New Who cares? · 2012. 3. 21. · 45 Dr Matthew Connell – Principal, Government and Industry...

Who cares? the implications of a new partnership to fund long-term care

2 Who cares? the implications of a new partnership to fund long-term care

contentsContents

3 Foreword

4 CIIanalysis

4 ExecutiveSummary

6 Long-termcare:definingtheproblem

9 Dilnot:towardsanewmodel

14 Consumerawareness

17 Engagingthepublic

19 Long-termcare:solvingamultifacetedproblem

21 Whattheexpertsthink

21 Summary

22 PaulLewis–FreelanceFinancialJournalistandPresenterofBBCMoneyBox

24 DrRosAltmann–DirectorGeneral,SagaGroup

27 AndreaRozario–DirectorGeneral,SafeHomeIncomePlans(SHIP)

29 JamesLloyd–Director,TheStrategicSocietyCentre

31 CliveBolton–AtRetirementDirector,AvivaUKLife

33 SteveGroves–ChiefExecutive,Partnership

36 TishHanifan–JointChair,SocietyofLaterLifeAdvisers

38 OttoThoresen–DirectorGeneral,AssociationofBritishInsurers

39 JulesConstantinou–HeadofMarketing,GenRe

41 RonWheatcroft–TechnicalManager,SwissRe

43 BrianFisher–LTCmarketingmanager,FriendsLife

45 DrMatthewConnell–Principal,GovernmentandIndustryAffairs,GlobalLife,Zurich

47 DrPatrickNolan–ChiefEconomist,Reform

49 DrBenRickayzen–CassBusinessSchoolandProfessorPhilipBooth–InstituteofEconomicAffairs

51 ConclusionandCIIView

52 Whotocontact


foreword

Who cares? the implications of a new partnership to fund long-term careLong-termcareisanissueofsignificantpublicimportance.Itisestimatedthatoneinfourofthose

aged65willrequirelong-termcareatsomepointintheirlife.Thereforeitisvitalforeachofus,andfor

societyasawholetoarticulateapolicywhich,overthelong-term,ensuresaffordable,goodqualitycare

andsupportforourcitizens.Financialservicescanhelpinthisregardbyidentifyinganddeveloping

appropriatesolutionstomeetpeople’sexpectedfundingneeds.

Unfortunately,thecurrentlong-termcarefundingsystemisbroken.Asignificantnumberofindividuals

whoenterthelong-termcaresystemenduplosingthemajoritytheirassetswhenpayingforit.

Compoundingtheissue,themarketforlong-termcarefinancialproductsandservicessuffersfromlow

take-upstemmingfromsubstantialsupplyanddemandbarriers.

Withincreasesinthenumberofpeopleexpectedtolivebeyond90,andconcernsabouttheimplied

burdensonindividualsandsocietyasawhole,thereisnewmomentumforreform.InJuly2011,thefinal

reportoftheDilnotCommissiononFundingofCareandSupportsetoutitsrecommendations,whichif

fullyimplementedwouldchangethefaceoflong-termcarebycappingthetotalcoststhatindividuals

wouldhavetopayfromtheirassets.Thiswouldlikelyhavesignificantpublicinterestaswellasfinancial

servicesimplications.

Astheworld’slargestprofessionalbodyforinsuranceandfinancialserviceswithover100,000members,

theCIIiscommittedtoprotectingthepublicinterestbyguidingpractitionersinthesectortowards

higherethicalandtechnicalstandards.TheCIIisparticularlyinterestedintherolethatappropriate

financialadviceandinsurancecanplayinsupportingthoseneedinglong-termcare.However,inorderto

understandthisissueproperly,afullandproperanalysisofthecurrentandpotentialfuturelandscape

forlong-termcareisrequired.Thisreportisdevotedtothatanalysis.

Ourreportconsistsoftwosections.ThefirstisananalysisbytheCIIthatidentifiesthekeyissues

andsetsouttheirimplications.Thesecondsectioncomprisesasetofcontributionsfromkeyplayers

inthedebate.Overall,wehopetoteaseoutthemainrelationshipsbetweenthecarefundingmodel,

themarketforcareproductsandservicesandthedriversofconsumerawarenessandengagement.

Inevitablyitalsodiscussesthecurrentpoliticalclimateforreform,asthisremainsaseriousstumbling

blockforthewholeprojectofdeliveringasustainableandeffectivefuturefundingsystem.

Robert Fletcher

ChairmanofCIILifeandPensionsFaculty

TheCharteredInsuranceInstitute

12September2011


CII analysisExecutive Summary

Why is the current funding system outdated?• Withlifeexpectancyincreasing,disabilityratesarealsolikelytoriseandbyimplicationthecostof

payingforlong-termcare(LTC).

• ThecurrentLTCfundingmodelisgenerallythoughttobeoutdatedandhasfacedcriticismforfailing

toadequatelyprotectthoseindividualswithlimitedwealth.

• Financialproductscanhelpindividualsmeetthecostofcarebutthecurrentmarketislimitedasa

resultofdemandsidebarriers.Thesesteminpartfromlowlevelsofpublicawarenessaboutthe

caresystemaswellasissueswithconsumertrust.Thelastproviderofpre-fundedLTCinsurance

exitedthemarketin2010.Today,whilstimmediateneedsannuitiesareoneofthefewLTCproducts

experiencinggrowth,only6%ofself-fundersusethem.

What reforms have been proposed? • TheDilnotCommissiononFundingofCareandSupporthassetoutitsrecommendationstoreform

thecaresystem.Itsmostnotableproposalsaretocapthetotalamountthatindividualswillhaveto

spendoncareandtoincreasethethresholdatwhichpeoplebecomeeligibleforstatesupport.

• Therearetwosignificantbarrierstoimplementationoftherecommendations:oneiscost;theother

iswhetheranappropriatefinancialservicesmarketcantakeroot.

How big a barrier is cost?• Thecostimplicationsofanyreformstolong-termcarefundingmustbeviewedwithinthecontext

ofotherGovernmentreformstotheretirementlandscape,suchasautomaticenrolment.Ifboth

thesereformshelptoincentiviseanincreaseinthepublic’slong-termsaving,thentheGovernment

couldactuallyrecoupsomeofthemoneyitspendsonimplementationovertimeduetofewer

individualsrequiringpensiontop-ups.

• OursurveyofMPssuggeststhatthereissomeconsensusovertheadoptionofanewapproachto

fundingcare,especiallyontheneedtoreformthesystemandthatanewpartnershipmodelisthe

bestwayforwardthoughthereisstillmuchtodebate.

Will a new market for appropriate financial services develop?• Dilnot’smodelmayprovideamoreconduciveenvironmentforthedevelopmentoffinancialservices

tohelpfundcare.However,thereremainquestionsabouttheviabilityofpre-fundedinsurance.Akey

determinantofanewLTCmarketiswhetherpotentialconsumerswillbeconvincedoftheneedto

purchaserelevantproductsinadvanceoftheirneedforcareand,inparallel,bewillingtoplacetheir

trustinproviders,suppliersandtheindustrygenerally.


What is the problem of consumer awareness and what is being done to tackle it?• ConsumerawarenessaboutLTCiscurrentlyverylowwithfewunderstandinghowmuchitcosts

orwheretogoforadvice.Thisincreasesthelikelihoodthatpeoplewillnotfindtherightfunding

solutionstomeettheirpriorexpectations.Asimplerfundingmodelcombinedwithagovernment-led

informationcampaignwouldbeanimportantstepforwardinthisregard.

What is the problem of consumer engagement and what is being done to tackle it?• Raisingawarenessthroughincreasedinformationwillnotbeenoughtoensuresufficient

engagementwithanewsystem.Researchshowsthatmanyconsumersareinertwhenitcomesto

financialservices,failingtoactevenwhenpresentedwithaccurateinformation.Evidencesuggests

thatthisis,atleastinpart,duetoaninherentdistrustoftheindustrygenerally.Itwillthereforebe

importanttobuildonkeyinitiativesalreadyunderwaysuchastheRetailDistributionReviewtoraise

professionalstandardsofadviceinthisarea.

A multifaceted approach is needed• Inorderforappropriatefinancialproductsandadvicetotakerootandsupportthoseneedingcare,

amultifacetedapproachtosolvingthelong-termcareproblemisrequired.Changingthefunding

modelmustbeconsideredaspartofawideragendatoraiseawarenessandengageconsumers

aboutlong-termcare.


CII analysis

1 ONSstatisticsquotedinSwissRe(Dec2009),The Insurance Report: The Cost of Doing Nothing,p.102 Ibid3 TheCommissiononFundingofCareandSupport(Dec2010),Call for evidence on the future funding of Care and Support,p.84 Ibid5 M.Weston,E.WinpenyandJ.Manning(June2011)Take Care: The Future Funding of Social Care6 Ibid7 Ibid

Long-term care: defining the problemDisability rates are likely to increase over the next two decades leading to more demand for long-term care. Unfortunately, the current funding model is outdated, providing little protection from the sometimes ‘catastrophic’ costs of care. Compounding the problem, the market for long-term care financial products remains limited with only a few viable options to help individuals meet care home fees.

Longevity and disabilityContinuingimprovementstohealthcareandchangestopeople’sworkinglivesareensuringthatan

increasingnumberandproportionoftheUKpopulationliveswellbeyondretirementage.Accordingto

theOfficeofNationalStatistics(ONS),in1981lifeexpectancyforwomenwas76.7.By2004–2006it

hadincreasedto81.3.1Overthenexttwentyyearsitisestimatedthatthisdemographictrendissetto

continue–theresultbeingtoincreasethepercentageoftheUK’spopulationthatare65oroverfrom

16–23%.2

Aslongevityincreases,theproportionofpeoplewhoareveryoldwillgrowthefastest.Thenumber

ofpeopleover90isexpectedtonearlytrebleoverthenexttwentyyears.Accordingly,itisexpected

thatolderpeople’sdemandforcareandsupportwillincreasebyaroundtwo-thirdsoverthenexttwo

decades,assumingthatdisabilityratesbyagewillremainconstant.3

Onaverage,aroundoneinthreewomenandoneinfivemenaged65areexpectedtoenteracarehome

withtheriskofenteringresidentialcareincreasingwithage.Currentlytheaveragecarehomecosts

£26,000peryearandtheaveragestayistwoyears–thoughasignificantproportionstayformorethan

fouryears4andmanycarehomesaresignificantlymoreexpensive.Indeed,somesurveyshaveestimated

thataveragecostsarecloserto£35,000ratherthan£26,000.

Itisalsodifficulttopredictthefuturecostofcarehomefees.Therecentsolvencyproblemsexperienced

bySouthernCrosshaveraiseddoubtsoverthesustainabilityofcarehomeproviders’businessmodels

andthereisasignificantconcernthatcarehomefeesmaycontinuetorise.

The relationship between longevity and disability

AsnotedinarecentpaperpublishedbySaga5,therehasbeenmuchdebateoverwhetheran

increaseinlongevitywillmeangreaterdemandforlong-termcare.Ofthirty-twodifferentstudies

ofpeopleagedatleastfiftyfiveinhigh-incomecountries,onlysixfoundevidenceofdisability

ratesincreasing,comparedwithtwentysixwhichfounddisabilityratestobedecreasing.6

Similarly,analysisofhealthexpenditurehasshownthathealthcostsriseinthefinalyearsoflife

regardlessofage.Anageingpopulationmaythereforejustdefercostsratherthanincreasethem.7

Thesestudiessuggestthatdisabilityratesmaynotthereforeremainconstant.Iftomorrow’s

elderlyleadsahealthierlifethantoday’s,thendisabilityratesmayactuallyfallratherthanrise.


8 EmmaSimon(July2009),Long-term Care: How to Beat the Meanest of Means Tests,Telegraph9 FiguresobtainablefromDirectGovwebsite:

http://www.direct.gov.uk/en/MoneyTAXAndBenefits/BenefitsTaxCreditsAndOtherSupport/Disabledpeople/DG_1001871010 BrownlowWealthManagementLtd(April2010),Factsheet: Registered Nursing Care Contribution11 J.Carr-WestandL.Thraves(March2011),Independent Aging: Council Support for Care Self-Funders,LocalGovernmentIntelligenceUnit,pp.7-812 Seeourreport-CharteredInsuranceInstitute(May2011),An age-old problem: developing solutions for funding retirement

The current funding modelUnderthecurrentsystemmostindividualshavetopaysomethingtowardsthecostoflong-termcare.

Thecurrentruleisthatanyonewithassetsworth£23,250orabovewillbeexpectedtopayfortheircare

needsandthevalueofanypropertyownedisincludedinmostcases.Thereareimportantexceptionsto

thisrule,suchasifthereisasurvivingspouselivinginthehouse,orifthehomeownersaltertheterms

ofpropertyownership.8ThereisalsostatesupporttohelpcovernursinghomefeesincludingAttendance

Allowance(upto£71.40perweek)9andaRegisteredNursingCareContribution(upto£108.70per

week).10Nevertheless,evenwiththeseadditionalformsofStatesupport,alargeproportionofthe

populationareexpectedtocoverasubstantialchunkofLTCcosts.

Thecurrentfundingmodelhascomeundersignificantcriticismforproviding too little supportfor

thosewithonlymodestwealthwithmanyspendingasignificantproportionoftheirassetswhenpaying

forlong-termcare.ResearchfromtheLocalGovernmentIntelligenceUnithasfoundthataquarterof

self-fundersrunoutofmoneyandultimatelyfallbackontheStatetosupporttheircareneeds.11

Anotherdrawbackofthemeans-testedsystemisthatitreducestheincentivesforindividualsto

accumulateassetsandsavingstopayforretirement.JamesLloydoftheStrategicSocietyCentrehas

arguedthatasystemwheresomepensionersmustpay“catastrophiccosts”forcare,“doesmuchto

underminepensionsaving.”Thisisamajorfailinggiventheneedforpeopletosaveanincreasingly

largeproportionoftheiroccupationalincometoensureanadequateincomeinretirementaswellaspay

forthecostsoflong-termcare.12

Private sector solutions and productsSincecareisnotfreeatthepointofuse,thereisamarket(albeitlimited)forfinancialproductstohelp

fundcare.Therearetwotypesoffinancialproductsspecificallyforthispurpose,oneofwhichmust

bepurchasedinadvanceofneedingcare,andtheotherpurchasedoncetheneedforcarehasbecome

established.Theyinclude:

Productsinadvance:

• Pre-funded long-term care insurance (LTCI):apre-fundedinsuranceplaninvolvingregularor

lump-sumpaymentsbythepolicyholderbeforelong-termcareisneeded.

• Investment-based plans:awayofpayingforlong-termcareinsurance.Theconsumerpurchasesan

investmentbondwithalumpsum.Thecapitalistheninvestedandtheamountneededtopayforthe

insurancepolicyiswithdrawnbytheinsuranceprovidereachmonthfromthevalueofthebond.

Productsatthepointofneedingcare:

• Immediate needs annuities:purchasedwithalumpsumtopayforimmediatecare.Theyprovidea

fixedlevelofpaymenttowardscareneedsforaslongasisnecessary.

• Lifetime mortgage schemes: thisisanequityreleaseproductwherebyamortgagechargeistaken

fromacustomer’shomeinexchangeforalumpsumtothehomeowner.Themostpreferredproduct

istheFixedInterestLifetimeMortgage,wheretheinterestisaddedatafixedrateduringthelifetime

oftheloan.Other‘draw-downlifetimemortgages’payaregularincomethroughanannuitisation

processbasedonlifeexpectancy.Forboththeseclassesofproducts,mostprovidersoffera

voluntary‘no-negativeequityguarantee’toprotecttheconsumerfromtheeventualityofhavingto

owemorethanthepropertyisworth.


CII analysis

13 JamesLloyd,(February2011),GoneforGood?Pre-fundedInsuranceforLong-termCare,TheStrategicSocietyCentre14 R.Dyson(June2007),Relief in sight for ‘Sam’ mortgage victims,

http://www.thisismoney.co.uk/money/mortgageshome/article-1611112/Relief-in-sight-for-Sam-mortgage-victims.html15 CII(February2010) What we talk about when we talk about trust,p.12

• Home reversion schemes:anothertypeofequityreleaseproductwherebytheproviderbuysashare

inthevalueofacustomer’shomeatadiscountedpricewhilstthecustomerretainstherightto

remaininthehomerent-free.Oncethecustomerdiesormovesintoacarehome,thepropertyissold

andtheshareoftheincomegoestothereversioncompany.Again,mostprovidersofthisproduct

classnowoffera‘no-negativeequityguarantee’.

