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A fairer way to fund long-term care

February 1, 2017

For many years we have been anticipating a crisis in social care funding. Successive Governments have looked at the issue and then stepped back from any decision in the hope that we can muddle through.

Last week’s decision to encourage councils to increase council tax to put more money in the system means we have finally reached a “tipping point”. But is this really the right way to address the problem?

Council tax has moved from being a low level tax with significant central funding to one which, increasingly, is actually a local tax which many families find is a significant amount and is set in and extremely regressive way.

This is because it is based on a proxy for asset value which does not differentiate between those who actually hold the assets (home owners and landlords) and what tenants pay is based on the proxy value of a house which they do not own. In addition, support for those on low incomes has reduced.

The Money Advice Trust’s Stop The Knock campaign revealed that 1.27m debts were passed to bailiffs by local authorities in 2014/15 for council tax arrears, an increase of 16% over a two-year period. Since 2013, most English councils have introduced minimum payments for people who were previously exempt.

On average, these families are required to pay £171 in council tax per year. Hundreds of thousands of people have ended up in court, forced to pay £150 in fees and administrative costs, causing the debt to spiral.

Council tax is one of the few debts where failure to pay can result in imprisonment. Without a root and branch reform of local taxation to make it more clearly related to capital and income, increasing council tax is possibly the worst way of getting more money in the system for social care.

So what should the Government have done? It depends on what you are trying to achieve. One option would have been to return to their Manifesto commitment to introduce the Dilnot recommendations.

The Government proposed a much higher upper limit of £118,000 to allow more generous treatment of the assets held in the home and a higher savings limit.

In addition there is the cap (excluding living costs) of £72,000 such that once this cap is reached no further costs. except living costs, would be incurred. The Government shelved this because of costs but the decision on council tax shows that they accept the need for more resources.

The problem with the Dilnot recommendations is that they only result in more money in the system if individuals save, or insure themselves, such that they have more resources than they would have done if they hadn’t saved or insured. Any why would they do that if it is offset £ for £ through the way means testing operates.

Also last week, a new ILC report “Means Testing Social Care in England” by Professor Les Mayhew, suggests some possible solutions to the conundrums of inequality of treatment between assets and income and encouraging savings for long term care.

The report takes the view that it is a general principle that income and assets should serve a common purpose and be regarded as interchangeable as far as paying for care is concerned. And that a system of financial support in which assets receive more favourable treatment than income will tend to favour those whose wealth is skewed towards assets.

Not only is this unfair, but it will increase the effect of people seeking to gain an advantage on the State by shifting wealth between income and assets.

Without going into the detail of the calculations, let’s take three individuals.

Under his preferred solution if person A has £66,667 of savings and £5,000 income; or Person B, with £50,000 of savings and £10,000 income; or Person C with £33,333 of savings and £15,000 each of them can afford 3.33 years of care and each therefore receives the same level of support from the State, (i.e. £8,333).

Yet under the Dilnot solution, the levels of support would change. A receives £9,669, B receives £8,136 and C, who has fewer savings than either A or B, gets only £6,603. So having more wealth in assets than in income becomes advantageous.

The asymmetric treatment of people with the same ability to pay for a given package of care creates an anomaly if we are seeking to introduce a system which strikes a fair balance between individuals of similar means faced with the same care costs.

Beyond that, while the means test offers an important safety net, it deters people from saving for care, and so potentially crowds out new sources of finance.

To address this the report calls for incentives to set aside money for care in the knowledge that it would not be simply taken away by an equivalent reduction in State support on a £ for £ basis.

The report is sceptical about insurance solutions, but I can see that a kind of critical illness product with a lump sum payout could have an element of the payout disregarded for means testing on admission to a defined level of care in a similar way to the disregards on savings that are contained in the report.

The Mayhew report is a valuable contribution to the debate on the future funding of long-term care and the current “quick fix” of rising council tax is unfair and regressive.

I think the report is also very interesting in thinking about the broader issue of what would be a fair way of setting what is now becoming a local tax without central funding; with a fairer balance between those who actually hold assets (and their actual value) and levels of income.

Written by Richard Walsh, SAMI Fellow and first published in Cover magazine, December 2016. 

