels much like a tax. Call it what you will. It feels like a tax and it feels like losing ten, twenty pounds a week out of your wage packet. It that is what people are proposing, then they should say it. We think it's better to have a basic minimum system which is compulsory on top of the flat rate basic pension, so that everybody has an element related to the amount...their living standard at work to make sure that when they do retire, they don't see too big a fall in their living standard. If they want to save more on top of that, fine, we want to encourage that. That's the third tier which I was talking about the other day, we want to encourage more of that through the extension of group personal pensions, more people taking advantage of individual personal pensions, more people making additional voluntary contributions into their schemes. And there's a great more deal of that going on than there used to be ten years ago. HUMPHRYS: You say it would feel like a tax, but the difference, of course, is that people would know that that money was going into their own fund which they would be able to to call upon when they needed it, when they got a bit older. Not at all like paying into SERPS in that sense, is it, because in SERPS you're paying today - not for your own future, you're not building up your own fund, you're paying for pensions that are coming out of the system now, as we speak. LILLEY: Well, for the small number who don't opt out of the SERPS scheme, but in the basic provision for three quarters of those eligible to do so is exactly in that form, it goes into an occupational or personal scheme, it is building up for them in future. They can put in additional amounts, we would encourage them to do so. HUMPHRYS: Why don't you get rid of SERPS to encourage them to do so - those who are still in SERPS. LILLEY: We originally did propose no SERPS scheme, abolishing it entirely. The reason we decided to keep it was that there was a group of people who tend to have volatile earnings and employment patterns, for whom the costs of providing personal pensions would absorb too much of the premium, industry told us that, employers told us that. So we kept the existing SERPS system for those whom it's not worth while to opt out. Now the more people we can make it worth while to opt out through getting down the costs of provision, the better and the more we'd like it. HUMPHRYS: So much for the longer term then. Let's look at this interim period as people describe it, because there is a problem here, isn't there? There's a sort of double bill for the people. We've already touched upon this. People are going to pay twice, both in terms of private pensions and in terms of long term residential care if that's what they need. They're going to have to finance their own pensions for the long term and they're going to have to pick up today's bills for those people who need it? LILLEY: Certainly, if you ever try to move towards a funded provision, people actually making their own provision, investing it and so on, but you start from a position where the next generation is expected to pay, there will be a period when one generation pays twice. In the case of long term care, we're really trying to build up something which has only existed for a smaller number of people in the past, because only a smaller number of people lived these lengthy periods. There always has been some provision, it's always been means tested as it is now, it's always taken into into account your capital and your home and other assets. HUMPHRYS: But there are many people watching this programme who feel as if they have been cheated. They've been paying National Insurance all their lives, may have been paying into SERPS as well, and they feel that their benefits have been whittled away to the extent that they've...they can live alright, they may not be starving in the gutter, but they can't buy the little luxuries that perhaps they'd expected, they can't have the holidays. You must get the letters, I certainly get the letters and after a programme like this, I know I will get many more. LILLEY: Each of us in our own family will have relatives who are in residential care or may have to go into and we know the costs involved. It is very expensive, we surely must try to move towards a system when more people can be provided for in a way that enables them to live their retirement in dignity, where old age is a boon and not a burden to them and to the country and that will only be the case if we have more provision in advance of people going into care, rather than loading all the burden on the taxpayer and...with the immense burdens that puts on the economy at a time when we have more and more people of working age...of retired age and fewer people of working age. HUMPHRYS: You've got this massive political problem, haven't you, persuading people somehow or another that they've got to pay twice, because that's what it comes done down to in the end? LILLEY: I don't think they are paying twice because it has always been the case... HUMPHRYS: If you're going to arrive at the situation that you want to arrive at, that is the price that's got to be paid. LILLEY: It's always been the case since 1948, since the Welfare State was set up, that the existing system of state provision
with means testing, has existed. If we can get more and more people who don't fall into that trap, who've got their own provision, so much the better. HUMPHRYS: But if people didn't read the small print.... LILLEY: ... it's not a small print... HUMPHYRS: ...of the Beveridge plans. Well you say that, but people get used to a situation that's developed over the generations, they don't go back to Beveridge and say: "well of course, that's what happened then, that's what was intended to happen then". What they say is "I've paid this money into the State, I expected to get something out of it, I didn't expect to have to sell my house, for instance, if I have to go into long term care". So the wealth can't cascade down the generations in John Major's term, or in their terms "I can't pass it on to my children" LILLEY: That is why we've increased the capital limits, the amount of capital people are allowed to keep... HUMPHRYS: Still relatively small though. LILLEY: Yes, but it's trebled the minimum amount, doubled the limit up to sixteen thousand. If we can, in addition, give people the opportunity to protect themselves and still leave themselves free to pass on the bulk of their assets to their children, that must be a much better system than passing it all on to the taxpayer, or sitting with a situation where the full brunt of the means test applied to people as it has since 1948. We're talking about a system that will be better for people than the system that's applied for the last fifty years. And of course, the reason it's become more salient now is that there are more people are living longer, there are more people with homes than there ever were in the past, and so more people come into that, and also it has to be said, because some people have found ways of manipulating the system and they cause resentment among the honest majority who don't. HUMPHRYS: So the logic of all this is that one way or another, people are going to have to pay twice and and you don't rule out the possibility - I stress possibility - you don't rule out the possibility of you compelling them to take out some sort of private insurance to cover long
term costs in homes or indeed private pensions. You don't rule out anything, as you've said. LILLEY: I mean when you say paying twice, at the back of your mind must be a suggestion that we move away from the system that we've had for the last fifty years..... HUMPHRYS: ...not affordable, what we've got is not affordable if people are going to live their old age in dignity, not just survive, but live with some dignity. LILLEY: I've spelt out what we think, I'm trying to work out what the alternative you're posing to everybody is. Surely, the alternative you're posing is to abolish the system we've had for the last fifty years and put it all on the taxpayer and enable Mr Hanson or Lord Hanson or whoever he is, to have free care and pass on all his assets to his children at the expense of the taxpayer. That's what you're moving towards, I think. HUMPHRYS: Well, I'm merely trying to sum up what you appear to be moving towards. LILLEY: I'm moving toward a system where more and more people have made provision which enables them both to live in dignity in their retirement and to pass on a substantial chunk of their assets to their chidren if they want to do so. I mean they may not want to do so. But that is a much better position. HUMPHRYS: Peter Lilley, thank you very much indeed. LILLEY: Thank you.