Barriers to private sector solutionsWhilsttheaboveproductsexist,take-uphasbeenlow–particularlyforpre-fundedschemes.Low

take-upofLTCIismainlyduetodemandsidebarriersincludingthecostoftheproducts,uncertaintyover

theavailabilityofcare,ignoranceoftheriskofneedingcare,inertiaandthecomplexityofproducts.13

Reputational issuesalsoactasabarriertoequityreleaseschemes,stemmingfromtheconsumer

detrimentcausedbypreviousproducts.Thenotorious‘homeincomeplans’ofthelate1980sleft

borrowersfacingbothmonthlyarrearsandnegativeequitywhilst‘sharedappreciationmortgages’ofthe

late1990slefthomeownerswithdebtssometimesthreetimeslargerthanwhentheyoriginallyentered

thescheme.14

Trustinfinancialservices,ingeneral,isrelativelylow.Thedeclineinlevelsoftrustwaswelldocumented

inasurveyundertakenbytheCIIinlate2010whichfoundthatoneinfiverespondentswillnevertrust

financialservicesagainand72%ofpeoplehavenotverymuchtrustornotrustatallinfinancialadvisers

andlifeinsuranceproviders.15

Therefore,whendeliveringafuturefundingmodelwhichisnotfreeatthepointofuse,theGovernment

andindustrymustaddressissuesassociatedwiththefairness of the system (suchasthepotential

forthosewithonlymodestwealthtolosethemajorityoftheirassets)andtheengagement barriers

thatexisttodeterpeoplefromseekingprivatesectorsolutionswhichcanhelptopayforcarewhilst

protectingkeyassets.


16 Commissiononfundingofcareandsupport(July2011),Fairer Care Funding – Report

Dilnot: towards a new modelOn 4 July the Commission on Funding of Care and Support (Dilnot Commission) set out its final recommendations16 to change the way in which long-term care is funded in England. It included proposals for a cap on costs and a new means test.

There are stumbling blocks to reform however – the first is the projected cost of reforming the system, the second is whether the new system will provide adequate incentives for long-term care financial products to take root.

BackgroundTheDilnotCommission(chairedbyeconomistAndrewDilnot)wassetupbytheGovernmentto

investigatehowtoachievean‘affordableandsustainable’fundingsystemforlong-termcare.Thefinal

reportoutlinestheCommission’sproposalsafterayear-longconsultationprocess.

The ‘new’ funding modelDilnotproposestolimitthemaximumamountthatpeoplewouldhavetopayforcaretobetween

£25,000and£50,000withtheCommission favouring a cap of £35,000.Dilnotalsorecommendsthat

only those with assets (including property) worth over £100,000 should pay for the full cost of care.

Individualswillstillhowever,havetocontributesomethingtowardstheirgenerallivingcosts(e.g.food

andaccommodation)ofupto£10,000ayear.Theplannedeffectofthesemeasuresistoensurethatno

one loses more than 30% of their assets.

Figure 1. Maximum possible asset depletion

Source:DilnotCommissionFinalReport

100%

80%

60%

40%

20%

0%

5% 25% Median 75% 95%

£0k £50k £100k £150k £200k £250k £300k £350k £400k £450k £500k

Assets on going into care

£35k cap with extended means test

Current system

Percentiles of housing wealth


CII analysis

17 PensionsPolicyInstitute(Jan2011),Towards more effective savings incentives: a report of PPI modelling for AEGONestimatesthattheintroductionofauto-enrolmentwillsignificantlyincreasethenumberofindividualssavinginapensionfrom14millionin2012toaround22millionby2015.

18 T.Rutherford(June2011),Pension Credit statistics,HouseofCommonsLibrary,p.3

Alongsidethecapandnewmeanstest,theCommissionalsorecommendsthatthereshouldbea

national eligibility and assessment framework toensureconsistencyacrosslocalauthoritiesinthe

waythatindividual’sneedsareassessed.Thisnewapproachwouldallowindividualstotaketheir

assessmentwiththemshouldtheymovefromonelocalauthoritytoanother.

CostCostisthemainpotentialstumblingblockforreform.TheCommissionestimatesthattherecommended

changestothefundingsystemwouldcostfrombetween£1.3bn for a cap of £50,000 and £2.2bn for a

cap of £25,000 per annum.IftheCommission’srecommendedcapof£35,000wasintroducedthiswould

costanestimated£1.7bn per annum.Thecostofthecapisthenprojectedtoincreaseovertimereaching

£3.6bnby2025/2026,thoughDilnotarguesthatthiscostcouldbeoffsetbyapartialincreaseinthecap.

Dilnotarguesthatthereformsareactuallyrelativelylowcostat0.14%ofGDPandsuggestsanumberof

waystopayforthem.Theseincludetaxation,reprioritisingcurrentexpenditureoraspecifictaxincrease

whichwouldtarget,atleastinpart,thosewhoareoverstatepensionage.

The complex cost implications of Dilnot

TheCommissioncalculatestheimplementationcostofitsproposalsbyaddingtogetherthe

costofintroducingacap,tothecostofincreasingthemeanstestandapplyingthistotheyear

2010/11.Theestimatedcostofthenewmodelthenincreasesovertimerelativetotheprojected

costsofthecurrentsystem.Thisisfortworeasons:firstly,assumingdisabilityratesremain

constant,improvinglifeexpectancywillleadtoincreasingdemandforcare.Secondly,risinghome

ownershipamongsttheelderlyisforecasttorise,increasingthenumberofpeoplewhowillbe

ineligibleforthecurrentmeanstestedsupportandwhothereforederivegreaterbenefitfromthe

Dilnotcap.

Interaction with pensions reform

Thecostofanyproposalstoreformlong-termcarefundingshouldalsobeviewedinthewider

policycontextofpensionsreform.Manydevelopmentsaretakingplaceinthisarea,ofwhich

arguablythemostimportantisautomaticenrolmentbringinganestimated8millionpeopleinto

formallong-termsaving.17Asmentionedabove,thecurrentlong-termcaresystemdoesmuchto

underminepensionsavingasonlythosewithminimalwealthareguaranteedsomestatesupport.

Bymovingtoasystemwherecostsarecapped,individualscanpreserveagreaterproportion

oftheirassetsprovidinganincentivetoaccumulatewealthoverthelong-term.Awelldesigned

long-termcarefundingmodelcouldthereforecomplementpensionsreformssuchasauto-

enrolment–helpingtoensurethatlesspeoplerequireStateprovidedtopupstopensionincome

inretirement.

Currentlynearly3millionpeoplearebeingpaidanaverageof£50perweekinpensioncredit18

whichguaranteespensionersaminimumlevelofweeklyincome.Ifthecurrentrangeofreformsto

theretirementlandscapesuccessfullyreducesthenumberofpeopleinneedofsuchsupportby

athird(duetogreatersavings),thegovernmentwouldsavearound£2.6bnperannum–roughly

equivalenttothecostofDilnot’sproposals.TheGovernmentmustthereforethinkcarefullyabout

thecostimplicationsofanylong-termcareproposalsaspartofthewiderquestionaroundthe

futureofretirementplanning.


19 DeliveredtotheHouseofCommonson4August:http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm110704/debtext/110704-0001.htm#1107044000628

20 PressRelease(4July)The King’s Fund Responds the Dilnot Reporthttp://www.kingsfund.org.uk/press/press_releases/the_kings_fund_33.html21 ThesurveyquestionswerewrittenwellinadvanceoftheCommission’sfinalrecommendationssothedescriptionofaPartnershipModelisonlyarough

approximationofDilnot’sfinalproposal.

Political reaction to the reportAgainstthebackdropofGovernmentspendingcuts,andachallengingeconomicenvironment,these

reformsmaybehardtosellpoliticallyandithasbeenrumouredthattheChancellorandTreasurywould

liketo“kicktheproposalsintothelonggrass”.

Indeed,inresponsetotherecommendations,HealthSecretaryAndrewLansleywasnoticeablyreserved

sayingthatGovernmenthasto“considercarefullyadditionalcoststothetaxpayer[oftheproposals]

againstotherfundingpriorities”19andthatthereportwouldbeused“asabasisforengagement”.

Anticipatingapush-backfromtheGovernment(oratleastHMTreasury),oppositionpoliticians,industry,

consumergroupsandcharitiesbroadlywelcomedthereformsrequestingthatGovernmentactquicklyin

forgingaconsensusandimplementingthechanges.

RichardHumphries,SeniorFellowattheKing’sFund,neatlysummedupthemoodwhenhesaid

“politiciansfromallpartiesmustnowseizethebestopportunityinagenerationtoensurethatpeople

canaccesscareandsupporttheydeserveinlaterlife”.20

TheGovernmenthassincecommittedtopublishingaWhitePaperinSpring2012andintheinterim

thereislikelytobefierceargumentsabouttheproposedfundingarrangements.AheadofDilnot’sfinal

recommendations,weconductedasurveyofMPstoseewhethertherewasaconsensusemergingon

thecharacteristicsofanidealfundingmodelforlong-termcare.Weasked:

Following the Dilnot Commission’s recommendations, the Government will be tasked with reforming the

funding of long-term care. What do you think is the most appropriate method of funding long-term care?

• Partnership model–thestatewouldfundafixed proportionofanindividual’sbasiccareneedswith

theremainder paid for by the individual(ThiswasaroughapproximationoftheDilnotmodel)21

• Means tested model–combinationofeachsystem,withcareforthepoorestfundedthrough

taxation,therichestpayingprivately,andamixedsystemforthosein-between(thecurrentsystem)

• Purely tax funded–long-termcarewouldbefullyfundedbythestatethroughtaxation

• Purely private system–apurelyprivatesystem,withnopublicfundingevenforthepoorest

andneediest.


CII analysis

Source:ComResfortheCharteredInsuranceInstitute.SurveywasconductedinMay2011,158respondentsacrossthepoliticalspectrum.

ThemajorityofMPsfavouredthemodelmostcloselyresemblingtheCommission’sproposition–and

itwasthefavouredoptionacrossallparties(albeitmarginallyfortheliberaldemocrats).Thissuggests

thatthereissomeconsensusbothontheneedforreformandonanewpartnershipmodelbeingthe

bestapproach.Theresultsdoatleastthen,providesomehopethatbroad-basedsupportforproposals

toreformlong-termcarecanbefoundandalastingsettlementachieved.Nevertheless,thepolitical

battlesarelikelytobefoughtoverthenewsystem’sparameters(somethingwecouldnottestatthe

timeofwriting),intermsoftheproportionofanindividual’scarebillthatgovernmentwillcoverandan

individual’seligibilityforstatesupport.

60%

50%

40%

30%

20%

10%

0%

52%

29%

11%

2%

Partnership model – the state would fund a fixed proportion of an individual’s basic care needs with the remainder paid for by the individual

Means tested model – combination of each system, with care for the poorest funded through taxation, the richest paying privately, and a mixed system for those in-between

Purely tax funded – long-term care would be fully funded by the state through taxation

Purely private system – a purely private system, with no public funding even for the poorest and neddiest

70%

60%

50%

40%

30%

20%

10%

0%Partnership model – the state would fund a fixed proportion of an individual’s basic care needs with the remainder paid for by the individual

Means tested model – combination of each system, with care for the poorest funded through taxation, the richest paying privately, and a mixed system for those in-between

Purely tax funded – long-term care would be fully funded by the state through taxation

Conservative

Labour

Liberal Democrat

61%

45%42%

33%

1%

19%

10%

4%0% 0%

23%

43%

Purely private system – a purely private system, with no public funding even for the poorest and neddiest

Figure 2. MP support for LTC funding models (overall and split by party)


A role for the private sector?Dilnotarguesthatwhenthestateprovidesastableofferwhichcaps‘tail-endrisks’andwherepeople

aremadeawareoftheneedtoplanforcareneeds,anewmarketcandevelop.

IntheCommission’sview,pensions, ISAs and housingarethemostlikelyvehiclesthroughwhichpeople

willprivatelyfundcarethoughtheremayalsobeincreasedopportunitiestoconvertcritical illness cover

oflifeinsurancepoliciestobridgethegap.However,Dilnotthinksthepre-fundedmarketwillremain

stagnantas“productsareexpensive,andtherearesignificantreputationalriskstoinsurancecompanies

iftheyareunabletodeliverontheircontracts”.

SincepublicationofDilnot’sfinalreport,JamesLloydhaspublishedarguablythemostextensivepieceof

analysisonthereport’srecommendations.Hequestionedtheabilityofinsuranceproviderstopricecare

policiesundertheproposednewsystem.22Hearguesthatinsurerscanonlypricesuchpoliciesonthe

basisoftrendsindisabilityandlongevityyetunderthe‘cappedcostmodel’a“person’s£35,000liability

isdeterminedbytheavailability of informal careandhow much a council gives individuals with a

defined level of need”.Lloydarguesthattheseadditionalelementsarethingsinsurerscannotpricefor.

LloydalsopicksupontheCommission’srecommendationforanextensiontothecurrentdeferred

payment schemewhichallowslocalauthoritiestopayanindividual’scarebilliftheycannotaffordtodo

sowithoutsellingtheirhome.Thelocalauthoritythenrecoupsthemoneywhenthehouseissold.The

Commissionbelievesitsensibletorollthisoutnationallyandallowlocalauthoritiestochargeinterestto

removethedisincentivetheycurrentlyfaceinpromotingthescheme.Lloydarguesthatoneeffectofthis

proposalmaybetocrowdouttheequity release market.

Itseemsthen,thatwhilstthenewproposalsmaygivetheprivatesectormoreofanopportunityfor

involvementthanpreviously,thismaybelimitedtoafewproductsthatarepurchasedatthepointof

useratherthanpre-fundedschemes.Lloydestimatesthatthenumberofself-fundersusingimmediate

needs annuitiesmayincreasefrom6%ofself-fundersto20%.23Akeydeterminant,however,ofwhether

financialproductsbecomeanappropriateandwidelyusedsolutiontofundcare,iswhetherthereis

sufficientconsumer demandwhichis,inpart,afunctionofconsumer awareness and engagement.

22 SeeJ.Lloyd(Aug2011),TheFirstStep?AResponsetotheCommissiononFundingofCareandSupport,TheStrategicSocietyCentre23 J.Lloyd(Aug2011)p.8


CII analysisConsumer awarenessPublic awareness about long-term care is very low with few understanding how much it costs or where to go for advice. This needs to change if people are able to identify the most appropriate solutions to their funding needs. However, on its own, a new funding model will not be enough to reverse this trend.

Using property to fund careAnexampleofthelackofawarenessinactionisthequestionofusingpropertytofundcare.Property

islikelytoremainabigpartofthefundingpictureeventhoughconsumersurveyssuggestthata

significantproportionofthepopulationarereluctanttouseittomeetthiscost.InanICMBBCpoll,80%

ofallrespondentsthoughtthatitwasunfairtohavetofundbasiccarethroughsellingtheirhome.24

Withoutraisingawarenessofthefactthatpropertywillremainakeyfeatureofthesystem,manywill

endupfundingcareinawaythatfailstomeetpriorexpectations.Thepublic,withthehelpofadvice

fromGovernmentandtheprivatesector,willneedtoplanaheadiftheywishtominimiselossesonwhat

theyholdmostdear.

Property will remain part of the picture

Manymaywellhavetousenon-pensionassetssuchaspropertytopayforlong-termcareevenif

theDilnotCommission’srecommendationsareimplemented.Thiscanbeshownthroughasimple

exampleoftheaveragepensionerrequiringacarehomeforfouryears.

CurrentlytheaverageUKpensionergetsaretirementincomeofaround£10,000perannum.25

WhilstthisisfarbelowwhattheOECDwouldconsideranadequatereplacementrate,forthesake

ofsimplicityweassumethatthisincomeisjustsufficienttocoverday-to-daylivingexpensesand

nothingmoreuptothepointatwhichtheyneedlong-termcare.Onceincaretheywillhavetopay

carehomefeesof£26,000ayear.

NowsupposingtheGovernmentoptstocaptheamountthatthepublicmustcontributetocareto

around£50,000.Forthefirsttwoyearsofcareinanaveragenursinghome,theaveragepensioner

wouldhavetofundthiscostindependently.However,anaverageperson’spensionincomewillnot

beenoughtomeetthiscostonitsownandwouldleaveanindividualwithashortfallofatleast

£30,000whichwillneedtobemetthroughnon-pension assets or some kind of insurance.The

ONS’AssetsandWealthSurvey2008indicatesthatthefinancial wealth(e.gsavingsaccounts,

ISAs,bondsetc)ofpensionersisnotenoughtocoverthiscost–medianfinancialwealthforthe

65–74agerangeisjust£13,900.26Asaresult,manypensionersmayhavetousetheirphysical

wealth(e.g.anycollectables,vehiclesetc)and/ortheirpropertytocovertheshortfall.

24 ICMandBBC(2010)77% ‘oblivious to social care costhttp://www.ageuk.org.uk/latest-news/archive/77-oblivious-to-social-care-cost/

25 OECD(2009),United Kingdom: Highlights from OECD Pensions at a Glance26 ONS(2009),Main Results from the Assets and Wealth Survey,EditedbyC.Daffin,p.33


Itisworthstressingthattheaboveassumptionsabouttheadequacyofaveragepensionerincome

tocovercostsbeforecareandthecostofacarehomearerelativelyoptimistic.Therealityisthat

formany,£10,000willnotbeenoughtoliveoffdaytodayandsopensionersmaybebuildingup

debtsorusingnon-pensionassetstofundretirementwellbeforetheyevenenteracarehome.

Inaddition,somecommentatorshaveestimatedthattheaveragecostofacarehomeiscloserto

£35,000ayearratherthanthe£26,000assumedabove.Theoverallshortfallmaythereforebe

significantlygreater.