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Diagnosing and Future Proofing Governance and Risk Management Issues

January 25, 2017

The CRSA Forum exists to share and improve understanding on the people aspects of governance and risk management. It met in December 2016 to consider why corporate governance and risk management have failed to prevent frauds and financial crises.

Peter Bebb of Perendie began by reminding us of recent corporate collapses and corporate wrong doing including mis-selling, fraud, rogue trading, poor controls over corporate assets resulting in security beaches and loss of physical assets and oil spills, and failure of care in the NHS and the reputation damage resulting from these incidents.

Corporate governance and risk management don’t take human factors, such as incentives and how we make decisions, into account. Governance and risk management reports were seen as backward looking and obscured by detail. They don’t support decision-making, tell you whether rules are being followed or are likely to be followed or how the organisation will perform in future.

Causes of failure of governance

In small groups we reflected on the causes and Tweeted our opinions of the causes of failure. We then voted on which were the most important.

  1. Recognising & agreeing risk plus complexity of risk
  2. Personal interest and lack of personal responsibility on individual board members
  3. Lack of transparency or ethics
  4. Lack of appropriate personal responsibility (Most important)
  5. Short term targets, over long term culture (3rd choice)
  6. Poor ethics and accountability at the top
  7. Board clarity & accountability
  8. Governance is very challenging in an ever changing world
  9. lack of protection of whistleblower, rule breakers don’t often lose out (2nd choice)
  10. Not just the rules, culture too

One group talked about the need for individual and shared responsibility within an organisation and how their lack has contributed to governance failures. Organisation should be set up so that individuals are treated as responsible adults where relationships are built on trust rather than control.

Areas for action

We Tweeted our suggestions for action and then voted on which were most important. These were:

  1. Culture and values (Most important)
  2. Clarity of purpose, enabling appropriate behaviour (3rd choice)
  3. Individuals understanding what is expected
  4. Recognising & agreeing risk plus complexity of risk
  5. Create an international body who is able to hold the board to account
  6. Accountability & audit design
  7. Culture change – incentivise not penalise (2nd choice)

Gill Ringland, CEO of SAMI Consulting, led the meeting in exploring the future role and challenges for governance and risk management using four scenarios for 2040.

sami-crsaThe ‘Second Hand’ scenario is the most similar to today and has developed as a result of the changes above without any significant disruption or systemic change. In ‘Globalisation‘ the main change would be the increased importance of virtual (web based) connections with less significance given to geographical place. In ‘City Societies‘ cities become wealth clusters or brands, nation states fail and democracy, capitalism and western values compete with other organising concepts within different cities. In ‘Affinity Groups’ society has re-formed around affinity groups; multiple value systems are accommodated in a single geography. In this scenario, London could become 20 or 30 ethnically diverse clusters, all globally linked more strongly than their local interactions.

We considered the scenarios in groups. The Globalisation group considered that virtual working would mean more isolation. Traditional management and governance controls may not work if people did not know what others were doing creating problems with lack of accountability and responsibility. Alternatively virtual working could make it easier for corporations to control staff, with unseen but all seeing eyes knowing where staff are and what they are doing.

In the Affinity Groups scenario groupings could form around common languages, corporations and conceivably intelligence as in Aldous Huxley’s Brave New World. Current concepts of control and responsibility may no longer be needed if people share a common purpose and culture, e.g. the current issue of formal incentives incentivising the wrong behaviours could be less if people have a common framework. However there could be rivalries e.g, between all powerful big corporations (as one Affinity Group) and other groups.

A newspaper headline in City Societies might read ‘London’s per head wealth 10 times that of Birmingham’ – there are winner and loser cities. International affinity groups, including corporations, would be more powerful. Staff in corporations would have different cultures in different cities or they may try to impose a common culture across all the cities where they have staff. There would need to be trade agreements between cities and some commonality in the legal systems. Cities would have good internal controls but there could be chaos externally. The more successful global cities might negotiate common frameworks benefitting all cities or they may benefit only themselves with other cities ultimately disintegrating or being taken over by other cities. Some cities may create armies to expand by conquest. Others would expand by succeeding in the market place.

People felt that a combination of City Societies and Affinity Groups could be quite likely.

