Peter Barnett, policy adviser to the House of Lords, says October's spending review will have a direct effect on financial services.
October's spending review will set out the government's plans for the next parliament, setting departmental budgets for the years 2011-12 to 2014-15. Protection Insurers can respond to the seismic changes ahead in terms of the funding and delivery of Health Welfare and Social Care in the UK, by engaging positively with government.
All the spending departments submitted their initial plans to deliver their priorities before the Summer Recess and while preliminary budgets went in on time it is understood some of these were promptly bounced back accompanied by the leitmotif ‘try harder'. The second efforts are now in, but exactly how the cuts will actually impact on the public we won't know until the review is published.
The Coalition Government continues to move very quickly and, having dealt with education in July, is wasting no time in moving onto health and welfare. Meanwhile, demographically and macro-economically, the storm clouds continue to darken.
In August, the Office of National Statistics (ONS) published new longevity data which showed life expectancy is increasing so rapidly that a child born today will live two and a half years longer than one born when Labour drew up its retirement age plans in 2006. At this rate, by 2030 there will be 5.6 million more people over the age of 65 than today.
The Coalition had initially planned to set the retirement age at 66 for men by 2016 and by 2020 for women. However, the ONS figures to raise the prospect that the date could be brought forward even further - possibly to 2015 for men and 2019 for women and both sexes could retire at 68 by 2038 at the very latest.
Time-bombs
As for capital flows, again in August, the US rating agency Moody's warned the recession has dramatically shrunk the time left for the big AAA states to prevent a full-blown sovereign debt crisis as their demographic time-bomb threatens. The group's quarterly Sovereign Monitor warns that while adverse debt dynamics were expected to materialise only in 15 to 20 years, the current crisis differs starkly from the ‘one-off' debt spikes after the Second World War, when young economies were able to outgrow the debt burden.
This time, the threat lies ahead as the ageing crisis drives up pension and health costs on a static tax base. The crisis has ‘fast-forwarded' history, eroding time available to adjust, and Moody's argue that to delay retirement age and pension reform risks an inevitable downward spiral.
At the end of August yields on ten-year Swiss bonds fell to 1.02%. Apart from Japan, no country in the developed world has ever seen ten-year yields drop below 1%. Rates remained significantly higher during the two great depressions of the 1870s and the 1930s.
In a recent client report, Arnaud Mares of Morgan Stanley, argues that debt-to-GDP ratios in the developed world greatly understate the true liabilities and ageing costs that threaten public finances, saying ‘investors are taking a risk buying sovereign bonds at this level'. Bondholders have so far been pretty well sheltered through the crisis but this is politically untenable as people will not suffer austerity for ever to pay the coupons.
There may be a significant backlash on the way from those groups who will be hardest hit, whether by mortgage debt, unemployment, dependency on public health and welfare, or redundancy from the public sector. Democracy will have its way and this coalition may be in for a rough ride. For evidence is forming of just how severe the impact of these cuts could be.
In August the Institute for Fiscal Studies (IFS) accused the Budget of being ‘regressive', which drew a sharp denial from Nick Clegg, for whom such a charge, if true, would be at complete odds with Lib Dem principle and policy. IFS suggested that "the biggest losers from the Budget are low income households of working age such as pensioners and families with children'.
The government's basic argument is that it is a question of priorities - rather than seeing the poor and needy as remote and powerless objects of charity, if you want a more equal society you have to first deal with the underlying causes of inequality - worklessness and low skills.
Again, such rhetoric does not sit at all well with the ‘Dem' wing of the Lib-Dems, so stand by for fireworks as the party conference season approaches.
Already there are stirrings of revolt; the public sector union Unison is seeking a judicial review of the government's proposed NHS changes on the grounds that the consultation process on plans to give GPs control of £80bn of NHS spending is unlawful as the Department of Health has already indicated the plans are non-negotiable.
Thus, the very groups financial services may have the opportunity to target seem likely to both be in a pretty fed up mood, and have less disposable income to spend - not a good recipe for developing long-term relationships. At the moment the focus is on the baby-boomers, but at least many of these have significant pension or property wealth.
However, Generation X, the cohort of folk between 30 and 50, is coming down the line and they will have much less accumulated wealth and assets of this sort. Many of them will have been hard hit by this recession in terms of propensity or ability to save, and at the younger end will also be saddled with student debt.
Any long-term settlement will by definition have to cover this group and thus the margin and reputation risks for providers, in terms of engaging directly with individuals who, apart from bank accounts and car insurance may have had little experience of financial services, could be significant.
Striking the right balance
I suspect marketeers, compliance departments and regulators will have significant issues in striking the right balance between meeting consumer need, facilitating product access and managing long-term customer perceptions around fairness and satisfaction - particularly about who provides and pays for advice.
The turmoil in the bond market outlined above does not make good reading for financial directors trying to grapple with current capital adequacy and reserving issues, let alone whatever Solvency II may bring. If capital, margin and reputational risks are all harder to quantify it may prove difficult for insurers to embrace the opportunities offered by these ‘once in a generation' changes in health and welfare provision.
That is why, rather than just beefing about restrictions and limitations, it is important for providers to talk to this government and share some of these issues in the round. Currently, both individual companies and representative groups are reaching out to engage policy makers and opinion formers, at both a national and local level, and it is critical that these tentative overtures are fostered and continue to develop into something stronger. There is a prize here for everyone, and if we are to participate fully, and get full value, from a truly ‘Big Society' then it must be worth making every effort to get our principles, values and limitations out on the table from the start. As Churchill once said - ‘Jaw-Jaw is better than War-War'.
Peter Barnett is a policy adviser in the House of Lords, an advisory board member of The Society of Later Life Advisers and chair of the Continuing Care Conference