RecentresearchfromPartnership27focusesonthislastpoint.Dilnot’sproposalswillnotresult

inthestatecovering‘hotelcosts’–thecostoflivingdaytodaywhichexcludesbasiccareneeds.

Partnershiparguesthatsincenursinghomescanchargeupto£50,000ayear–nearlydoublethe

costsofbasiccare–individualswillstillbeleftfacingsubstantialcosts(abovethe£50,000cap)

thatthestatewillnotbewillingtocover.

Awareness of the cost of careOnepreviousconsumersurveyfoundthatnearly eight out of ten peoplehavenoideahowmuch

theywillhavetopayforcareinoldage.28AseparatestudycommissionedbytheLocalGovernment

Associationfoundthat63%ofindividualswronglyestimatedtheaveragecostofacarehomeasless

than£25,000peryear.29AndasurveyfortheDepartmentofHealthfoundthat54%ofthepublicthink

thatcareservicesarefreeatthepointofuse.30

Will the proposed model close this perception gap?

TheproposedfundingmodelshouldhelptoclosetheperceptiongapbyincreasingtheState’s

contributiontowardstheprovisionofcarerelativetotheindividual’s–bringingitmoreinlinewith

people’sexpectationsthattheStatecoversmostofthecosts.Similarly,fixingthemaximumamountthat

peoplewillhavetopaytowardstheirowncareshouldimproveawarenessofpersonalresponsibility

and,toacertainextent,reducecomplexity.

Planning for careFewhavebeguntothinkabouthowtheywillpayforlong-termcare.In2008apollfoundthat87%of

peoplehadnotmadeanyplanstopayforpersonalcareinolderage,whilejust5%ofpeoplehadplans

alreadyinplace.Only6%saidthattheywerecurrentlyarrangingplanstofinancetheircare.31Similarly

asurveyconductedbyICMfortheBBCfoundthatmorethantwoinfivepeoplehadnotmadeanyplans

forcareintheiroldage.32Perhapstheseresultsareunsurprisinggiventhatmanyindividualsbelieve

theStatewillfootthebillwhentheyneedcare.Theproposedfundingmodelmayhelpinthisregardby

settingaclear limitonwhatanindividualneedstocontribute.

Worryinglyhowever,manypeopledonotevenknowwheretobeginwhenlookingforadviceonlong-

termcare.Onepolloftheover 50sfoundthataquarterofthepopulationhavenoideawhotocontactfor

advice.Only11%saidtheywouldcontacttheirlocalauthoritywhileonly 4% said they would contact

a financial adviser.33

27 Partnershippressrelease(Aug2011),Following Dilnot - Self Payers Still Pay 90% of all their Care Costs...28 ICMandBBC(2010)77% oblivious to social care cost29 Local Government Association (March 2009) Call to make the care of our ageing population a priority for

all political parties30 DepartmentofHealth/IpsosMORI(2010)Public attitudes towards care and support31 CounselandCare,CarersUKandHelptheAged(2008)Right care, Right deal Scary, depressing and

confusing: Voter’s view of Social Care Revealed32 ICMandBBC(2010)33 Partnership(2010)Over 50s drastically under estimate the cost of long-term care


CII analysis

34 CELLOmrukSocial&MarketResearch(2009)CostandProvisionAdultSocialCareSurveyPreparedforLondonCouncils

Insurance to fund care Justonepreviousconsumerstudyhaslookedatwhatincentivesmayencouragepeopletocontribute

toaninsuranceschemetofundtheirsocialcareneeds(itonlylookedatLondonandwasthereforenot

necessarilyrepresentativeofthenationasawhole).Overhalftherespondentsagreedthat‘matched

contributions’fromtheGovernmentwouldencouragepeopletoparticipate–makingitthemostpopular

ofthesuggestedoptions.OtheroptionsincludedmoreGovernmentinformationonhowtoplanforthe

future,makingcontributionstaxfreeandspecialhighinterestrates.34

Byprovidingmorecertaintyaroundwhatindividualsmustpaytomeetthecostoflong-termcare,the

newmodelshould,asDilnothasacknowledged,makeitmorelikelythatindividualswillseekprivate

sectorsolutions.Consumersandindustrywill,however,needtohaveconfidencethatanynewruleswill

lastiftheyaretoeffectivelyplanahead.

Some tentative implicationsInshort,thenewapproachmayprovideimprovedincentivesforpeopletoconsiderfundinglong-term

careinadvance.Thiscouldprovidemoreopportunitiesforfinancialservicestoproveitsworthin

developingsolutionstohelpconsumersmeettheirlong-termcareneeds.However,thereisstilllikelyto

beaworryinglylowlevelofawarenessaboutthecostsofcareandwheretogoforadvice,increasingthe

likelihoodthatpeoplewillfailtofindfundingsolutionstomeettheirexpectationsandprotectassets.


Engaging the publicMore information and education is needed to raise awareness about long-term care. However, this will not be enough to tackle the associated problem of inertia. As the survey results above show, whilst nearly half the population appears to understand that care services are not free, nearly 90% are doing nothing to prepare for the costs. Securing a simple and sustainable funding model as well as raising the level of trust in financial services are important ways to reverse this trend.

InapaperpublishedaheadofDilnot’sfinalreport,wecalledforawidespread,government-led

educationcampaigntoraiseawarenessaboutlong-termcare35–somethingwhichtheCommission

hasalsopressedfor.Wealsoarguedthatindustryandconsumergroupswillhaveimportantrolesto

playininformingthepublicabouttheoptionsthatareavailabletomaketheprocessofpayingforcare

lesspainful.

However,moreeducation and informationmaynotbeenoughtoensurethatconsumersarewillingto

engagewithlong-termcareissuesincludingfinancialproductsandservices.Anothercrucialbarrierto

engagementcitedintheliteratureisinertia–manyconsumersaredoingnothingdespitethefactthey

understandsomeofthepotentialrisksofinaction.

Inpart,inertiaislikelytobeafunctionoftheregularlychanginglandscapeforretirement.Thereisa

generalrecognitionthatpeopleexpectthelong-termcaresystem–aswithpensions–tochangeona

regularbasis.Peoplecannotbeexpectedtoeffectivelyplanforthefuturewithoutastableenvironment

inwhichtooperate,particularlywhentherearesomanyothervariables,suchasthemacroeconomic

environmentwhichremainuncertain.Inthiscontext,theDilnotreportwillactuallyhelptofuel

uncertaintyaboutneartermfuturecostsaspeoplewonderwhatfundingsystemwillultimatelyemerge.

However,thisdoesnot,onitsown,explainwhythepublicappearstobereluctanttoengagewith

financialservicesontheissueoflong-termcarefunding.Inthiscontextitisworthreferringtoarecent

reportbytheSocialMarketFoundationwhichneatlyexplainswhydistrustoffinancialservicesmaybe

the mostimportantcauseofinertia:

Apervasivesenseofdistrustamongconsumersmeanstheyarelikelytowritefinancialservice

providersoffas‘allthesame’,withoutevencheckingwhatisonofferonthemarket.Furthermore,

behaviouraleconomicssuggeststhatconsumersbecomedisengagedinthefaceofmarket

complexity:theyarethereforelesslikelytocheckthemarketiftheycannoteasilyunderstandor

compareproductsonit.36

Therefore,inorderforthepublictoviewfinancialservicesasakeypartofthesolution,initiativesare

requiredtoraisetheleveloftrustandconfidenceintheindustry.

35 CIIIssuesPaper(June2011)Who Cares? The Implications of a new partnership to fund long-term care36 SocialMarketFoundation(July2011)A Confidence Crisis? Restoring Trust in Financial Serviceseditedby

JohnSpringford,p.13


Tackling distrustThereisevidencetosuggestthatpractitionersthatcommittobestpracticeintermsofqualifications,

continuingprofessionaldevelopmentandacodeofethicsbenefitfromgreaterlevelsofpublictrust.37

Currentinitiativestoraisetheprofessionalstandardsofthoseworkingintheindustrymaytherefore

helptoimprovelevelsofpublicconfidenceacrosstheboard.

TheRetailDistributionReview(RDR)isonesuchproject.Itsspecificobjectiveistoimprovepublictrust

inretailfinancialservicesbyraisingthemandatoryqualificationlevelforfinancialadvisersandbanning

commissionpayments.Thisenhancedqualificationrequirementcouldmeanthateventuallymore

practisingadvisersundertakespecialistlearningrelatedtolong-termcare.38Newrulesoncommission

willalsoensurethatadviserscanonlyreceivepaymentfollowingupfrontagreementwiththecustomer

onthecostoffinancialadvice.Themeasuresaredesignedtoreassureconsumersaboutthecompetence

offinancialadviceandthetransparencyofthedistributionprocess.

37 CII(PollingbyYouGov)(2009),Consumer Views of Chartered Status:http://www.cii.co.uk/downloaddata/Consumer_views_of_Chartered_status.pdfSeealsoWellsandGostelow(Nov2009,updated18March2011)Professional Standards and Consumer Trust,PreparedfortheFSA:http://www.fsa.gov.uk/pubs/other/psct.pdf

38 TheCIIcurrentlyhas5000membersqualifiedtoprovidefinancialadviceonlong-termcare.

CII analysis


Long-term care: solving a multifaceted problemFromtheaboveanalysis,itisclearthatdevelopingafairerlong-termcaresystemwherethepublic

activelyseeksappropriatefinancialproductsandadvicetohelpmeettheirfundingneeds,requiresa

multifacetedapproachfocusingonanumberofkey,relatedareas.

The funding modelThefundingmodelcanonlylimitwhatanindividualisrequiredtopayforcareanddeterminethetype

andsizeoftherisktobecoveredbytheinsuranceindustry.Assuch,themodelhassomeimportant

implicationsforthetypesoffinancialproductsthattheindustrycanofferandwhetherconsumersare

abletounderstandwhattheyareexpectedtopayfor.

The market for financial products However,stimulatingconsumerdemandforlong-termcarefinancialproductsisnotjustafunctionofthe

fundingmodel.Athrivingmarketwillonlybeachievedbysubstantiallyraisingawarenessaboutthecost

ofcareandthedegreetowhichconsumersarewillingtoengagewiththeindustry.

Consumer awareness and engagement Thelevelofpublicawarenessaboutcarecostsiscurrentlysolow,andlevelofpublicinactionsohigh,

thatmeasuresoutsideofthoserecommendedbyDilnotneedtobeconsidered.Improvingthedurability

oflong-termcarepolicyandthetrustworthinessoffinancialserviceswillbekeytotacklingtheseissues.

The cost of care homesWhilstthefuturecostofcarehomesisoutsidethescopeofthisreportmuchdependsonit.Ifthe

averagecostofcarehomessuddenlyincreaseswellbeyond£26,000ayear,thengovernmentmight

havetorethinkthelevelofthefundingcapandthiscouldhaveknockoneffectsforthemarketfor

long-termcareproductsandthelevelofconsumerawarenessandengagement.

Thediagramoppositesetsouttherelationshipsbetweensomekeypartsofthepuzzle.


CII analysis

Consumer engagement

Market for LTC financial

products

Appropriateproducts

and advice

Trust andConfidence

The cost of residential care impacts upon the required size of the cap and in turn the market for financial products

Capping tail-end risk improves consumer understanding and insurability

Reliance on needs assessment approach reduces potential for prefunded insurance

Information campaign raises awareness

Dilnot proposals

Cost of residential care

Efforts to professionalise financial services raises standards of practitioner behaviour and consumer trust

Professionalism

Figure 3. A multifaceted approach to long-term care

Source:CharteredInsuranceInstitute

Withthedebateensuingaboutanewfundingmodel,nowisanopportunemomenttoconsiderthe

long-termcarefundingproblemassomethingmorethanjustthesumofitsparts.Thefollowingsection

containsshortessaysfromkeystakeholdersinthedebate,whoidentifypossiblesolutionstothe

wide-rangingissuesdiscussedabove.


Summary

Inordertogainabetterunderstandingofthekeyissuessurroundingthefundingoflong-termcareandtheroleoftheprivatesector,weaskedanumberofexpertstoprovidetheirconsideredviews:

22 PaulLewis–FreelanceFinancialJournalistandPresenterofBBCMoneyBox

24 DrRosAltmann–DirectorGeneral,SagaGroup

27 AndreaRozario–DirectorGeneral,SafeHomeIncomePlans(SHIP)

29 JamesLloyd–Director,TheStrategicSocietyCentre

31 CliveBolton–AtRetirementDirector,AvivaUKLife

33 SteveGroves–ChiefExecutive,Partnership

36 TishHanifan–JointChair,SocietyofLaterLifeAdvisers

38 OttoThoresen–DirectorGeneral,AssociationofBritishInsurers

39 JulesConstantinou–HeadofMarketing,GenRe

41 RonWheatcroft–TechnicalManager,SwissRe

43 BrianFisher–LTCmarketingmanager,FriendsLife

45 DrMatthewConnell–Principal,GovernmentandIndustryAffairs,GlobalLife,Zurich

47 DrPatrickNolan–ChiefEconomist,Reform

49 DrBenRickayzen–CassBusinessSchoolandProfessorPhilipBooth–InstituteofEconomicAffairs

what the experts think


Paul Lewis Freelance Financial Journalist and Presenter of BBC Money Box

Paying for care in old ageWeallagreethatthepresentsystemofpayingforcareinouroldageisconfusingandunfair.Weall

agreeitshouldbechanged.Weallagreethatmoremoneyisneeded.Weallagreethatsomeoneshould

pay.Andweallagreethatitshouldnotbeus.

AndrewDilnotwassetthetaskoffindingafairerwaytopayforcare.HisreportFairerCareFunding

publishedinJulyproposedshiftingthebalanceofpayingawayfromthosewithpropertywealthand

towardstaxpayersasawhole.No-onewouldbeworseoffandmanywouldgain.ButtheGovernmenthas

shownfeeblesupportforhisideasandagreedonlytopublishitsownreportearlynextyear.

Thecostofmakingcarefreeforallelderlypeoplewouldbearound£4billion.39Thereareonlytwoplaces

thatmoneyforcarecancomefrom.

First,youcouldraisetaxes.Topaytheentire£4billionayear,wouldrequireariseofabout1pon

thebasicrateofincometax,currently20pinthepound.Thosewhothinkthatisimpossibleshould

rememberthatincometaxbasicratewas22pinthepoundasrecentlyas2007/08.Oritcouldbedone

byaddingabout1%tothe20%rateofVAT–takingituptothelevelratechargedinIrelandorBelgium

andwellbelowthatincountriessuchasGreece(23%)orNorway(25%).

Butitishardtoseeanypoliticiangivingsuchacommitmentwhenthecostisexpectedtorisesharply

overthenextfewyearsandfurtherrisesintaxmaybeneeded.AnditisharderstilltoseeHMTreasury

allowingthemtoraiseaspecifictaxtomeetaspecifiedexpense.Hypothecation–asitiscalled–always

causesapoplexyamongTreasurycivilservants.

AndrewDilnotsuggestedhismoremodestproposals–whichwouldcostaround£2bnor½%onbasic

rateofincometaxoronVAT–weresosmalltheycouldbelostintheTreasury’smarginsorerror.He

pointedoutthat£2billionisamere1/400thoftotalgovernmentexpendituresoitwouldnotbenoticed.

Buttheguardiansofthenation’spursepointoutthatwhileanyparticularproposalisalwaysaffordable

byitself,itwouldinevitablyleadtoothersimilardemandsandbeforeyouknowwhereyouarethe

countrywouldhaveadebtof£950billion.Oh.Wedo.

ButhasDilnotgotitentirelywrongtoproposeshiftingthecostawayfromindividualstowards

taxpayers?Thereisanothersourceofmoneythatcouldcertainlybeusedtopayforcareformostpeople

foratleastthenextgeneration–theestimated£2.5trillionlockedupinowneroccupiedhousing.40

Thiswealthismainlyownedbythebabyboomerswhoboughttheirhomescheapandhaveseenthem

changefromaplacetolivetoalotterywininlittlemorethanthetimetheirchildrenhavetakento

becomeadults.

Thereareverystrongargumentstosaythatthosewhoownthiswealthshoulduseittopayfortheir


39Dilnot,FairerCareFunding–analysisandevidencep.8240Halifaxpressrelease15/5/2010UKHouseholdWealth41www.nationwide.co.uk/hpi


owncare.Takeatypicalcouple,JoanandMichaelCurwen,wholiveinCornwall.Theirhomeisworth

£260,000.Whentheyboughtitin1981theypaid£34,225.41EvenwhentheirchildrenwereyoungJoan

andMichaelbothworked,oftenlonghours,tomakesurethemortgagewaspaid.

Whentheyboughttheirhomeitwaswortharoundsixtimestheaveragewageof£5600.42Todaythe

houseisworthabout10timesaverageearnings43andtheyhavemadeagainof£225,775.Evenifthe

costofborrowingistakenintoaccount,whichroughlydoublestheamounttheypaid,thewindfallisstill

closeon£200,000.

JoanandMichaelbelievetheyearnedthismoney.Butinrealityitissimplyawindfallderivedfromthe

economytheyhavebeenfortunateenoughtolivein.Anditonlyseemsfairthattheyshouldbeexpected

topaysomeofthiswindfallgaintopayfortheirowncare.