So what should we do today? The future is unknowable but consideration of these scenarios could help us understand the world as it changes and spot what is happening earlier. The view of the room was to have capitalism with social responsibility and a shared sense of values and ethics. We should all try to view companies and the systems within which they operate from other perspectives looking down as if from a helicopter or observing it from distant vantage points, or from the eyes of different stakeholders. We should focus on purpose but beware people whose purpose is not socially benign.

Some conclusions

·       Globalisation, in some form, seems likely to continue in all four scenarios.

·       Governance will need to embrace technology.

·       In City Societies there must be accountability for leaders and transparency for cities and organisations.

·       The importance of culture in governance is emphasised by Affinity Groups, governance structures need to reflect the values of diverse cultures.

Notes

  1. Gill Ringland’s PowerPoint slides can be downloaded here
  2. Peter Bebb’s PowerPoint slides can be downloaded here
  3. Slides showing participants Tweets and priorities here
  4. More information about the CRSA Forum can be found at http://www.crsaforum.com
  5. Join the CRSA Forum Linked In Group here
  6. For further information or if you would like to attend future meetings contact paulmoxey@crsaforum.com
  7. The next meeting will be on Board Oversight of Risk

Written by Paul Moxey, SAMI Fellow.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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What a month for welfare reform and income protection

January 18, 2017

The world is changing. 70% of long-term absences are amongst employees of small or medium enterprises with 43% being people who work for employers with fewer than 50 staff; 60% of absences are accounted for by women and 57% of absences are amongst people under the age of 50.

And savings for a rainy day are very low. The latest MAS research (September 2016) found over 16 million people have savings under £100. Clearly income protection insurance (IP) and the welfare state are the only show in town for the vast majority of the UK population who are too ill to work.

But IP coverage is small. If you combine IP bought by individuals and employers for their employees there are about 3 million people covered.

By way of comparison, the Sergeant Review of Simple Products noted that a further 23.5 million adults could potentially benefit from Income Protection.

But IP is not just about financial support. Legal and General, has published statistics on those who returned to work in cases where early intervention rehabilitation was provided: 78% of all notified GIP claimants returned to work before the end of the deferred period and 83% did so within the first year of absence.

These figures are replicated for mental health and musculoskeletal claimants. Research shows that there is a £16.80 saving for every £1 spent with rehabilitation on group scheme claimants.

Meanwhile, welfare state provision is being scaled back. Currently, under Universal Credit, owner-occupiers with a mortgage must wait for a qualifying period of 9 months before they are entitled to any support for their mortgage payments.

In addition, no help is available if you (or your partner) have any earned income. This is in contrast with other elements of UC, where the intention is to make working worthwhile.

In the summer budget of 2015, the Government announced that, from April 2018, payments towards mortgage interest will be turned into a loan from the Government.

The loan will have to be repaid when the house is sold or on return to work. This policy remains unchanged following the Autumn Statement. As for generation rent, there are housing benefit restrictions which are set locally based on lower end rental costs.

These were also to have been capped from 2018 but this has now been postponed until 2019. Finally, Universal Credit deducts IP bought by individuals on a £ for £ basis – including any provision for mortgages and rent even if that money were to be paid direct to the creditor.

This is unlike the situation for “earned income” where the taper will be improved from 65p/£ to 63p/£ from next year. A key aim of our report is to encourage a debate on the future of the interaction between IP and welfare benefits.

Green paper vs Autumn Statement

It was very encouraging that the day after our launch the DWP and DH launched their joint Green Paper on work, health and disability.

In it they set out their vision for the future. Four of the six elements of the vision complement our report very well. When an individual is in work they should have jobs that actively support and nurture health and wellbeing.

If at risk of long-term sickness absence they should encounter early action to stay in, or return to work. If out of work due to health or disability they should encounter the right support to secure work.

And if an individual is unable to work they should have access to rapid financial support.

Two publications well aligned. What could possibly go wrong?

We found out in the Autumn statement on salary sacrifice. Gym membership and Group income protection (GIP) bought by choice through employers is to be taxed.

Given this decision has been made now – bang in the middle of the Green Paper consultation process – indicates that the old problem of lack of joined up Government is as persistent as ever.

