A recent report on the funding of social care recommends individuals should be required to contribute no more than £35,000 towards the costs of their own care in old age.
If taken forward, the added certainty provided by a fixed cap will present the financial services industry with a massive opportunity to develop products to help people plan for this contribution.
The care of the elderly is an issue that will affect the majority of us directly or indirectly at some point in our lives. Between 2010 and 2030, the number of people above the age of 85 is expected to increase by 100% and the number of people between the ages of 65 and 79 by around 40%. By 2035, over 20% of the UK population will be over 65.
With demand for older people's social care expenditure currently touching £8 billion and actual spending sitting at around £7.25bn, the gap between supply and demand is alarming.
In July 2010, an independent body, the Commission on Funding of Care and Support, was asked by the Government to make recommendations on how to achieve an affordable and sustainable funding system for care and support for all adults in England, both in the home and in other settings.
Specifically, the Commission, chaired by Andrew Dilnot, was to consider how individuals and the state could together meet the increasing cost of social care, how people could protect their homes and other assets against those costs and how public funding could best be used to support the care system now and into the future.
On 4th July 2011 the Dilnot Commission published its report and recommendations. It concluded that the current adult social care funding system "is not fit for purpose and needs urgent and lasting reform."
The Commission found that most people are realistic about the need to make some contribution to the costs of care in later life, but they want a fairer way of sharing costs and responsibility between the state and individuals.
Under the current system, however, they are unable to plan ahead to meet their future care needs and, when they do require care and support, they find assessment processes are complex and opaque, with eligibility criteria varying from one local authority to another.
"A major problem is that people are unable to protect themselves against very high care costs," the report states as one of its key findings. "The current availability and choice of financial products to support people in meeting care costs is very limited. There is great uncertainty and people are worried about the future."
To address this uncertainty, the Commission recommends placing a cap on the contribution an individual makes to their own care at between £25,000 and £50,000. £35,000 is put forward as an appropriate and fair figure.
Where a person's care costs exceed the cap, they would be eligible for full support from the state.
For those not able to afford to make a personal contribution, means-tested support should continue. The report recommends that the asset threshold for those in residential care beyond which no means-tested help is given should increase from £23,250 to £100,000.
The Commission also suggests that people should contribute a standard amount (between £7,000 and £10,000 per year) to cover their general living costs, such as food and accommodation, in residential care.
Other recommendations include the developments of national, standardised eligibility criteria and an awareness campaign to encourage people to plan for their old age.
"The Government should develop a major new information and advice strategy to help when care needs arise," the report states. "It is critical that the public has access to better, easy-to-understand and reliable information and advice about services and funding sources. This strategy should be produced in partnership with charities, local government and the financial services sector."
The Commission hopes the cap on individual contribution will make it easier for people to plan ahead financially – and for the financial services industry to help meet that need.
"We have had extensive discussions with the financial services sector and think that our proposals would stimulate both supply and demand. By capping the overall risk that people face, new financial products could develop to support people in making their contribution," the report suggests.
"These products could be linked to pensions, savings, insurance and housing. Our view is that given the tax-favoured treatment of pensions, ISAs, and housing, these are most likely to be the vehicles used to prepare for social care costs."
On the insurance side, no major providers are currently offering pre-funded insurance products against social care costs. The report identifies several reasons for this:
"Partly it is because it is very difficult to price an insurance contract – the time periods are long and the risks are very uncertain. Partly it is because people do not currently want to buy the products.
"The reasons for this lack of demand include: a lack of understanding about the current system; a belief that care is free, like the NHS; a reluctance to address something unpleasant to think about; and, for some, a preference for taking a risk, rather than trying to save for a cost that they are unable to predict and that could be potentially very high."
As a result, pre-funded insurance products have failed in the past and been withdrawn from the market.
The Commission, however, has been told by the industry that there may be opportunities to convert critical illness cover or life insurance policies to provide cover for care costs. "A further insurance area that could potentially grow is top-up insurance, which could provide an extra amount of money to supplement the amount people spend on accommodation and general living," the report suggests.
Nick Kirwan, ABI assistant director of health and protection believes deferred payment could pave the way for long-term care to be added as an option on life insurance policies.
"A deferred payment scheme means people can pay the fees after they are gone. Of course, a life insurance policy pays out money after you are gone, so one way forward would be to take out a whole of life insurance policy which would pay the care fees. There might be some innovative products that emerge into this area which would be more affordable and easily available to people."
Although the long-term care market will not suit every insurer, Kirwan believes it is a market that other insurers may be willing to develop. There are, however, currently no concessions towards the tax treatment of long-term care products to encourage take-up.
Even if the Dilnot Commission report fails to tempt insurers into the market, it is predicted that the recommendations could trigger an equity release boom, as people look to use part of the equity in their house to fund long-term care without having to sell their home.
Pension unlocking might also be a possible solution. One obvious difficulty is that people already do not save enough for their pensions. But if there were some incentive to commute some of the lump sum towards saving for care, it might become more attractive.
Other pension-linked products to consider are an immediate needs annuity or a disability linked annuity. Disability linked annuities reduce the income from an otherwise flat annuity, but then double or treble income when the person develops a care need or reaches a certain age.
To encourage such products, the report recommends the Government makes a clear statement that disability linked annuities are permissible under current pension taxation rules.
The Government is due to respond and publish a white paper on social care in April 2012. Before then, a House of Commons Select Committee inquiry will consider the practical and policy implications of the Government’s plans for funding social care.
But, although there is broad cross-party consensus that something must be done, there is a real danger that the Commission's recommendations will be put aside and labelled “too difficult and too costly for now”.
Speaking at a fringe event at the Conservative Party conference in October 2011, Andrew Dilnot said the Government has a "huge moral obligation" to progress the reforms. "The Coalition Agreement is very strong on this and if the Government does not do something about it, I intend to hold Mr Cameron and Mr Clegg’s feet to the fire and I shall enjoy that activity."
Nevertheless, Dilnot believes it may take at least two years for any further progress from Parliament on implementing his recommendations, despite the Liberal Democrats and Labour backing the proposals and Health Secretary Andrew Lansley promising a "very positive response".
Andrew Dilnot said that the issue must be dealt with soon."The consensus means the question is does it happen under this Government or do they leave it to the next Government? That will be a matter for political calculation. If I have anything to say about it, we will get it done sooner rather than later and I will be making an awful lot of noise about it," he said.
Contact: Bruno Geiringer (firstname.lastname@example.org 020 7418 7306)