Atthemomenttheygenerallywillnothavetodoso.Iftheyarethefirsttogointocareleavingtheir

partnerbehind,thenthevalueoftheirhomewillbeignored.Itwillalsobeignoredwhenthesecond

goesintocareifthereisarelativeaged60ormorelivingthereand,atthelocalauthority’sdiscretion,if

ayoungerpersonwhohasbeenacarerislivingthere.FiguresfromcarespecialistsLaing&Buissonand

theDepartmentforWorkandPensionsindicatethatonlyaboutoneineightoftheelderlypeopleliving

inacarehomehavesoldtheirhometopaythefees.

Theaveragetimeinacarehomeisabout2.5years.44Theaveragefeeisaround£30,000ayear.45That

putstheaveragecostofcareforanindividualataround£75,000–or£150,000foracouple.Thatis

belowtheaveragevalueofahome–whichisjustover£160,000.46Soasimplemechanismtotakea

chargeagainstthevalueofahometopayforcarewouldseethecostscoveredinmostcases.

Ofcoursemanyolderpeoplewillaskwhythosecarefullynurturedassetsshouldbetakenwhenothers

getcarefree?Butthepeoplewhowouldlosefromthispolicyarenotthoseincarebuttheirheirs

whowouldnolongerinheritthewindfalltheirparentshavemadefromtheeconomictimestheylived

through.Andwhyshouldtaxpayersasawholefootthebillsothatmiddleagedadultscaninheritmore?

42Calculated1981-2011usingONSindexLNMMand2%risein2010and2011432010AnnualSurveyofHoursandEarnings,2010table1.1atab4,OfficeforNationalStatisticswebsite44Laing&Buisson45£700aweekwithnursingcare,£500aweekwithout.Laing&Busisson2011.46LandRegistryHousePriceIndexAugust2011


Dr Ros Altmann Director General, Saga GroupThecurrentsystemoflong-termcarefundingishaphazard,inefficientandunsustainable.Eventhough

ithasbeenobviousformanyyearsthatanageingpopulationwillmeanspendingmoremoneyoncare,

neitherGovernment,norindividuals,havepreparedproperlyforfuturecarecosts.Severalmajorofficial

reviewssincethe1990shavebeenparkedinthepoliticallonggrass,hopefullytheDilnotCommission

willnotsufferthesamefate.

TheDilnotreporthighlightshowfailuretoadjustsocialcarepolicyovertimehasleftcareunder-funded

acrosstheboard–atnational,localandindividuallevel.Thewelfarestatewasdesignedinthe1940s,

whentheideaofmillionsofpeoplelivingtoadvancedoldagewasunheardof.Thefewwhodid,would

haveapensionandbelookedafterbythehealthserviceiftheywereveryillorbytheirfamilies.Such

assumptionsnolongerhold.Timeshavechanged:morewomenwork,familiesarelivingfurtherapart

andtheNHSdoesnotprovideongoingsocialcare.PastGovernmentshavefailedtohelppeopleprepare

forcare,eventhougharoundoneinfourofuswillrequireexpensivecareinlaterlife.

Dilnotdescribeshowcareisthepoorrelationofpublicspendingontheover65s.Governmentspends

over£100bnonbenefits,over£50bnonthehealthserviceandjust£8bnoncare,leavingmillionsof

vulnerableolderpeopleatrisk.

Associalcareislargelyprovidedfromlocal,ratherthannational,budgets,Councilcost-cuttingmeans

reductionsincarespendingareleavingevenmoreindividualswithunmetneeds.

What has gone wrong? The‘problem’isthatpeoplearenowlivingsomuchlongerthanbefore,whichisactuallygreatnews,but

oursupportsystemsarebeingoverwhelmed.Inadequatefundingisinextricablylinkedwithpoorcare

delivery.Recentheadlinesofcarehomefailings,resultpartlyfromCouncilcostcuts,andsuchproblems

willonlyworsenwithoutreform.

Dilnot’sprimefocuswasonimprovingprivateprovisionforcareinEngland–buthisrecommendations

canextendtothewholeUK.Hehighlightedthecurrentsystem’sconfusingandinconsistentrules,with

paymentsandassessmentsbeingsomethingofa‘postcodelottery’.Thecurrentmeans-testoperates

veryharshly.Anyoneneedingresidentialcare,whohasassetsworthover£23,250(includingthevalue

oftheirhome,unlesstheirspousestilllivesinit)mustpayfortheircarehomecostsinfullthemselves.

Somostpeople’swholelifesavingsareatrisk,butmanydonotrealisethisatall.Itisimportanttohelp

themunderstandandprepareforcare,justasweencouragepeopletosavefortheirpension.

Unlikewithpensions,noteveryonewillneedcare,soinsuranceagainstfuturecarecostsisoneobvious

potentialsolution.However,potentialcostsareunlimited,soitisimpossibletofindaffordableinsurance

togivefullpeaceofmind.



How could an insurance market be encouraged?Dilnotrecommendsacapof£35,000–£50,000whichindividualsmustpayfortheirowncareneeds,

beforethestatestepsin.Healsorecommendsahighermeans-testingcut-offwithagentlertaperupto

£100,000,toprotectthosewithmodestassetsfromusingalltheirsavings.Withamaximumamount

of,say,£50,000,peoplecantakeoutaninsurancepolicyorasavingsplantocovercareneeds.They

couldalsoaddextrasavingsorinsuranceiftheywantmorethantheminimumstateprovision.Currently,

however,becausepotentialcarecostsareunlimited,itisdifficulttodevisepoliciesthatwillprovidereal

peaceofmind.

Dilnot’ssolutionisnotperfect(especiallyasresidentialhomeaccommodationcostsarenotincluded)

however,hisframeworkwouldbeasignificantimprovementonthecurrentsituation.Encouragingan

insurancemarketcouldalsohelpcutfuturecarecostsbyincentivisingmoretelehealthandtelecare

services,aswellashomeaidstohelppreventordetectaccidentsorinjuries.Forexample,insurersmay

insistonpeoplehavinghandrails,electronicmonitorsorotherdevicestokeepthemsaferandprevent

themneedingcare,justashomeinsurancecompaniesincreasinglydemandhouseholdershavealarms

andsecurelockstopreventburglaryorfire.

A cap on care costs could also facilitate a market in new savings products to prepare for care, if they prefer this to insurance.Atthemoment,however,Governmentincentivesforprivatefinancialprovisioninlaterlifefocusalmost

exclusivelyonpensions.Thebesttaxincentives,mandatoryemployercontributions,extensivefinancial

productsareallfocusedonpensions.Ofcourse,toofewpeoplearesavingenoughfortheirpensions,

butatleastmanyaremakingsomeprovision,withfinancialfirmsmanagingbillionsofpoundsfor

people’spensions.Butcareneedscanbefarmorecostlythanpensions,andyetthereisalmostnothing

setasideforthis.Moneyhastobefoundurgentlyatthepointofneed,causingindividualsandtheir

familiessignificantdistress.

MeasurestoencouragecaresavingcouldincludeCareISAs,allocatinganannualpension-style

allowancetoprovideforcare,incentivisingemployercareplansandadaptingannuityrulestoallow

pensionfundstobeusedtobuy‘CarePensionAnnuities’,withalowerstartingincomebutcanthen

providemuchlargersumsinlaterlifeifcareisneeded.

Greater use of Equity Release is inevitable, since most people needing care will have to access the value of their property – especially for those receiving domiciliary care. Anotherpotentialsavingsproductthatwouldbefacilitatedbyacaponprivatecarecostswouldbe

‘FamilyCarePlans’.Partoftheproblemputtingpeopleoffsavingforcare,isthatnoteveryonewill

actuallyneeditsoitistemptingtojusthopetheywillnotbeaffected.But,statistically,withinafamily

offour,onepersonwillprobablyneedcare–howevertheydon’tknowinadvancewhichone.Fourfamily

memberscouldclubresourcestogetherandsaveinajoint-accounttoensure,say,thatoneofthem

willhavetheircareneedscovereduptothecap.Suchaccountscouldalsobetiedinwithadditional

insurance,sothatifmorethanoneinfouractuallyneedscare,theywillbeinsured

againsttheextracosts.Byjoiningtogether,eachindividual’scostswillbemuchlowerthansaving

forcareseparately.


What will happen with Dilnot?TheCoalitionhascommittedtotryingtodealwithsocialcareinthisParliament.IthaspromisedaWhite

PaperinSpring2012,althoughthatwillbeaboutdeliveryofcare,notjustfunding.

OneobviousproblemwithDilnot’sproposalsistheircost–anextra£1-£2bnayear–whichmight

explaintheGovernment’sinitiallukewarmresponse.Itishardtoimaginethestatebeinglessgenerous

thanunderthecurrentstarkmeans-test,sotheTreasurymaybeinnohurrytoimplementchange.

However,thecapsandthresholdsofDilnot’sframeworkcouldbeadjustedtooperateinamore

cost-neutralmanner,andmoneycouldbeearmarkedfromtheNHSbudgettopayforcare.Thiscould

actuallysavethehealthservicehugeamountsinfuture.

Reformisessential.Carefundingmustimproveandthemorepeoplecanprovidefortheirowncare

needs,themoretheywillhavepeaceofmindthattheywillbewelllookedafterifrequired.

Whetheritisforourselvesorourlovedones,wewouldallbebetteroffknowingthatcarewillbethereif

weneedit,ratherthanhopingthatthedaywillnevercomeandfailingtobeprepared,orfindingthatthe

standardofcareisinadequatebecauseoflackoffunds.Ourcaresystemisnotdesignedfor21stCentury

realities.Thesoonerwebringitintothemodernworld,thebetterallourfutureswillbe.



Andrea Rozario Director General, Safe Home Income Plans (SHIP)Therearemanyproblemsfacingthecurrentsocialcarefundingsystem,butthebiggestofthese

problemsislackofclarity.PeopledonotknowwhatisexpectedofthemandwhatGovernmentwill

provideforthem.Theydonotknowwhatsupporttheyareentitledtoorhowtheireffortstoprovidefor

themselveswillaffecttheirentitlementtobenefits.Governmenttoosuffersfromalackofclarity–not

knowinghowmuchthestatewillhavetocontributebecausethesystemisill-definedandill-equippedto

meettheneedsofanageingpopulation.

IntherecentreportfromhisCommissiononFundingofCareandSupport,AndrewDilnotmakes

proposalstoaddressthisproblem.Herecommendslayingoutacleardefinitionofhowmuchpeoplewill

havetocontributetotheircarecostsandhowpeoplewillbesupportediftheyarenotinapositionto

contribute.Thestatecannotaffordtopayforuniversalfreesocialcare.Dilnotacceptsthat.Norcanthe

stateaffordnottosupportpeoplewhentheyneedsocialcareprovision.Dilnotacceptsthattoo.Whathe

proposesisadefinedbalanceofresponsibility–aframeworkthatsaysGovernmentpaysforthismuch,

youpayforthismuchandthosewhoabsolutelycan’tpaytheirsharewillbesupportedtodoso.

CommentatorshavesaidthatDilnot’sproposalswillprovetooexpensiveforGovernment.Theyare

rightthatitisnotacheapsolution.Butsocialcarefundingisnotacheapproblemandthereisnocheap

solution.ThisisanopportunityforGovernmenttofinallyaddresswhatisagrowing,andevermore

costly,problem.Otherwise,thiswilljustendupbeingkickedintothelonggrass,ashashappenedso

manytimesbefore,andtheproblemwillgetworseandmorepeoplewillsuffer.

So,iftheGovernmenttakesthison,whatelseneedstobeconsidered?Akeyaspect,andonethat

theGovernmentcanhelptoaddressbyworkingwiththefinancialsector,ishowpeoplewillpaytheir

share.Themeanstestingforthiswilltakeintoaccountaperson’sincomeandtheirassets,tosome,as

yetundefined,extent.Howtheirhousingwealthistakenintoaccountwillbeimportant.Astoowillbe

howpeoplearesupportedtoaccesstheirhousingwealth,especiallygiventhedesireofGovernmentto

ensurethatpeoplearen’tforcedoutoftheirhomesbytheirneedtoaccesscashtopayforsocialcare

andtheincreasedfocusondomiciliarycare.

Equityreleaseisoneofarangeoffinancialservicesproductsthatcanhelptoaddressthisquestion.

Equityreleaseproductsallowpeopletoreleasesomeoftheequityfromtheirhomeswithouthaving

tomove.Therearenorepaymentstomakeduringthelifeoftheloanandbothmembersofacouple

arecovered.Theloanisgenerallyrepaidwhenthehouseissoldafterthedeathoftheindividualor

couplecovered.

SHIPisthetradebodythatrepresentstheequityreleaseindustry,currentlyrepresentingaround90%

oftheequityreleasemarketintermsofvolume.SHIPwasformedtoensurethatthesectorprovides

thebestpossibleprotectionandsecurityforpeopleconsideringreleasingequityfromtheirhomes.

Tothisend,allSHIPmemberssignuptoSHIP’scodeofconduct,whichincludespledgesforcustomer

protection.Thesepledgesincludeaguaranteethatcustomerscanliveintheirhomesforlifeaslongasit

remainstheirmainresidenceandanonegativeequityguarantee,sothatcustomerswillneverowemore

thanthevalueoftheirhomeandnodebtwilleverbelefttotheestate.


Despitetheseguarantees,thereisasignificantbarriertopeopleaccessingtheseandotherretirement

financialservices:thereisalackofreliableindependentinformation.Peopleeitherdonotknowabout

theproductsthatareavailable,donotrecognisehowtheycouldbeusedtohelpthemorfinditdifficult

toknowwhichproductsrepresentasafeoptionforthem.Thesepeople,understandably,donotfeel

comfortablegettingalltheirinformationaboutfinancialservicesfromthefinancialservicessector.

Ifpeoplearegoingtohaveconfidenceinfinancialservicesproductstohelpthemmaketheircontribution

tocarecosts,theyhavetohaveindependentinformationaboutwhattheiroptionsare,clearguidanceon

ifandhowfinancialservicesproductswillaffecttheirbenefitentitlementsandwhatkindofcarecosts

theyshouldbeplanningfor.ThisiswhereGovernmenthasanimportantroletoplay.

Governmentshouldprovidepeoplewithunbiasedandindependentinformationaboutthevarious

optionsavailabletothemintermsofretirementandsocialcarefunding,includingthetypesoffinancial

servicesthatareavailable;informationonthetypesofcareservicesavailable,howtoaccessthemand

wheretoviewassessmentsofspecificservices,aswellasaguidetochoosingtherightservice;anda

guidetothebenefitsthatareavailabletopeopleandhowtheyareaffectedbyvariousmethodsofsaving

andaccessingequity.

Governmentshouldalsobeworkingwiththeretirementfinancialservicessectortodefinewhatproducts

areavailable,orcouldbedeveloped,tomeettheneedsofpeoplewhowanttoaccessfundingtopay

forsocialcare.Innovativeproductshavebeenandcouldbedevelopedtospecificallyaddressjustthis

typeofneed;thiscanbedonemuchmoreeffectivelyinthefuturewithGovernmentandthesector

workingtogether.

WithGovernment’ssupport,wecanensurethatpeoplehaveaccesstotherightsolutionsforthemand

theirspecificsituationsandthattheyhavetheconfidencetomakeuseofthem.



James Lloyd Director, The Strategic Society CentreByproposingthatthestateprovidesprotectiontothepopulationagainstthe‘catastrophiccosts’of

long-termcare,theCommissiononFundingofCareandSupporthaslaidthegroundforadebateabout

howindividualscoulduseproductsprovidedbythefinancialservicesindustrytomeetthecostoftheir

remainingliability.

The‘cappedcost’modelisperhapsbestdescribedasa‘cappedexclusionfrommeans-testedsupport’

model:individualswouldhavetheirneedsassessedbylocalauthoritiesandbeallocatedafinancial

valueforthesupporttheyrequire.Ifthepersonbeingassessedfallsbelowthemeans-testthreshold,

theywillreceivethismoney.Ifthepersonisabovethethreshold,thissupportwillremain‘notional’,and

itisonlywhenaperson’saccumulatednotionalsupportreachesatotalof£35,000thattheywillthenbe

entitledtoactualsupport.

However,throughoutthisprocess,localauthoritieswill–asnow–beundertakingso-called

‘carer-sighted’needs-assessments:ifapersoncanhavetheirneedsmetfullyorpartlythroughinformal

care,theywillnotbeentitledtolocalauthoritysupport–includingnotionalpackagesofsupport–even

iftheyareexperiencingrelativelyhighlevelsofdisability.The‘cappedcost’modelisthereforebuilt

around‘need’definedasafinancialvaluebylocalauthorityresourceallocationsystems,ratherthan

disabilityorexpenditureoncareservices.