So what next? In my view the focus of discussion needs to focus on IP and what happens at claims stage on interaction with state benefits.

If we can show that change could be made a no cost to Government to encourage, rather than penalise, individuals for supporting themselves I still remain optimistic that we can make progress.

In addition, IP has a much greater chance of rapid growth with changing employment patterns towards more people in small companies that have less interest in GIP and the end of the “job for life” – as it is portable from one job to the next.

We will need to engage with a wide range of stakeholders during the Green Paper consultation period including across Government departments.

As for lobbying for tax relief, the Autumn Statement shows that this is a non-starter.

And worse still, for those who support auto-enrolment for GIP, it is difficult to see the case for an opt-out system for a taxed benefit.

Suddenly the difference between the treatment of pensions and GIP has become much more stark.

Written by Richard Walsh, SAMI Fellow and first published in Cover magazine, November 2016. Also co-author, with Alan Woods, of a report for the CII – “Building Resilient Households – the future of financial provision for those too ill to work”.

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Expect even stranger events in 2017: why citizenship is (nearly) dead.

January 11, 2017

The impact of globalisation; the rise of ‘false facts’ and of ‘click-journalism’; the widening gap between richest and poorest; the simple desire to give politicians a kicking: all of these have been identified as likely causes for the rise of populism and its most obvious manifestations in the UK EU referendum result and, in the US, the election of Donald Trump. Few doubt that there will be more manifestations of these trends in 2017. These are plausible causes, but the true drivers of change that sit behind them are ill-understood and barely-discussed. It is the job of strategists to help political and business leaders to understand what is happening and to formulate plans to make resilient and better futures.

We need to understand two drivers of change in particular if we are to grasp what is happening right now.

Driver 1: Generational conflict

Goodness knows that we strategists have been formulating scenarios for decades that anticipate a ‘generational war’ with younger people fighting older people for scarce physical and social resources as lifespans lengthen. Yet we hardly seem to have noticed that the war is well underway, or how one-sided it is. In developed countries older people have almost all of the financial and political power. This is not to suggest that all older people have all the power – indeed, a relatively small minority have it, but it is in that generational group where it rests, so much so that under-35s are struggling to be heard. Property is in the hands of the old, student debt is mounting, older people have pensions and they are staying longer in the jobs they already occupy to pay for their pensions. Younger people are often self-employed and are proving to be poor employers of themselves, unable to give themselves enough hours to work and often in the grip of ‘zero hours’ contracts. Older people vote in proportionately larger numbers than the young and make sure that politicians are duly afraid of their voting power.

‘We know all this, it’s hardly new’ I hear you say. Well, yes, but what are we doing about it? Do we understand how much of a problem this imbalance, both economically and politically, is? If younger people feel they have little stake in the societies of which they are members then they will begin to behave in ways that are careless of the future of those societies. Can we imagine what that looks like? We may be about to see…

Driver 2: Social atomisation

This, again, is a driver of change that we have often explored in scenario-planning processes. But, again, we seem to have barely noticed how comprehensively atomisation has taken place. The neo-liberal period which has been dominant since the early 1980s was always intended to promote individualism and corporate power over state power or other forms of social organisation. What was less foreseeable in the early 1980s was the impact of technology and, in particular, of the internet on social atomisation. It is not simply that people form communities using social media in preference to more conventional forms of combination, it is the increasing commoditisation of social discourse which is having the biggest impact. Almost everything that once required a meeting, a commitment of time and often of negotiation can now be dealt with in a transaction in a couple of clicks. This brings great advantages. But it also turns us all into customers, with the expectations and minimal obligations of customers. What, one might ask, is a citizen in this on-line world?

 The destruction of citizenship

The combinatorial effect of these two drivers on current trends is to destroy notions of citizenship as they have been conventionally understood for generations. Older people hope to live for decades more: their sense of obligation to younger people is limited by this belief, and by the general human reluctance to give away existing advantage. We hope, naturally, that our children and our neighbour’s children will do well in life. But what are we prepared to do about it? Very little, it seems. Meanwhile younger people express themselves through social media and even organise demonstrations and e-petitions using the internet. But the effect is ephemeral.

