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Japan Introduces a Pensions Rip-off from the Middle Ages

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Long-term care for the elderly has always been required, but as people are now living longer than ever before - this care is needed for many more people. In the future, if longevity continues on its current growth trajectory, the demand for care will increase further. In medieval England (and other areas of Western Europe), although fewer people reached what we would now think of as old age, long-term care was still needed. One form of this was provided by religious institutions such as monasteries. Individuals or couples could buy a 'corrody', which entitled them to live in an institution with monks or nuns for the rest of their life; with rooms, food, drink (beer and wine) clothing (robes) and medical care provided. Corrodies were paid for by a single up-front non-refundable payment either in cash or by real estate transfer. This placed longevity and inflation risk with the institution, as no matter how long a corrodian lived, or how much the price of food and clothes increased, the monastery received no additional payment. A study of the prices charged for these medieval pensions (Bell and Sutcliffe, 2010) found that the institutions over-charged for their corrodies by a considerable margin, with some corrodians charged a fee that was too high, even if they were to live forever! A feature of this study was that the authors, by pricing the corrodies as annuities, were able to show for the first time that the sale of these pensions were profitable for the institutions - over-turning a historical misconception that these pension products were priced in the pensioners favour and were therefore a drain on the receiving institution. The provision of corrodies, ended in the 1530s with Henry VIII's Dissolution (along with the monasteries of course)! Since then a different model of long-term care has developed in the UK (and elsewhere) where residents pay a monthly fee for as long as they remain living in the care home. In this case the care home does not face longevity or inflation risk, as these remain with the residents. So why do we think that a form of this medieval pension is now being practiced in contemporary Japan? Japan has one of the oldest populations in the world, and so long-term care is currently a bigger issue there than elsewhere. In recent years many Japanese long-term care homes have adopted a charging mechanism which harks back to the medieval corrodies we have described. In this situation the Japanese care home makes two charges to residents:

  1. An initial lump sum payment which gives lifetime residence in the care home. If the resident leaves within a specified number of years (typically 5 years), a proportion of the initial payment is refunded.
  2. A monthly fee to cover the cost of the resident’s daily living expenses. This fee can be increased to allow for inflation, but not due to the resident becoming older or in worse health.

So here, the care home takes on the longevity risk of providing accommodation (excluding living expenses). The initial payments are substantial - very roughly sixty times larger than the monthly fees. A recent paper (Sugawara, 2017) has investigated the pricing policy of these Japanese care homes - independently of our earlier study. His empirical analysis of 1,265 Japanese institutions finds that the initial fees are set way too high, and imply that residents will live for 30 years after admittance, while the average age at admission is estimated to be somewhere between 73 and 81 years, and the average time in residence is only 6.4 years. So, not only have contemporary Japanese revived the medieval corrody, according to Sugawara (2017) they have also continued the 600 year old tradition of grossly overcharging residents for this form of long-term care!

by Professors Adrian R Bell and Charles Sutcliffe References:

Professor Adrian Bell

Research Dean, Prosperity and Resilience

Professor Charles Sutcliffe

Professor of Finance
Published 5 July 2017

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