So what will the ‘capped cost’ model mean for financial services?TheCommissionpinpointsequityreleaseproductsasonewayinwhichfamiliescouldfundtheirliability;

withtheirliabilitycapped,individualsmaybelessaversetospendingdowntheirhousingwealth

throughtheuseofequityrelease.Thismaywellbetrue,althoughindividualsmaystillbeconcerned

abouttheadequacyoffuturesupportfromthestate.Butthebiggestissuefortheequityreleasemarket

wouldactuallylikelybetheCommission’sproposalforplacingadutyonallcouncilstooffer‘deferred

paymentschemes’,wherebycouncilspaytheresidentialcarefeesof‘self-funders’andreclaimthis

amountafteraperson’shomeissold.Wheretheseschemeshavepreviouslybeenavailable,theyhave

effectivelyamountedtosubsidised,publiclyrunequityreleaseschemes.Ifallcouncilsaretooffer

deferredpaymentschemes,evenchargingabasicrateofinterest,theinteractionwiththeequityrelease

marketwillhavetobethoughtthrough;crowding-outwouldbeaclearrisk.Givenmanycouncilsmay

struggletooffer‘deferredpaymentschemes’,itmaybethatahybridsolutionisarrivedatinwhichmore

councilsprovidedeferredpaymentschemeswithfinancialservicespartners.

Atpresent,theonlyactivemarketforcareinsuranceproductsisimmediateneedsannuities,boughtat

thepointofenteringresidentialcare.Givenmostpurchaserspaysignificantlymorefortheirresidential

carethanthosefundedsolelybylocalauthorities,thismarketwouldsurviveunderthe‘cappedcost’

model,astheseindividualswillalwaysbeleftpayingout-of-pocketforsomeoftheirfees,evenafter

theyreachthe£35,000thresholdofstatesupport.Indeed,thismarketwouldmostlikelygrow.With

self-fundersknowingthatfinancialsupportfromtheircouncilwouldjumpatacertainpointinthefuture,

bydefinition,agreaterproportionofthe120,000self-fundersinresidentialcarewillhaveanactuarial

interestinpurchasinganimmediateneedsannuity.Affordabilitywouldbegreaterformorepeople,and

thecurrentmarketofaround7–8000policiesmightincreaseto15,000–20,000.


Turningtovarious‘pre-funded’insurance-basedcareproducts,thepicturebecomessubstantially

morecomplicated.Wouldindividualsbeabletopurchasepre-fundedinsuranceagainsttheir£35,000

liability?No.Thisisbecausetheliabilityis,strictlyspeaking,uninsurable.Insurerscanpriceproducts

onthebasisoftrendsinlongevityanddisability.But,underthe‘cappedcost’model,aperson’s£35,000

liabilityisalsodeterminedbytheavailabilityandreceiptofinformalcare,andlocalauthoritydecisions

onentitlementproportionaltodifferentlevelsofneed.Thesearefactorsthatinsurerscannotpricefor.

Whatwouldbetheresult?Anypre-fundedinsuranceproductswouldlikelybelimitedtoofferinga

£35,000lump-sumwhenapersonexperiencesadefinedleveloffunctionalimpairment.Thismayor

maynotbewhenapersonbeginsbeingallocatednotionalsupportbytheirlocalauthority.Itispossible

toimaginesomeonemakingasuccessfulclaimontheircareinsurance,receivinga£35,000lump-sum,

butbeingtoldthattheyarenotentitledtonotionalsupportfromtheircouncilbecausetheirpartneris

judgedabletomeetalltheirneeds.Insuchasituation,itwouldbelefttoindividualstospenddownthe

lump-sumastheysawfit.

Ultimately,suchasituationmayberatherunsatisfactoryforcustomers,andiscertainlyinefficientin

insurancetermsandfromtheperspectiveofpolicymakers.However,assumingsuchaproductcost

£10,000perpremium,recentanalysisbytheStrategicSocietyCentrefoundthattake-upwouldbe

unlikelygrowabove6%ofnewretirees(thosestillworkingwouldalwaysbebetteroffputtingmoney

intoapension).47Ataround45,000newpoliciesperyear,thiswouldnotrepresentasignificantnew

marketforproviders.

Asimilarsetofissuesfacedisability-linkedannuities,whichwouldalsolikelyhavetoofferlump-sum

payoutsunderthe‘cappedcost’model.Amongdefined-contributionpensionsavers,relativelyfewhave

suchabigpotatretirementthattheywouldbewillingorabletoallocate£10,000toprotectionagainst

carecosts.Pensionpolicymakersmightalsohavesomethingtosayaboutthisgivenongoingproblems

arisingfromsofewannuitantspurchasinginflation-protectionordual-lifepolicies.

Sooverall,the‘cappedcost’modelwouldlikelyresultinincreasedtake-upofdecumulationvehicleslike

equityrelease,andpoint-of-needproductslikeimmediateneedsannuities.

However,pre-fundedinsuranceprotectionunderthe‘cappedcost’modelislikelytobeverylimited

indeed.Thisisperhapsinevitablewhentwoverydifferentsystemsforallocatingresources–private

insuranceandlocalauthorityresourceallocationmechanisms–seektointeract.Itwouldbeleftto

individualstoresolvethecontradictionsthatwouldflowfromthisinteraction,buttheeffectwouldalso

likelybetofurtherinhibittake-up.

Doesthismatter?Ifthegovernmentweretoimplementthe‘cappedcost’modelwithagenerous,low

capof£35,000,thenprobablynot.But,ifacapwereinfactsethigher–£50,000to£100,000–the

inabilityofindividualstoprotectthemselvesfromthisliabilityinasatisfactorywaywouldlikelybecome

muchmoreofaheadacheforpolicymakers.


47LloydJ(2011)TheFirstStep?AresponsetotheCommissiononFundingofCareandSupport,TheStrategicSocietyCentre,London


Clive Bolton At Retirement Director, Aviva UK Life

Consumer attitudes to long-term care fundingWeknowpayingforcareinlateryearsisasignificantconcerntopeoplethinkingabout,orinretirement,

andpublicinterestinthetopicofsocial,residentialandnursingcareinlaterlifehasbeenparticularly

highinrecentmonths.TheBBC’sinvestigationintostandardsofcareatresidentialhomes,thefinancial

difficultiesfacingSouthernCross,andlastlyJuly’sreportfromtheCommissionfortheFundingofCare

andSupporthasfocusedsustainedattentionontheissue.

Asaleadingproviderofannuities,equityrelease,andadviceforcustomersapproachingorinretirement,

Avivaisonlytooawareofthefinancialconcernspeoplehavearoundcare.Tohelpaddtothedebatein

thisimportantdiscussionpaperfromtheCharteredInsuranceInstitute,Iwanttoshareourinsightsinto

howcustomersviewpayingforcare,andhowtheymayrespondtothenewproposals.

Aviva’sRealRetirementReportresearchseriesanalysesthefinancialissuesfacingtheover55s,andwe

supplementedthiswithasurveyofover4000peopleinearlyJuly(throughICMResearch)investigating

attitudestocarefunding.

Firstlyit’sworthnotingthatcareandhealthworriesregularlyappearinretirees’topfinancialconcernsin

ourquarterlysurvey,butthere’sarealagedivide.Oneinthreeover75sisworriedaboutpayingforcare

–butthefiguresaresignificantlylowerinthe‘youngerretiree’groupof55–64yearolds.

Itthereforeseemsindividualsandfamiliesareyettopersonalisethisissueandtranslateitintotheir

ownfinancialplansandattitudes.TheGovernmentmayhaveachallengeonitshandstoeducatethe

averageUKfamilythatsocialcare(whetherintheirownhomeorinaresidentialhome)isnotfree,anda

newsystemthatattemptstofairlyapportionthecostsofcareisnecessary.

Whilstthemajorityoftheover55swesurveyedacceptedcarecostsshouldbedividedbetween

governmentandindividuals,thereisacleardividebetweenpeoplebelievingonlythe‘betteroff’should

makeacontribution(51%)andthosethinkingthiswouldbetheresponsibilityof‘mostpeople/ortheir

families’(19%).Overaquarterexpectcaretobefullycoveredbygovernmentspending(27%).

Thissuggeststherecommendationforahighermeanstestthresholdshouldbepopular,though

Governmentwillneedtoclearlycommunicatethatthoseunderthethresholdwillstillhavetomake

somecontribution,andthattherecommendedcapappliestocostsincurredonlyforcarethatisrequired

underthenationalassessmentcriteria,nomatterhowitispaidfor.

The reality of finances in retirementAviva’sresearchsuggestspeoplehaveareasonableunderstandingofthecurrentcostsofcarebuthave

noplanforhowtheymightmeetsuchcosts.72%ofallrespondentsdidnotknowhowtheymightpay

fortheirowncareinfuture,andamongstthe1300whoanticipatedafamilymemberwouldneedcarein

thenearfuture,59%hadnoplan.Soevenasrealitystartstobite,inactioniscommon.Anyreformneeds

tomakeiteasierforpeopletoknowwhattheyneedtopay,andtheoptionstheyhaveabouthowtodo

so.TheCommission’srecommendationsforanewawarenesscampaignandbetterinformationadvice

shouldhelpaddressthis.


Whenweaskedtheover55showtheymightpayfortheircareifneeded,aboutathirdwoulduse

savings/investmentsandaquarterwouldconsiderequityrelease.Buthowlikelyisitthataverage

retireescouldmeetthecostsofcareusingthesesolutionsalone?TheJune2011RealRetirementReport

showedmediansavingsamongtheover-55sstandat£11,907–clearlytherewillbehouseholdswith

fargreatersavingsbutthe‘average’retiredfamilyorindividualisunlikelytohaveenoughinthebankto

easilycovercarecostsdespitetherecommendedcap.

Further,oneinfourhomeownersover55sstillhasoutstandingmortgagedebt,withtheaverage

amountowedstandingat£61,370.Forpeopleinthissituation,usingequityreleaseordownsizingin

thefaceofcarecostsmaynotbeanoption.However,theaveragepriceofhomesownedbytheover55s

is£231,306(May2011)–muchhigherthanthenationalaveragehouseprice(£160,519)despitefalling

propertyvalues.Forretireeswithaveragelevelsofsavingsandhousingequity,payingforcarelooks

withinreachifalifetimecapisintroduced,evenconsideringthepotentialresidentialbillsthis

mayinvolve.

How can the insurance industry help?Sowheredoinsurerscomeintohelppeoplewhowillneedtopayforcare?Differentagegroupswill

needdifferentsolutions–thoseatorclosetoneedingcarenowwillhavedifferentoptionstothose

atretirement,andyoungergroupsabletomakelongertermplans.Thesystemmustworkforeachof

thesegroups.

Thoseconsumersalreadyinorapproachingretirementhavelimitedopportunitiestosavemoreor

changetheirfinancialplans,andsoexistingproductscoupledwithamorestraightforwardsystemand

betteraccesstoadviceiscrucial.Weseeaclearroleforequityreleasehere,whichworkswellwitha

proposedcapthatmaybecomeanincentivetoseekcareandsupportearlier,andtoremaininthehome

forlongertoavoiduncappedresidentialcarecosts.

Theproposedcapcouldfosterinsuranceproductspayingafixedsumorincomeinspecificevents

ratherthanbeingtiedtopayingallcarecosts.Thisremovesthepoliticaluncertainty,becomesasimpler

customerpropositionandcouldbeeasierforinsurerstoprice,reserveforandunderwrite.Butwiththe

riskofcatastrophiccostsremoved(atleastforsocialifnotresidentialcare),itislikelytheincentivefor

peopletoinsureinadvancewillreduce.

TheCommission’sproposalsprovidesomecertaintyandamorestableframeworkforcurrentretirees

andthoseapproachingretirement.Acaponcostsandslidingpaymentscalecoupledwithahigher

meanstestingthresholdshouldmakelong-termsocialcostsappearmoreaffordableforaverage

families–oneofthekeyobjectivesofreform.

ItremainstobeseenhowmanyoftheCommission’smorecostlyproposalswillbeadoptedbythe

Government,andthekindofproductsconsumersmaywishtoturntounderthenewsystem.Untilthen,

it’shardtodefinewhatnewinsurancesolutionscouldlooklike.It’sstillearlydaysinwhatcouldbea

longpoliticaldebate,butwe’restartingtoseeopportunitiestohelpcustomersplanandpayforcare.

Aclearpictureofcurrentconsumerattitudes,wealthandassetsiscrucialinensuringthepoliticaland

industryresponsemeetsitsgoals.



Steve Groves Chief Executive, Partnership PartnershipisthelargestproviderofLong-termCareAnnuitiesintheUK.

Partnershiphasbeencampaigningforself-funderstoreceiveappropriatefinancialadvice.Self-funders

arethoseinthecurrentcaresystemwithassets(includingproperty)ofmorethan£23,250inEngland

whohavetopayfortheirowncare.

Long-termCareannuitiesorImmediateNeedsAnnuitiesprovideanincomeforlifetofundcarecostsin

returnforaoneoffpremium.Providedtheincomeispaidtoaregisteredcareprovideritistaxfree.This

productisportableandprovidespeaceofmind.Anyresidualassetscanbeleft,typicallyasabequest,to

family,safeintheknowledgecarecostshavebeenmet.

What are the problems with the current funding system? • Achroniclackofawarenessamongconsumershasleadtoafailureofdemandforlong-termcare

insuranceproducts.Thiscoversachroniclackofawarenessof:

– Thecostsofcare

– Howlongpeoplewillliveincare.Whileaveragelifeexpectancyinresidentialcareis2yearsour

policyholdersliveonaveragefor4years

– Howmanypeoplewillneedcare.Webelievebetween1in2and1in3womenaged65todaywill

needcareduringtheirlifetime

– Wheretogetfinancialadvice.Ofthe130,000peoplewhoenteredresidentialcarein2009,41%

or53,000wereself-funders.Howeveronly7%receivedappropriatelyqualifiedfinancialadvice48

– ThetypesoffinancialproductswhichareavailableMostpeopledonotknowaboutanyofthe

fundingproductsavailable(76%).Only12%hadheardofalong-termcareannuity49

– 80%ofcarehomeshadneverheardofImmediateNeedsAnnuitiesandmostsocialworkers

andDirectorsofAdultSocialServicesareequallyignorantoftheproductsavailabletohelp

self-funders.79%ofcarehomeshavenorelationshipwithanappropriatelyqualified

financialadviser.

Other significant issues include:• LimitednumbersoffinancialadviserswithCF8(estimatedatapproximately8,000)whoare

appropriatelyqualifiedtoprovidefinancialadviceinthisarea.Lackofaccesstosuitablyqualified

advicehasasignificantimpactontheabilityforpeopletopurchasetheappropriatefinancialproduct

• Extremelyfewlocalauthoritiessign-postself-funderstoappropriatefinancialadvice–despite

thoseself-fundersbeingentitledtoit.Withoutappropriatefinancialadviceandfailuretopurchase

anappropriatefinancialproductitisinevitablethatself-fundersprematurelydepletetheircapital

andfallbackonthestate.Partnershipestimatesthatthecosttolocalauthorities(inEngland)from

self-funderswhodepletetheirassetsprematurelyisnearly£1bnayear.TheLocalGovernment

InformationUnit(LGiU)estimatesthat25%ofself-fundersdepletetheircapitalandfallbackonthe

state.50

48OliverWymanresearchforPartnership49GfKNOPresearchforPartnership50Independentageing:councilsupportforcareself-fundersMarch2011


what the experts think• Manylocalauthoritiescompleteafinancialassessment(meanstest)priortoacareneeds

assessmentinanefforttoavoidthecostofcarryingoutthelatteriftheelderlypersonisa

self-funder–eventhoughitisanentitlement!

• Transparencyandstandardisationoflocalauthoritycontributionsarenecessarytostopdistortions

inthemarketgreaterdemandmanagementwouldreduceoverallpublicsectorcosts.

Are Dilnot’s recommendations well designed to solve these issues?WebelievethefollowingrecommendationsbyDilnotwillplayasignificantroleinaddressingthechronic

lackofconsumerawarenessaboutcareandwheretoreceiveadvicewhichwebelieveisfundamentalto

thegrowthofaninsurancemarketforLong-termCare:

• Amajorcampaignpromotingawarenessofthesystem

• Betterinformationandadvicetobemadeavailable

WebelievethatdistortionscreatedbydifferentapproachestothefundingofLTCbylocalauthoritieswill

start,inpart,tobeaddressedbythefollowingrecommendation:

• Introductionofconsistentnationalassessmentcriteria

AlsowemustnotlosesightoftheimportanceoftheLawCommission’sresponseonAdultSocialCare

(whichwillfeedintotheSocialCareWhitePaper).Thisisamuchneededrationalisationwhichprovides

aclear,modernandeffectivelegalframeworkfortheprovisionofadultsocialcareservices.Previously,

byitsownassessment,therewas“anoftenincoherentpatchworkoflegislation,whichmakes

interpretationandapplicationofthelawcomplexandtimeconsuming”.

Ofparticularnoteisrecommendation(6)thatthe“statuteshouldplacedutiesonlocalauthoritiesto

provideinformation,adviceandassistanceservicesintheirareaandtostimulateandshapethemarket

forservices”.Thisofcourseneedsclarityaboutwhatservicesareandhowtheyaredelivered–however

appropriatefinancialadviceforself-fundersiscritical!

What might a Consumer Engagement Strategy Look Like?Partnershiphasspentsignificanttimeworkingwithlocalauthoritiesandotherpublicfacing

organisationstoensurethatpeoplewhoneedinformationandadvicereceivethem.Focusingresources

totheseexistingsourcesofconsumerinformationisclearlyimportant.