We all have a vote, of course, and it’s up to us, whatever our age, to use it. But votes get used in odd ways when you think you’re a customer of your society, not a citizen of it, and when you are either protecting an existing stake or think you have no stake at all.

What can be done?

Successful and resilient societies do one thing supremely well: they make everyone feel they have a stake. Nationalism works up to a point to achieve this effect, but if we think of how the United States has achieved what it has over the last century, it has been through an inclusive and diverse form of national pride that had been extremely successful at making everyone feel they belong. The nationalism now on the rise in many countries is different. It is of a narrowness that plays well to the drivers of generational conflict and atomisation, but is not likely to lead to economic or social success in the medium or long term.

We need our leaders in business and politics to tackle what is driving change in the wrong direction head-on. We need them to make generational equity and social cohesion their top priorities and to implement policies that make tangible improvements quickly. Else 2017 will see us all swept away on a stormy tide.

Written by Sean Lusk (Author of ‘Rethinking Public Strategy’, Palgrave Macmillan, 2014)

The views expressed are those of the author and not necessarily of SAMI Consulting.

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ESPAS conference 2016

December 21, 2016

ESPAS, the European Strategy and Policy Analysis System, is a unique inter-institutional project aimed at strengthening the EU’s efforts in the crucial area of forward planning. ESPAS brings together the European Commission, the European Parliament, the Secretariat General of the Council of the European Union and the European External Action Service to strengthen the Union’s collective administrative capacity to identify and analyse the key trends and challenges, and the resulting policy choices, which are likely to confront Europe and the wider world in the decades ahead.

I was invited to the second ESPAS conference, on Global Trends to 2030 – Society and Governance, held In Brussels on 16th and 17th November.

The first day was held in Berlaymont and was exceptional – arrangements, presentations, participants. Outstanding presentations from Geoff Mulgan of Nesta and Aaron Maniam from Singapore. The thrust of the day was: we are living in uncertain times – no longer Business As Usual – so what can we do to understand what is happening and act effectively? The video can be found at https://www.youtube.com/watch?v=Zmz6YlzM8hQ

foxOne contribution I particularly picked up on was from Nic Gowing, who with Chris Langdon has interviewed leaders globally and found a disturbing lack of capability to tackle uncertain times – they suggest that having the conformity that gets you to the top prevents you being able to see change, or to deal with it. The analysis of the interviews is in a number of reports on their web site http://www.thinkunthinkable.org/ . This reminded me of the work we did for the book “Beyond Crisis” in which we analysed the behaviour of leaders under the headings of (borrowed from Isaiah Berlin and Greek Mythology) hedgehogs and foxes. The Fox knows many things, but the Hedgehog knows one big thing. In the book we also developed a framework for harnessing the foxes in the organisation to drive change.

The second day was held on the fifth floor of the European Parliament, in the Library Reading Room.hedgehog

One session interested me in particular, on cities in the 21st century, picking up as it did on some of the ideas in “In Safe Hands”, www.longfinance.net which asks – how might our society reconfigure after a crisis, maybe into city regions with very individual brands, or maybe into amorphous geographies populated by Affinity Groups with strong ethnic, religious or language ties across the globe.

The second day finished with contributions from Klaus Welle, Secretary General of the European Parliament, and James Elles, a former MEP and chairman of ESPAS, both of which are on YouTube:

https://www.youtube.com/watch?v=wSW1HjpJRUs , https://www.youtube.com/watch?v=u0hcc2Ra75M

In conclusion, asking how ESPAS should tackle the new world order, the discussion also revisited Foxes and Hedgehogs!

With that thought, I wish all our readers a Happy Christmas and a New Year that starts to tackle the challenges thrown up by 2016.

Written by Gill Ringland, SAMI Fellow and CEO.

The views expressed are those of the author and not necessarily of SAMI Consulting.

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Finding A Way To The Future

December 14, 2016

This review of 4 Steps to the Future by Richard Lum and Future Infused Strategy Development by Maree Conway was first published in the October 2016 edition of Compass, the newsletter of the Association of Professional Futurists, and is republished here with their permission.

These two books have a similar provenance and a similar ambition. Both are written by futurists; both seek to explain to non-futurists what futurists do and how futures thinking can improve organisational outcomes. In the process, perhaps, both also hope to create better customers for futures work.

Of the two, Richard Lum’s book focuses on the process an organisation goes through when it executes a foresight project. Maree Conway’s focuses more on the process an individual needs to follow to get their “foresight switch turned on.” Both books are valuable assets for getting more people to understand the value of — and therefore the use of — foresight. I tried to read them with my corporate hat on, through the eyes of the intended audiences.

4 Steps to the Future is intended for potential clients who don’t have a huge budget for foresight but still need to think about the future(s). It is set up to help them to feel more comfortable with foresight concepts and to ask the right questions both of their colleagues and potentially of their consultant. It isn’t an exhaustive description, rather a short explanation, that will get them to a shared understanding and some action.

The 4 steps Richard speaks of are a guide to the process that can be followed to achieve the holy grail of understanding how the future is different from today and how it might look, so that you can develop a vision and strategy.

The steps are:

  1. Past
  2. Present
  3. Futures
  4. Aspiration

At each step Richard provides questions and worksheets that can be used to stimulate thinking, along with a valuable discussion. Since it is written with (potential) clients in mind, he reminds them that we can’t predict the future, that there are many possible futures, and that we co-create the future, whether we understand this or not.

It is written in an approachable, informal style and is free of jargon. It can be hard for an ‘expert’ to remember what it was like not to know about their subject, and therefore to deconstruct it to the point that they can lay out the steps that someone who is just beginning should follow. Richard does this very well—I really liked his list of everyday practices and ground rules for people just starting out into foresight thinking, as well as his checklist of indicators to help the reader to test of their organisation will be supportive of futures work.

This isn’t a book for foresight professionals: it is for potential clients who don’t know what foresight is about. In that light it is often simple — I think this is on purpose to make it more accessible. You could argue about this (thinking it too simple), but I think it gives a clear trajectory of the path that a foresight project takes from start to finish — you could add more detail, but one basically follows his four steps in most foresight work.

The book is short (87 pages) and clear, easy to read and follow. Even a busy executive ought to be able to find the time to read it. With my corporate hat, I found it an excellent how-to book, if quite US-centric. In a short book Richard has provided good, structured suggestions – things like making sure that scenarios have both good and bad in them, paying attention to the focal issue, identifying stakeholders and looking at how they will react to a change (to help you explore threatening dynamics) — the kinds of things that make it something that can be used, straight out of the box.

The focus of Maree Conway’s Future Infused Strategy Development is on how to help and encourage individuals to “turn on their foresight switch.” As with 4 Steps, it is informal, easy to read and designed for the non-practitioner who wants to find out more about strategic thinking.

She makes the point that using foresight is personal. It is about changing the way a person thinks about the future. And it is a process best understood by experiencing it.

Maree’s own foresight journey, shared in the book, started when she was asked to run a foresight project at the university where she worked. She learned by doing many things wrong as well as many things right (the way we all learn). She found out the hard way that the organisational context — the seedbed for the process of foresight — needs to be properly prepared and nurtured in order for the process itself to flourish.

She starts with the conceptual framework around Foresight — with guiding principles and with assumptions and worldviews which may need to be challenged. She points out that “We are responsible for future generations — the future we create today is for our descendants.” In other words, we need to think about being good ancestors.

Maree uses a framework which combines Richard Slaughter’s Social Foresight development model to describe the stages of development of organisational foresight capacity and Ken Wilber’s Four Quadrant model for making sure that all four quadrants have been considered when exploring an organisational change. She uses this framework to help identify how futures ready an organisation is.

She then explores foresight and strategy and the relationship between the two. Foresight is how you think about the future, strategy is about positioning an organisation to be ready for the future. Stumbling blocks along the way: people seek certainty, they are afraid of change, they want to use quantitative data (which is about the past, not the future), and they feel uncomfortable involving staff/larger groups of people.

This is followed by discussion of how to manage these challenges. She goes into some detail about the Generic Foresight Process Framework and how to use it, then briefly describes several further foresight frameworks and their process steps so that you get a feel for the choices available.