Itisclearthatprovidinga‘onesizefitsall’bookletorgenericwebsiteisnotsufficient.Consumers(the

elderlyandpeoplewithpowersofattorney)willbemakingcarefundingdecisions,typicallyatatimeof

distress,followinganaccident.Theyneedhelpandadvicetailoredtotheirneeds!

• Local authorities,whichareakeypointofcontactforconsumers–requiresystemswhichare

focusedonindividualneeds.Ideallytheyshouldidentifyself-funderswellinadvanceoftheirneed

forcare.Partnershipisworkingcloselywithover30localauthoritiestogenerateawarenessofthese

issues,andhelpthemdevelopconsumerfocusedprocessestosignpostself-funderstoindependent

financialadvice


• payingforcare.co.ukPartnershiplaunchedthissiteinresponsetoaseriousinformationgapabout

wheretogetadviceoncareoptionsandinparticularwheretogetqualifiedfinancialadvice.Thissite

alsoprovidesopportunitiestodirectly‘chat’withqualifiedcarefeesadvisers.Partnershippioneered

thiswhenitrecognizedthat29millionpeople‘Googled’theterm‘payingforcare’andthat69%turn

totheinternetforinformationoncareforolderpeople.

What preconditions are necessary for the development of a healthy market for long-term care financial products and services?AsthePolicyExchangesetoutinitsreport–‘Careless,FundingLong-termCarefortheElderly’

June2010

Political uncertainty about the future of social care funding over the last 12 years has

caused the private care insurance market to fail. Why pay for something that the State

will provide for free.

This requires a clear statement from the Coalition Government that free personal care for the

elderly cannot be provided entirely by the State.

Partnershipbelievesthatclarityaboutwhattheconsumerisrequiredtopayforandwhattheindividual

hastopayforiscritical.Withoutthisconsumerswillbeunabletoplaneffectivelyfortheircareprovision.

Thisis,inouropinion,theprincipalpre-condition.HoweveritisworthnotingthattheRetailDistribution

Review(RDR),willrequiremoreadviserstoachievehighlevelsofqualification,whichformanywill

includeCF8,enablingmoreadviserstoadviseoncareproducts.

How can we ensure that consumers have trust and confidence in financial advice and products related to long-term care?Partnershipbelievesthataccesstoappropriatelyqualifiedfinancialadviceiskeytothis.

AdvisersmustgetCF8qualificationstoprovideadviceoncareandideallyER1forequityrelease.

AnothervaluableconsumerbenchmarkintheprovisionofcarefinancialadviceisSOLLA(theSocietyof

LaterLifeAdvisers),whichisanindependentlyauditedsocietyofadvisersskilledinprovidingadviceto

theelderly.


Tish Hanifan Joint Chair, Society of Later Life Advisers TheDilnotCommissionhashighlightedsomekeyaspectsofthecurrentshortcomingsofthecare

system;thecomplexityofthestateprovisionforcarefundingandtheresultinglackofclarityforthe

olderpersonortheirfamilywhoaretryingtonavigatetheirwaythroughamyriadofoptionswithno

clearsignposts.

Muchhasbeensaidofthe‘postcodelottery’bothintheprovisionofNHScareandforlocalauthority

fundedsocialcare.Thislotteryisalsotrueinrelationtothepathwaysbywhichtheolderpersonenters

thesystemandfindstheirwaythroughit.

TheneedformuchofmiddleEnglandtofundtheircareinwholeorinparthasbeeninplaceforover18

yearsyetthereisstillmuchconfusioninthemindoftheconsumerastowhopaysforwhatandwhen.

Partofthisconfusionisahistoricaccidentinthatgovernmenthascarvedoutcarefundingintotwo

discreteareas;continuingcareprovidedbytheNHSandsocialcarefundedbytheLocalAuthority.

WiththesocialimperativebeingthatNHScareisfree[orseentobe]andlegalandfinancialconstraints

ofLocalAuthorityprovisionofsocialcarerequiringthattheindividualcontributetothecostoftheircare,

thefinancialimplicationoffallingintoonecategoryratherthananotherareverydifferentandpotentially

costly.Howevertheboundariesbetweenthesecategoriesareblurredandindistincteventothosewho

workwithinthemorprovidelegaladviceastoentitlement.

Againstthisbackgrounditislittlewonderthattheconsumerfindsthesystemdifficulttounderstand.

Theyexperiencecarewithinthecontextoftheirneedsandarebewilderedatthefinancialimplications

ofbeingdesignatedintocategories.ThisconfusionleadstowhatDilnotandothershaveidentified;a

feelingofinjusticebasedonpoormanagementofexpectations.

AsuccessofDIlnotandthedebateithasengenderedwillbeifthepublicarehelpedtowardsa

greaterawarenessoftheuniversalneedtoconsidertheprospectofbothneedingcareinthefuture

andtherecognitionthat,formanyofthem,thiswillalsoinvolveafinancialburdenwhichtheymust

factorintotheirretirementplanning.Financialserviceshasakeyroletoplayinthisbyworkingalong

sidegovernmentdepartmentstoensurethatconsumereducationisgivenahighprioritywithinthe

forthcomingWhitePaper.Governmentdepartmentsarewellpositionedtoprovideaccesstoinformation

andtohelpwithsignpostingtheindividualthroughthesystemandtheoptionsavailable.

Dilnotreferstothepossibilityofanationalwebsiteasapossiblevehiclefordeliveryofthisinformation.

Whilstduplicationofpublicsector,NFPandcommercialsitesisalmostcertainlyawasteofresources

andpotentiallyincreasescomplexity,thereareinherentproblemswiththeprovisionofjustone

‘approved’resource.Notleastoftheseisthepotentialforaprescriptiveandnarrowapproach.There

areanumberoforganisationsfromboththepublicandthecharityandNFPsectorwhoallprovideclear

informationinanaccessibleway.

Theevidentneedisforgoodcoordinationoftheseresourcesinordertobalancewiderangingadvice

withclarityofinformation.ThepivotalroleofLocalAuthoritiesinsignpostingtheirself-fundersis

increasinglybeingrecognised.Therehavebeenanumberofdepartmentalinitiativestotryandassist

LocalAuthoritiestomeettheirresponsibilitytoself-funders.51


51J.Carr-WestandL.Thraves(March2011),IndependentAging:CouncilSupportforCareSelf-Funders,LocalGovernmentIntelligenceUnit


DilnotsupportstherecentLawCommissionrecommendationthatthisresponsibilitytoself-funders

shouldbemandatory.HoweverDinotalsohighlightsthatitisnotonlyinformationandsignpostingthat

theindividualneedsbutalsoadvice.Inthisregard,financialserviceshasanimportantroletoplay.The

financialsectorcanandwillrisetothechallengeofprovidingproductsandsolutionstomeettheneed

ofanageingpopulation.Inallaspectsofretirementplanningthisisalreadybeingachievedandthe

sectorwillcontinuetomakeprogress.However,iftheindividualistobenefitfromtheinnovationwhich

financialservicescanprovidethentheymustbehelpedtounderstandtheoptions,makedecisionsand

actonthem.

Behaviouraleconomicscontinuestoprovidemuchenlighteningresearchintheareaofdecisionmaking.

Oneaspectofthiswhichisaconstantisthatcomplexityanduncertaintyleadstoinertia.Facedwith

tryingtomakesenseofmanynewfactorsandasystemwhichisusuallyunknownterritory,theability

ofpeopletotakecleardecisiveactionisunderstandablyoftencompromised.Factorintothisdecision

making,theadditionalproblemthat,inthecurrentsystem,decisionsareoftenmadeatatimeofcrisis

anditbecomesapparenthowdifficultcleardecisionmakingisfortheindividual.Whateveroptionsare

available,thesewillonlybebeneficialifthedecisionmakerknowsaboutthemattheappropriatetime,

andisguidedthroughthemsothattheyfeelconfidentinthedecisiontheyneedtomake.

Awellinformedconsumerwhothenhasaccesstogoodandclearfinancialadvicewillbeabletomake

theimportantdecisionsneededinrelationtocareplanningandotheraspectsofretirementplanning,

bothforthemselves,andforthoseforwhomtheymayactasattorneys.

However,abarriertothetake-upoffinancialadvicebytheconsumeristhelackoftrustthatmany

peoplehaveinthefinancialservicessector.Muchresearchsupportsthisview.TheCIIforexample,

foundthatoneinfiverespondentswillnevertrustfinancialservicesagainand72%ofpeoplehavenot

verymuchornotrustatallinfinancialadvisersandlifeinsuranceproviders.52

TheSocietyofLaterLifeAdviserswasfoundedin2008asanotforprofitorganisation,toassist

consumersandtheirfamiliesinfindingtrustedaccreditedfinancialadviserswhounderstandfinancial

needsinlaterlife.Itwasestablishedtoaddressthisneedbyenablingtheconsumertofindspecialist

independentfinancialadviceinwhomtheycouldhaveconfidence.TheLaterLifeAdviserAccreditation

(LLAA)wasdevelopedinconjunctionwiththeFinancialServicespartnership(thentheFinancialServices

SkillsCouncil).Inestablishingtheappropriatestandardsforthisaccreditation,theworkinggroup

includedAgeConcernandWhich?whobothstressedtheneedforadviserstobeabletodemonstrate

theirsoftskillsandevidencetheirabilitytounderstandthespecificneedsofthissector.Thestandards

forthisaccreditationcanbefoundat:

http://www.societyoflaterlifeadvisers.co.uk/PDF/Prospectus_Brochure-v.07.pdf

Byensuringcontinuedconsumeraccesstoinitiativessuchasthisandbydevelopingspecialistfinancial

advicetomeetstheneedofanageingpopulationaswellastheimplementationoftheincreased

professionalismunderpinningtheRDR,financialserviceswillbeabletotoprovidetheconsumerwitha

keyproductforasuccessfulretirement–high quality advice.

52CII(2010)Whatwetalkaboutwhenwetalkabouttrust


Otto Thoresen Director General, Association of British Insurers53

Long-termcareaffectsusall.Itishighlylikelythatmanyofuswillrequiresomeformofspecial

assistancelaterinlife,whenthroughfrailtyordisability,wefinditincreasinglydifficulttocarryout

normaldailyactivitiessuchaseating,dressingandshopping.Eventhosefortunateenoughnottoneed

thissupportwillalmostcertainlyknowsomeoneintheirfamilyorcircleoffriendswhodoes.

Thefactthatwearelivinglongerisoneofthegreatachievementsofthelastcentury.However,thisis

placingnewpressureonsocietytomeettheadditionalcostsofanageingpopulation.Thestatealone

cannotpaythebillsinvolved.Theaveragecostofcareinaresidentialhomeis£25,000ayear.Thisrises

tonearly£39,000perannumwhennursingisrequired.Despitethispotentialfutureexpenditure,most

peoplearefailingtoplanaheadforthefullrangeofneedstheymayhaveinretirement.

What contribution can the insurance sector make?1) Weneedtohelppeoplebetterprepare.Wearedevelopingpoliciesandactivelyengagingwith

keystakeholderstopromotetheimportanceofbuildingamorefinanciallyresilientsociety.The

insuranceindustryisuniquelyplacedtorelievesomeoftheburdensonthestatebyproviding

savingsandinsuranceprotectionproductsthathelppeopleplanforretirementandanyunexpected

eventsthatmayresultinalossofincome.Byencouragingindividualstotakemorepersonal

responsibilityfortheirownandtheirfamily’sfinancialsecuritywecanhelpconstructasocietythatis

lessdependentonthewelfarestate.

2) TheABIsupportstherecommendationsbytheDilnotCommissionasaframeworkforasustainable

solutiontofundinglong-termcare.ItisessentialthatMPsfromallpartiesworktowardsa

sustainablesettlementandthattheissueisnotputontheshelf.Thereneedstobeclarityover

therespectivecontributionswhichgovernmentandindividualswillbeexpectedtopay.Oncethis

frameworkisinplace,insurerscandevelopthenecessaryfinancialproductstoenableapersonto

covertheirshareofcarecosts.

3) Mostimportantly,weneedtogetpeoplesaving.Aroundhalfthepopulationareeithernotsavingina

pensionatallorarenotsavingenoughforadecentretirementincome.TheABIisthereforeastrong

supporterofautomaticenrolmentintoworkplacepensionsavings,startingfrom2012.Itwillbea

socialrevolutionforretirementsavings,theimportanceofwhichishardtounderestimate.

InsurersarereadytoworkinpartnershipwithgovernmentandotherkeystakeholderstoensureBritain

isaresilientsociety.Wewillcontinuetoexplorewaystheprivatesectorcanfillthegapbetween

people’sprotectionneedsandtheservicesofferedbythestate.


53ThetextwasfirstpublishedonEpolitixhere:http://www.epolitix.com/latestnews/article-detail/newsarticle/building-a-more-financially-resilient-society/


Jules Constantinou Head of Marketing, Gen Re

How should the insurance industry respond to Dilnot?TheDilnotReportwaspublishedonJuly4th2011andoutlinestheNationalCommissionontheFunding

ofSocialCare’srecommendationsonfundingandsupport.54Sinceitspublicationthefocusofdebate

hasbeenaroundthe‘three’numbers;35,000,100,000and10,000referredtointhereport.£35,000

representsthemaximumthatanyindividualwouldcontributetothecostoftheirsocialcare.£100,000

istheproposedmaximumvalueofassetsanindividualcouldholdbeforetheirentitlementtofullstate

fundingdisappearsandtheywouldberesponsibleforthefull£35,000.Thisisasignificantchange

fromthecurrentlevelof£23,250andmuchfairergiventhattheassetsofmostwhorequiresocialcare

aretiedupinbricksandmortar.Althoughthisrepresentsasignificantshiftfortheindividual,most

commentatorsbelievethiswillnotmateriallyaddtothecostsforthestate.Finally,£10,000isthe

recommendedmaximumcostpermonthforfoodandaccommodationwhilstrequiringsocialcare.There

willbeacontinuedfocusonthesenumbersoverthenextfewmonths,asthedebateaboutturningthe

broadframeworksetoutbytheCommissionintoapracticalstructuredevelops.Thedevilwillbeinthe

detailandalreadytherearesignsthatthe“three”numbersareinherentlymisleadinginthatthepublic

arelikelytopayalotmorethan£35,000beforetheStatetakesfullresponsibility.

DespitethesecaveatstherearetwomessagesfromtheCommissionofparticularimportance.Firstly,

everyonewillpaysomethingfortheirsocialcareunlesstheyareunabletodosofinancially.Thisisan

importantmessageasitcreatesadistinctdifferencebetweenthefundingforsocialcareandtheNHS,

whichiscurrentlyfreeforallatthepointofentry.Secondly,thattheStatewillassumeresponsibility

forthepotentiallycatastrophiccoststhatattendsomeonerequiringsocialcareformanyyears

(currently,self-funderswhosefundsbecomeexhaustedarecostinglocalauthoritiesbetween£500m

and£1bnperannum).

Boththesemessagesshouldreinvigoratetheprivateinsuranceindustryandprovideaplatformfor

insurerstodevelopproductstoassistthepublictomeettheircommitmentsunderanewsystem.Sofar

theindustryhasunderperformedwithonly30,000prefundedpoliciesinforcebytheendof2010andno

morethan1500newimmediateneedspoliciesbeingboughtperannum.

Inordertomakethemostoftheopportunitiesthereareanumberofissuesthatstillneedtobeclarified

beforethemarketwillgainmomentumandadviserswilldeveloptheconfidencetorecommend

Long-termCare(LTC)policies.

Fundamentaltotheprocessisthedevelopmentofafundingsystemthatisbasedonanational

assessmentframeworkwithaclearexpectationofthecarethatcanbeexpectedasaresultofthat

assessment.Thecurrentsystem,inwhichtheavailabilityoflocalauthorityresourceleadstodiffering

levelsofcareforsimilarneedsdependentuponwhereanindividuallives,hasledtogreatdifficultyin

givingclearadvicetopotentialpurchasers.TheCommissionhasmaderecommendationsontheneedfor

portableassessments,butitisthepracticaldeliveryofthesethatwillalsohaveabearingonthefuture

ofanyprivateproducts.

54https://www.wp.dh.gov.uk/carecommission/files/2011/07/Fairer-Care-Funding-Report.pdf

ThisarticlereferencessourcematerialthatissubjecttoCrownCopyright2011.CrownCopyright2011materialisreproducedwiththepermissionoftheControlleroftheHMSOandtheQueen’sPrinterforScotland.


ThepurchaseofLTCpoliciesinthepasthavemostlybeen‘distressedpurchases’.Thedevelopmentof

anillnessoftenpanickedfamiliesintomakingquick,uninformeddecisionsontheprovisionandthe

financingofcarefortheirlovedones.Thelackofclearsignpostingtoadviceonboththeprovisionand

thefinancingofsocialcarehasbeenhighlightedbytheCommissionwhomaderecommendationsfora

Stateeducationcampaigntoaddresstheseissues.

InadditiontothesestructuralissuesthatcanbeaddressedbytheState,theinsuranceindustryitself

needstocloselyexamineandaddresscriticismsoftheexistingsuiteofproductssotheybecomemore

attractivetoadvisersandtheirclients.