The next four chapters are about using foresight in anger, each one a step on the way. In Getting Started Maree provides a table of 10 questions to help you position yourself, which I found useful and insightful. She discusses the prerequisites for a successful project — including the organisational context questions that need to be considered to give the project a chance of success. These might seem basic to a practitioner, but it covered all the areas that one needs to consider.

The following chapter is a methods overview organised using the Generic Foresight Process Framework with descriptions and graphics of each method described, followed by a chapter on scanning. There are examples throughout the book from Maree’s experience, successful and less successful, with some great ones in this chapter. A novice might want a bit more information about some of the methods in order to feel comfortable with trying one.

A chapter on Strategic Thinking ties it all together — analysing and making sense of the information that came out of the foresight process to develop a plan for the organisation to thrive in the short, medium and long term. The final chapter, Lessons from the Field, has great tips from years of experience to enable a really successful project.

I found it an easy and interesting read, accessible for people just starting out. I liked the examples and that Maree was willing to share those that didn’t work — or didn’t work so well — as well as those that did.

Of the two, I’d say that Richard’s book was written for a more senior manager who was looking for greater structure, while Maree’s was more suited to someone who was really open for exploration. Both are valuable additions to the available books out there in our field, and both are deserving of a round of applause — plaudits to both for being simple, short and sweet.

Written by Tricia Lustig, SAMI Associate, Managing Director of Unlocking Foresight and European futurist and author.

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Price discrimination and cross-subsidy in financial services

December 7, 2016

At the end of September the FCA published Occasional Paper 22 on price discrimination and cross-subsidy in financial services.

It is a good analysis of the subject and worth a read, particularly in the context of Brexit where some EU-driven restrictions may be abolished or replaced with UK-specific ones.

Price discrimination happens when a firm charges different prices to different consumers for the same product, or where all consumers are charged the same price but costs differ between consumers – so different consumers face different mark-ups.

Currently, there are four key ways of implementing price discrimination. First consumers with higher income or wealth may have a lower sensitivity to price.

They may see the value of switching suppliers to achieve small savings as less important. Second, consumers may prefer to stick with a particular supplier despite price differences with other suppliers. Third, consumers may have fewer options, for example those with a poor health record. Fourth, some consumers may be less ‘savvy’ about the way the market operates.

With the increasing availability of Big Data, firms may be able to refine their prices to more accurately reflect the value a given consumer places on the product. But if the data are very expensive to acquire or analyse, consumers may be able to buy at a lower price from less sophisticated rivals. The jury is out on how this will turn out in practice.

There are two types of cross-subsidy. One is where some consumers are charged below the cost of providing the product, which is paid for by the firm charging other consumers above the cost price.

The second is between products, where a firm’s profits from one product are used to provide another product at a loss. The pricing of PPI was an example of cross-subsidy between the loan market and insurance, as some consumers with low credit scores might have been unprofitable were it not for PPI income.

Price discrimination and cross-subsidy may be a concern if the high-price segments contain a high proportion of consumers in need of protection (‘vulnerable’ consumers), or a significant share of such consumers are excluded from important products, such as IP insurance.

Charging higher mark-ups to less price-sensitive consumers may be an alternative to uniform pricing. But concerns may be raised that those groups are paying more than a proportional share of those costs.

However, price discrimination is often a part of normal competitive practice and so does not necessarily warrant any intervention. And badly designed or inappropriate regulatory interventions can lead to undesired or unintended consequences for consumers and competition.

So what’s this got to do with Brexit? The EU Gender Directive prohibits using actuarial factors based on gender in the calculation of premiums. The effect of the prohibition has been to introduce uniform pricing.

Due to the different accident risks, health risks and life expectancy of men and women, which affect costs of supplying insurance, the effect is to require different mark-ups for the two groups – a form of price discrimination. Next year we expect to see ‘The Great Repeal Bill’.

One in the frame could be the Gender Directive.

What is particularly interesting about the economic analysis is that it shows the intention to reduce one form of discrimination has actually produced another version of it.

What the report does not cover is the ethics of this deliberate decision. Next year it is likely that we will see a repeat debate on such seemingly settled issues.

Written by Richard Walsh, SAMI Fellow and first published in Cover magazine, November 2016

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