ThemaincriticismofprefundedLTCproductshasbeenthelackoflong-termpremiumguarantees.Most

oftheproductshadpremiumreviewsbuiltineverytenyearsinordertomanagetheuncertaintyofthe

underlyingexperience.Thisresultedinlargepremiumincreasesorbenefitreductionsonpoliciesfor

ageingpolicyholders.Thosewhoseassetsweretiedupintheirpropertyoftenlackedthefluidresources

torestorethecovertotheleveltheyhadplannedforyearsinadvance.Astheexperienceofthose

policeshasbeguntoemerge,pricingactuarieshavegainedgreaterconfidencewhich,coupledwiththe

State’sappetiteforthecatastrophicclaims,shouldcreateanenvironmentwherepremiumguarantees

areeasiertoprice.

Theothermajorchallengeisthedifferencebetweenthepublicperceptionofhowtheindustry

providescoverandtheactualprocessesthatallowittodoso.Onlyaround25%to33%willrequire

LTCeventually.Lookingatthisfromadifferentperspective,67%to75%ofuswillnot!Theaesthetic

appealofpre-fundedproductsisvastlydifferentfromthesetwocontrastingviewpoints.Themajorityof

peoplewillfeelthattheywillnotbenefitfromtheirhardearnedmoneyandthattheinsurerswill.Whilst

thoseintheindustryunderstandthatinsurancereliesonhomogeneouspoolstospreadriskacrossthe

populationandthatthepeoplewhoeventuallyclaimarebenefitingfromthosewhodon’t,thisisnotthe

perceptionofthemaninthestreet.Insurerscannotbecomplacentandshouldseektodesignproducts

thatprovidebenefitstothosewhodonotclaimaswellasthosewhodo.Examplesofthesearedisability

linkedannuitiesthatpayalesserinitialamounttothepolicyholderandthenpayamultipleofthat

amountiftheyrequiredcare.TheUnitedSatesmarkethasseenthegrowthofintergenerationalproducts

whereanyunusedbenefitsarebequeathedtospousesorheirs.Inotherspheres(termassurance)

productspromisingafullorpartialreturnofpremiumstopolicyholdersthathaven’tclaimedorlapsed

havebeendeveloped.

ShouldtheproposalsoftheCommissionbeadopted,theinsuranceindustryneedstobereadytotake

advantageofthenewenvironment.Theuncertaintiesthathaveattendedthefundingofsocialcare

forsolonghavemeantthatithasbeendifficulttodevelopproductsthatmeetpeople’sneedsandare

attractivetobuy.Whilstthesepotentialchangesleadtooptimism,itisclearthatanyinsuranceproduct

isnotthepanaceathatwillprovidecompleteindemnityagainstthepublic’ssocialcarecostsbutoneof

rangeoftoolsorfundingmechanismsthatpeoplecanaccesstogetbetterfinancialpeaceofmind.



Ron Wheatcroft Technical Manager, Swiss Re

Has Dilnot loosened the ties stifling long-term care funding?Itisgenerallyacceptedthatthecurrentsocialcaresystemisnolongerfitforpurpose.Itiscomplex,

poorlyunderstood,andcreatesextrastressforfamiliestryingtocopewithemotiveissuesinfundingand

arrangingcarefortheirlovedones.Hence,theDilnotCommissionreportisbothtimelyandwelcome.

Fundingincreasinglongevity,whetheringoodorpoorhealth,willbeachallenge.Researchpublishedat

theendof2010bytheDepartmentforWorkandPensions,basedonONSpopulationprojectionsandlife

expectancyestimates,suggeststhatnearlyoneinfivepeoplecurrentlyintheUKwillliveto100.

Despiteincreasedlongevity,theaveragepersonwillspendagreaterproportionoftheirlifeinpoor

health.ONSdatashowthatamalebornbetween2004and2006canexpecttospend11.2%ofhislifein

poorhealth,comparedwith9.0%forsomeonebornin1981.Forfemales,theproportionhasremained

broadlystableat13.2%.

Weneedtoaddressthefinancialconsequencesofincreasedlongevitygenerallytoachievethe

appropriatecostbalancebetweenthoseinworkandthosenotworking.Increasestothestatepension

age,auto-enrolmentandtheremovalofthedefaultretirementagewillstarttoaddressthis.

Whiletheseinitiativeswillhelp,thereisagreatriskthatpeoplemakinganyprovisionwillthinkit

sufficienttoprovidetheretirementincomeandlifestyletowhichtheyaspire.Realistically,wecannotget

awayfromthefactthatasignificantincreaseinfundingtomeetthecostoflateryearsisessential.

The Commission’s recommendationsShortofcompulsion,thereisnosinglewaytomeetcarecosts.ItispossiblethattheCommission’s

recommendationsmaybeacceptedbythegovernmentinwhole,inpart,orevenrejectedastoocostly.

Nonetheless,theysetoutsomestrongindicatorswhich,ifadopted,shouldencouragethefinancial

servicessectortodesignanddeliverproductsthatdovetailwithstateprovision.

Thecommissionproposesapartnershipmodel,basedonacaponcarecostsofaround£35,000,tiered

forthoseagedbetween40and65.Themeans-testedthreshold,setat£100,000,shouldencouragethe

creationofsavingsandinsuranceproductstocoversome,orall,ofthecostofcareforpeoplewhose

assetsexceedthislimit.

Currently,noinsurersofferpre-fundedlong-termcareprotectionpolicies.Thecaponcosts,particularly

ifupratedinlinewiththebasicstatepension,couldencourageprovidersotherwiseworriedaboutthe

possiblelong-termliabilityforclaimscosts.Thissupportsthedevelopmentofspecificcareproducts,

orcarebeingcoveredaspartofawiderpackage.Oneexamplemightbeanextensiontocoverunder

acriticalillnessorincomeprotectionpolicy.Forpureprotectionproducts,andinordertomaximise

consumeraccess,theregulatoryregimeforpureprotectionbusiness(ICOBS)shouldbeused.

Equityreleaseproductsshouldalsohaveaplaceforpeoplewhoarecash-poorbutasset-rich.Inthe

absenceofotherprovision,manypeoplewillstillneedtodrawonthevalueoftheirpropertytomeet

theircarecosts.

Itisappropriatethatthosewhoareunabletoprovideforthemselvesthroughsavingsorother

meansshouldbeprotected.Consequently,theproposedsafetynetforthoseforwhomcarecostsare

unaffordableiswelcome.


what the experts thinkLinkage with pensionsGreaterflexibilityandcloserlinkswithpensionprovisionshouldbeexplored.Pensionshavebecome

moreflexibleinresponsetochangingconsumerneeds.Forexample,thereisagrowingmarketfor

annuitieswhichrecognisereducedlifeexpectancyandothercharacteristicsatthepointofvesting.

Impairedlifeandenhancedannuitiesarenowcommon.Themarketdoesnot,however,provideanatural

vehiclewhichrecognisesandaddressestheneedforextramoneyincludingpayingforcarewhen

circumstanceschangeaftervesting.

TheCommissionrecommendsthatfurtherconsiderationbegiventodisability-linkedannuitieswhere

paymentsincreasewhentheannuitantbecomeseligibleforcare.Currently,thisdesignwillnotbe

approvedbyHMRCunderthepensiontaxrules.

Meanwhile,thegovernmentshouldconsiderallowingpre-fundingofcarecoststositalongsidepension

savings,withtaxreliefoncontributionsasanextensionto,orwithin,theannualallowance.

Engaging consumers to prepare for possible care needsAlthoughsomecomplexityremains,thesimplersystemproposedbytheDilnotCommissionshouldhelp

toclarifywherepersonalresponsibilitylies.Agovernmentcampaigntohelppeopleunderstandthenew

systemisessential,withindustrypromotioncomplementingthismessaging.

Weneedtoencourageconsumerstolookholisticallyattheirfundingrequirementsandthefinancial

consequencesofnotbeingabletomeetthem.Thesolutionsmayincludedrawingonsavings,income–

whereconsumersareeffectivelyself-insuringtherisks–andinsuredbenefits.Thishassimilaritieswith

thewaythatconsumersarelookingbeyondtraditionalpensionproductsandusingISAsandpropertyas

partoftheirretirementincomeplanning.

Accesstohigh-qualityadvicethathelpspeopleplanwillbevital.Therearealreadyanumberofexcellent

advisersprovidingatop-classserviceforpeopleenteringcareandfortheirfamilies.Ahighstandard

isappropriateheregiventherangeofotherdistressingissueswhichcanemerge.Theproposals,if

adopted,shouldcreatefurtherdemandforadviceservicesforcareandestateplanning.

Weneedtorecognisethatsomeconsumerswillnotwanttouseadvisers,butwillinsteadbuydirectly

fromaninsurer.Thisismostlikelytobethecasewherecarebenefitsformpartofaprotectionpackage.

Makingpeopleawareoftheoptionswillbekeyhere.ThereisalsoanimportantrolefortheMoney

AdviceServiceinclarifyingpeople’sresponsibilities,irrespectiveofwhethertheyuseanadviserornot.

ThisshouldbeanintegralpartoftheFinancialHealthCheck.

Overall,theseproposalsarepositivenewsfortheindustry.Ifimplemented,ourresponsewillneedtobe

onethatwilldeliverresultsandtheplanningtowardsthatshouldstartnow.


Brian Fisher LTC Marketing Manager, Friends LifeTheDilnotCommissionreportonthefundingoflong-termcarehasraisedthepublicawarenessof

theneedtoconsiderhowfuturecarewillbefunded.Againstademographicbackgroundofincreasing

numbersofpeoplelivinglongerandbeinglikelytoneedcarelaterinlife,itisessentialthatthisissue

isaddressed.

Thereportthrowsupanumberofpositiveproposals:

• Thereshouldbeauniversaleligibilitycriteriaforcaretoendthe‘postcodelottery’andcare

packagesshouldbe‘portable’ifindividualsmove–althoughthereisalsoaschoolofthoughtthat

localauthoritiesshouldbefreetodeliversolutionstolocalsituations

• TheGovernmentshouldinvestinanawarenesscampaignanddevelopanewstrategytoimprove

accesstoinformationandadviceforthepublic.Thisisavitallyimportantarea.Fundinglong-term

careiscomplexbyitsverynaturesoarobustinformationandadviceprocessisessential.

• Thereshouldbebettersupportforcarers.

Followingpublicationofthereport,therewasmuchfocusontheproposalsregardingthemeanstest

thresholdandtherespectivecapsontheamountthatthepublicwillbeexpectedtocontributetowards

theirowncare.

Theseareasarefundamentallyimportantandtheyarealsotheareasofgreatestcomplexity.Anumberof

headlinesfollowingthereportsuggestedthatthemeanstestthresholdwillbe£100,000,witha£35,000

caponthecostofcareanda£10,000caponthecostofaccommodation.However,thereisalevelof

complexitybeneaththiswhichneedscarefulconsideration.

Regardingthemeanstestthresholds,theproposalsrecommendchangingtheuppermeanstest

thresholdleavingthelowermeanstestfigure–thecapitaldisregard–at£14,250.Capitalbetween

theupperandlowerfiguresisconvertedintotariffincomeattherateof£1perweekforevery£250.

Thismeansthatfulllocalauthoritysupportbecomesavailablewhenanindividual’sassetsaredown

to£14,250.

The£35,000caponthecostofcareisaccruedattherateofalocalauthorityassessedneedandnotthe

amountthatanindividualmayhavepaidfortheircare.Thisisanimportantareaasitisonlythecostof

carethatthelocalauthoritydeemsnecessarythatwillaccruetowardsanindividual’scap.

Similarly,foranindividualpayingfortheirowncareinaprivatecarehome,irrespectiveofwhattheypay

infees,thecapwillonlyaccrueatthelocalauthority’scontractrate(whichislikelytobelessthanthe

rateschargedbyaprivatecarehome)lessthe£10,000p.a.accommodationcharge.

Intheareaofmeanstestingtheremaybesomeusefulexperiencewecandrawon.Walesremovedthe

gapbetweenthetwothresholdsinApril2010,leavingasinglemeanstestfigure.Theremaybesome

valueinlookingatthiswithaviewtodevelopingasystemthatisveryeasytounderstandandcost-

effectivetoadminister.

Encouragingpublicengagementiscrucialasweknowanecdotallythatmanypeoplestillpreferto

thinkthattheywillnotneedcareinthefuture.TheDilnotCommissionplaysavitalrolehereinraising

awarenessandputtingforwardproposalsforimprovingthesysteminthefuture.


what the experts thinkInaddition,localgovernmentandtheNHShavetheinfrastructuretofacilitatetheflowofinformation

tothepublicthrougharangeofpublictouchpoints.ConsumerorganisationsliketheSocietyofLater

LifeAdviserscanworkwithlocalauthoritiestoprovideaccesstospecialistindependentadvicetothose

requiringcareandtheirfamilies.Allofthiscanhelptoboostawarenessandknowledge.

Allofthoseactiveintheprovisionoflong-termcarehaveadutytoengageinshapingtheproposalsput

forwardbytheDilnotCommission.ConsiderationalsoneedstobegiventotheStatebenefitssystemand

howthisrelatestothefundingoflong-termcare.


Dr Matthew Connell Principal, Government and Industry Affairs, Global Life, ZurichThecurrentsystemoflong-termcareinEnglandandWalesisnotsatisfactory–ittriestomuddle

throughwithmeanstestedbenefitsthatcanbeparticularlyharshonpeoplewhohavesavedhard

throughouttheirlives.

However,experiencearoundtheworldshowsthatstatesocialinsuranceforlong-termcarecanbevery

expensive,puttingsignificantupwardpressureonlabourcosts.

Dilnot’splansseemtobeasensiblemiddlewaybetweenthesetwoextremes,settingouttherole

oftheindividualandthestateinawaythattheycanbothmanage.However,therearestillthree

majorchallenges:

• Anyincreaseinstateexpenditure,howevermodest,willbedifficultinthecurrenteconomicenvironment

• Overtime,itwillbedifficulttomaintainthebalancebetweenstateandindividualresponsibilities–an

externalbodymaybeneededtomonitorandreinforceanysettlementthatcomesoutofthisprocess

• Dilnot’sproposalsdonotincludemuchscopeforindividualsto‘topup’thelong-termcareservices

thatapplytothem–theycouldbemademoreflexible,sothatindividualscan,forexample,make

provisionfor‘hotel’servicesthatextendbeyondthestandardoffering.

Long-term Care Insurance – The ChallengesAtfirstsight,long-termcareisperfectlysuitedtoinsurance,forthreereasons:

• First,itaffectsasignificantminorityofpeople.Around20%ofmenand30%ofwomenneed

long-termcareduringtheirlives

• Second,forthosewhodoneedit,thecostcanbehuge–around£39,000ayearforsomeonewho

needsnursingcareinanursinghome

• Third,thehealthconditionsthatforcepeopletorelyonlong-termcarearevariedandonlypartly

influencedbyfamilyhistory,soitishardforindividualstoknowwhethertheywillneeditornot.

Itisthiskindofdistributionofriskthatusuallymakesforasuccessfulinsurancemarket–itenablesa

largenumberofpeoplewhopotentiallyfaceacatastrophiccosttosharetheburdenbetweenthem.

However,viableprivatemarketsinlong-termcareinsurancehavenotsprungupspontaneously.Even

intheUS–acountrywithalongtraditionofprivatehealthinsurance–onlyabout4%oflong-termcare

costsarefundedfromprivateinsurance.Mostpeopleareunwillingtoplanfordistant,costlyandoften

unpleasantscenarios.

Onewaytoovercomethisisthroughacompulsoryinsurancescheme,andseveralcountrieshaveset

upsuchschemesoverthelasttwentyyears.However,theyhavebeenexpensive.Acompulsorylong-

termcareschemesetupinGermanyinthemid-1990swas€500millionindeficitby2005,andin2008

contributionstothefundhadtoberaised.AsimilarschemeintheNetherlandssawariseincostsof

37%infouryears.


Dilnot’s SolutionGiventhechallengesthatfaceattemptstobuildpurelystate-runsystemsoflong-termcareinsurance,

Dilnothasattemptedtocreateamixtureofprivateandstatefundinginsettingoutasystemofcarefor

theUK.

Recognisingtheneedtocapthehighlyuncertaincostsoflong-termcare,hehaschosenamodelwhere

individualsmakeasetcontribution(withmeans-testedhelpforthosewhocannot),andthenthestate

picksuptherest.

Thisisabitlikethemodelthatisemergingforuniversityfunding,withindividualspayingaset

feefortuition,andthestatecoveringtherest.Itisverydifferentfromthemodelsinpensionand

medicalprovision,wherethestateoffersabasicbenefitthatindividualscantopupwithprivatesavings

andinsurance.

Giventhatpeopletendnottoprepareforeventslikemovingintoacarehome,thekindof

financialproductsthataremostlikelytoflourishinthiskindofenvironmentaresavingsproducts

orequity-releaseproducts.

Dilnot’splansseemlikeapracticalmiddlewaybetweenhigh-costsocialinsurance,whichputshigh

burdensonlabourcosts,andthecurrentsysteminEnglandandWalesofmeanstestingandmuddling

through,whichcanleavepeoplewhohavesavedhardthroughtheirlivesallbutdestitute.

However,therearethreeoutstandingissues:

• Atatimewhengovernmentsarefightinghardtokeepcovetedcreditratings,theUKTreasurywillbe

waryaboutsigninguptonewspendingcommitments,eventhoughthecostsofDilnot’sscheme,at

around£2bn,aresmallcomparedtotheUK’soverallspendingonsocialsecuritybenefitsof£170bn

• Itwillbedifficulttomaintainasteadyboundarybetweenthestateandtheindividual.Inthe

pensionsarenawehaveseenunexpectedchangestotaxandbenefitrulesthathavechangedthe

boundaryovertime,underminingpublicconfidenceinthesystemasawhole.Thesamecouldbe

truewiththeDilnotsettlementif,forexample,theGovernmenttinkersthe‘hotel’costcontribution

orthelevelsatwhichmeans-testingkicksin.Itwillprobablybenecessarytosetupanindependent

bodytooverseelong-termcarepolicy,toensurethatdecisionsaremadeaccordingtotechnical

considerationsratherthanpoliticalexpediency

• Currently,thereisnotagreatdealofchoiceinDilnot’sproposals.Forexample,thereisnoscope

forpeopletopayextra‘hotel’coststogetahigherlevelofaccommodation,yetsomepeoplemight

want,say,asuiteofroomsinalong-termcareestablishmentthatallowvisitingrelativestostay

withthemovernight.Withoutthiskindofflexibility,peoplemayfeelthattheyneedtosinkthelion’s

shareoftheirlifesavingsintocompletelyprivateoptions,inordertogetthelevelofservicethatthey

andtheirrelativesfeelisimportant.

Dilnot’sproposalsonlong-termcareareflexibleandintelligent.Thechallengeforpolicymakersandthe

industryistoturnthemintoaworkablesystemthatindividualsunderstandandtrust,andthatwilltake

manyyearstoaccomplish.



Dr Patrick Nolan Chief Economist, Reform

Time for an honest conversation Withpeoplelivinglongerandbirthratesdecreasingthepopulationasawholeisgettingolder.By2050

itisprojectedthat22.9%ofthepopulationwillbeaged65andover.Peoplearelivinginretirement

longer,livingwithmorecomplexillnessesandrequiringmorespecialisedcaretowardstheendsof

theirlives.

Yettoomanypeopleareunpreparedforthecostsnecessarytolivecomfortablythroughlongerperiods

ofretirement.Governmentsarealsowaryofintroducingrealreformtoagerelatedspendinggiventhe

influenceofoldervotersinelections.Inshort,thereisalackofanhonestconversationoverthereal

costsofanageingpopulationandhowtoaddressthem.Thisisagambleas,astheCIIhaspreviously

argued,inmanycasesitisnotpossibletobeconfidentthatstatebenefitswillprovideacomfortable

lifestyleinretirementorcoverthecostsoflong-termcare.55

Thisisalsonotjustaproblemforpeoplefacingretirementbutaffectsyoungermembersoffamiliestoo.

AsAvivahasshown,middleagedpeople(fromaged35upwards)areincreasinglybearingsomeofthe

costoftheirparents’ageing.56Aroundhalfofthoseinthis“SandwichGeneration”areprovidingfinancial

supportlikecontributingtohouseholdbillsorpayingthefeesforcarehomes.Manypeopleinthis

cohortarealsofacingthecostsofraisingchildren,greaterlevelsofstudentdebttopayoffandlower

levelsofhousingaffordability.Toooftenthisfinancialsqueezecomesasasurprise.

Theneedforanhonestconversationoverthecostsofanageingpopulationcanperhapsbeshownmost

clearlyinthecaseoffundinglong-termcare.Thelatestinstalmentinthelongrunningdebateonhowto

fundthecostsoflong-termcarewasreleasedinearlyJuly2011(thereportoftheCommissionon

Long-termCare).Butwehavebeenherebefore.In1997theLabourGovernmentmadereforming

thefundingofcareapriority.ARoyalCommissionreportedinin1999andittookuntil2009forthe

Governmenttosetoutoptionsforfundamentalreform.

Thistimetheresponsehastobedifferent.Changehastotakeplace.Withoutreformlong-termcarewill

onlybecomemorecostlyanddelaywillreducethetimepeoplehavetoprepareforchangesinpolicy.By

proposingamodelbuiltaroundtheneedforpeopletotakeresponsibilityfortheirowncostsofcarethe

Commission’sreportmakesanimportantcontributiontodebate.Yettheproposalsitcontainsaretoo

expensiveandwillrequirerevisiontobeseriouslyconsidered.

TheCommission’sreportisrighttoemphasisethatpeopleshouldmakeprovisionfortheirown

long-termcareneeds.Thereissufficientwealthheldinassets(especiallyhomes)toadequatelyfund

care.Theseassetsshouldplayapartinanyfundingbase.AsthePensionsPolicyInstitutehasnoted

thevalueofhousingwealthownedbypeopleoverStatePensionAgeisalready£907billionandwillbe

likelytoincreaseto£1,274billionby2030(in2009earningsterms).57

TheCommissionproposescappinghowmuchpeoplearerequiredtopaytowardsthecostsoftheir

careat£35,000.Theideaofcappingcontributionsisright.Thiswouldprovidegreaterclarityover

entitlementsandexpectations.Itwouldmeanthatpeoplecouldpayforthebulkofthecostsofthecare

thattheyneedbutwhenthesecostsrisetocatastrophiclevelstheStateprovidessupport.Thiscertainty

wouldencouragepeopletolooktovehicleslikeinsurance,annuitiesandequityreleasetohelpmanage

55TheCharteredInsuranceInstitute(2011),Anage-oldproblem:developingsolutionsforfundingretirement.56Aviva(2008),UnderstandingtheSandwichGeneration.57PensionsPolicyInstitute(2008),Retirementincomeandassets:howcanhousingsupportretirement?


thesecostsandmakethemarketmoreattractiveforprivateproviders.Butthelevelofthecapistoolow.

Increasingthecapfrom£35,000to£50,000wouldreducetheimmediatecostoftheproposalsfrom

£1.7billionto£1.1billion.Goingevenhighershouldbeconsidered.

Thereport’sproposalstoreformthecurrentmeanstestarealsoagoodstart.Thecurrentmeanstest

operateswithasharpcliffedgesoonceapersonhasassetsover£23,250theyfacethefullcostsof

theircare.Again,however,theproposalsinthereportaretooexpensive,withpeoplewithassetsbelow

£100,000beingexemptedfromsomeofthecostoftheircare.This£100,000thresholdistoohighand

shiftingthethresholdlowerwouldhelpreducethecostsoftheseproposals.

ThesecostsmustbereducedasthelongertermoutlookfortheGovernment’saccountsisbleak.As

Reformillustratedearlierthisyearthefiscaltimebombofpopulationageingisalreadyexplodingwith

thebabyboomergenerationretiringandtheproportionofthepopulationofworkingagefalling.58As

aresultthecostofhealthandcare(beforetoday’sproposals)isprojectedtoincreaseby£40billion

(intoday’smoney)by2041andthecostofpensionsisprojectedtoincreaseby£32billion.Addingthe

Commission’sproposalsontothis(projectedtoaccountforanadditional£3.6billionby2025)will

meanatotalincreaseofcostaround£75billionayear.ThisismoneythattheGovernmentsimply

doesnothave.

58Cawston,Haldenby,Nolan,ParsonsandTrewhitt(2011),OldandBroke,Reform.



Dr Ben Rickayzen, Cass Business School and Professor Philip Booth, Institute of Economic Affairs

Helping customers with new products - will the EU get in the way?Adisability-linkedannuityisaninnovativeproductwhichcouldbedevelopedwithintheinsurance

industryasameansforindividualstohelpmeettheirlong-termcarecosts.Thistypeofannuitywas

acknowledgedwithintheDilnotReportasbeingpotentiallyveryattractivetoconsumers(seepage21

of“Summaryofresponsestothecallforevidence”April2011andpage40ofthemainreport).Itwas

alsogivenahighprofileinthepressfollowingthepublicationoftheDilnotReport(forexample,seeThe

Timeson4thJuly2011).

Adisability-linkedannuityisaspecialtypeofannuitywheretheproductispurchasedbyapolicyholder

whoisinreasonablehealthattheoutset.Thekeyfeatureoftheproductisthattheincomepaid

increasesifthepolicyholderbecomesdisabledand,forexample,requireslong-termcare.Assuch,a

disability-linkedannuitycouldbeusefulinprovidingforbothpensionandlong-termcareneedsfrom

onesavings“pot”.

Thispolicyisaneasyonefortheinsurertounderwrite,unlikeconventionaldisabilityandlong-termcare

insurance.Thereasonforthisisthattheriskthattheinsurerhastopaytheenhancementtotheannuity

ifthepolicyholderbecomesdisabledislikelytobenegativelyrelatedtotheriskoftheannuitantliving

foralongtime.Iftheannuitantbecomesdisabled,theirexpectedlifespanisshorter.Assuch,thetwo

mainriskstotheinsurertendtopullinoppositedirections.Withaconventionaldisabilityorlong-term

careproduct,aninsurancecompanyisveryexposedtoanti-selectionbycustomerswhoarepoorrisks

–inordertoreducethatexposureexpensiveunderwritingprocedureshavetobefollowed.Withthis

product,ifacustomerwerelikelytobecomedisabled,theywilltendtohaveashorterlifeexpectancy.

Fromthepointofviewofthepolicyholder,theannuityenhancementwouldhelptomeettheadditional

carecostsassociatedwithseveredisabilityandtherebysupportanybequestmotive.Attheveryleastit

wouldmaketheamountofanybequestapolicyholderislikelytobeabletoleavemorepredictableand

helpinpersonalfinancialriskmanagement.

Theannuityisalsomoreflexiblethanastandardannuitysinceitincreasestohelpmeetlong-termcare

costswhenrequired.Indeed,suchanannuitycouldenablethepurchasertoreceivecareintheirown

homeratherthanhavingtomoveintoaninstitutionsuchasaresidentialhomebecauseitwouldhelp

resolvetheproblemofindividualsbeing“incomepoorandcapitalrich”.

Inourresearchintothisproduct,wealsofindthatthepricingisrelativelyinsensitivetoassumptions

abouthowlikelypolicyholdersaretobecomedisabled.Again,thisisbecauseapoorerdisabilityoutlook

islikelytogiverisetoashorterlifespan.Becauseofthis,theproductshouldbequiteeasytoprice,

thoughtheinsurerisstillatriskfromincreasedlongevityingeneral,orfromthedevelopmentofnew

treatmentsthatwouldincreasetheexpectedlifespanofthosewithdisabilities.

Oneratherworryingfinding–somethingthatshouldconcerntheDilnotCommissionandthegovernment

–isthatthemale/femalepricingdifferentialiswiderthanforastandardannuity.Womenshouldpay

moreforthisproductbecausetheyhavealongerlifeexpectancy,ahigherprobabilityofaconditionthat

wouldgiverisetoanenhancementoftheannuityandalsotendtospendlongerwiththatconditionwhen

itarises.TherecentjudgementoftheEuropeanCourtofJustice(1March2011)requiringtheelimination

ofmale/femalepricingdifferentialscouldthereforebedamagingtothisformofproduct.


Togiveanindicationofhowmuchinitialincomemustbesacrificedfromastandardlifeannuityinorder

toconverttoadisability-linkedannuity,welookedatadisabilitylinkedannuitythatpays£10,000per

annumattheoutsetwhilstthepolicyholderisingoodhealth,£15,000perannumifthepolicyholder

failstwoofthestandardsixactivitiesofdailyliving(ADLs)and£25,000perannumifthepolicyholder

failsthreeormoreADLs(i.e.isdeemedtorequirelong-termcare).Assumingthattheannuityincreases

inlinewithpriceinflation,weestimatethatamaleaged65wouldneedtopayaround10%morefor

thedisability-linkedannuitythanforanindex-linkedstandardannuitypaying£10,000perannum.This

extrapremiumis,perhaps,surprisinglylowgiventhehighlevelofdisabilitybenefitsbeingprovided.

Thereasonforthisisthatindividualswhoarehealthyatoutsetareexpectedtospendrelativelyshort

periodsinastateofmoderateorseveredisabilityinthefuture.Furthermore,suchperiodswilltendtobe

attheendoftheindividual’slifeandthereforetheannuityenhancementswillbeheavilydiscounted.

So,whatneedstobedone?Firstly,asnotedintheDilnotReview(andinanearlierpaperbyoneof

theauthorsofthisarticle),thetaxtreatmentofdisability-linkedannuitiesneedstobeclarifiedbefore

insurersundertakeworkinproductdesign.Itisimportantthatthepensionfundtaxregimeisnota

barriertothemarketabilityoftheproduct.Itisespeciallyimportantthatsuchannuitiescanbebought

withtheproceedsofpensionfunds,forexample.Itwouldbehelpfulifdefinedbenefitpensionfunds

couldofferthemtoo.Insurancecompaniesmightthenwishtoexamineandmarketvariantsofthese

products.Itisalsopossiblethattheycouldbecombinedwiththoseformsofequityreleaseproduct

thatprovideannuities.But,allthisworkcouldbewastediftheproductswerestrangledatbirthbythe

recentECJruling.Giventhatthemarketintheseproductshasnotreallygotofftheground,insurersmay

notbeawarethatthisislikelytobeanissue.Itisdifficulttoimaginewhatgoodcancomefromthesex

discriminationrulingifitpreventsthedevelopmentofaproductthatcouldallowpeopletoinsurefor

long-termcarecheaplyandeasilyandreceivecarewhilstcontinuingtoliveintheirownhomes.



Conclusion and CII viewDilnot’srecommendationsareagoodstart–settingoutafairerapproachtothefundingoflong-term

carewhichwill,ifimplemented,helppreventself-fundersspendingthemajorityoftheirassetson

payingcarehomefees.Theproposalswouldalsoprovideimprovedincentivesforthedevelopmentof

financialproductssuchasimmediateneedsannuities,andcouldleadtogreaterdemandforfinancial

adviceasthecostofcarebecomesclearer.However,onitsownanewfundingmodelcannotresolvethe

chronicproblemsofalackofconsumerawarenessandengagementwhichwill,ifleftunresolved,deter

peoplefromadequatelyprotectingtheirassetsthroughfinancialservicesastheygrowold.Fromthe

CII’sperspective,therearethreeareasinparticularwheremoreeffortmustbemadetoreversethese

detrimentalbehaviouraltrends.

• Political consensusonthelong-termcarefundingmodeliscrucial.Governmentandoppositionmust

dotheirbesttoprovidecertaintyaboutfuturerules–makingcrosspartysupportfortheeventual

settlementvital.Peoplecannotbeexpectedtoeffectivelyplanforthefuturewithoutastable

environmentinwhichtooperate.

• TrustisakeyissueandtheindustrymustembracereformssuchastheRetailDistributionReview

(RDR)whichisaimedatimprovinglevelsofconfidencearoundfinancialservicesandproducts.There

isaconcernhowever,thatwithoutactivelypublicisingtheRDR’saimsandsuccesses,theprojectwill

passunnoticedbythepublic.RecentCIIresearchfoundthatjust20%ofadultswereawareofthe

RDRbutonceinformedweremorelikelytoconsiderseekingfinancialadvice.59Thosewithaninterest

inraisingthelevelofconsumertrustandengagementmustthereforedomoretoimprovepublic

awarenessabouteffortstoprofessionlisefinancialservices.

• Education and easy access to understandable information is also important.Inthisregard,

wewouldreiterateourearliercallforagovernment–lededucationcampaignandbackDilnot’s

proposalsinthisarea.

Thereisgeneralconsensusthatthecurrentfundingsystemisoutdated.Nowallinterestgroupsmust

ensurethatthemomentumforreformcreatedbyDilnotissustained,andanewlastingsettlement

formed,whichdeliversmuchimprovedfinancialsecurityandpeaceofmindforourelderly.

59 CIIIssuesPaper(June2011)Financial Capability: The Money Advice Service and Educating the Public on the RDR

conclusion and CII view


CIIBen Franklin

PolicyandResearchCo-ordinator

CharteredInsuranceInstitute

20Aldermanbury

London

EC2V7HY

Email:

[email protected]

About the Chartered Insurance Institute (CII)

Professionalism in practice

TheCIIistheworld’sleadingprofessionalorganisationforinsuranceandfinancialservices,withover

100,000membersin150countries.

Wearecommittedtomaintainingthehigheststandardsoftechnicalexpertiseandethicalconductinthe

professionthroughresearch,educationandaccreditation.

OurCharterremitistoprotectthepublicbyguidingtheprofession.FormoreinformationontheCIIand

itspolicyandpublicaffairsfunction,includingexamplesoftherangeofissuesinfinancialservicesand

insurancethatwecover,pleasesee:

www.cii.co.uk/policy

Who to contactw

ho to contact

Ref:CII_long-termcare(09/11)CII_6102

The Chartered Insurance Institute 42–48HighRoad,SouthWoodford,LondonE182JPtel:+44 (0)20 8989 8464email:[email protected]:www.cii.co.uk

©TheCharteredInsuranceInstitute2011

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