ILC-UK Seminar - The Private Sector's Role in Care - supported by partnership

The Future of Care Funding

Seminar Series

ILC-UK Seminar:The Private Sector’s

Role in Care

5 April 2011


Seminar Series

Baroness Sally Greengross

ILC-UK


Seminar Series

Professor Les Mayhew

Private Finance Products in Partnership Model

Les Mayhew Faculty of Actuarial Science and Insurance

Cass Business SchoolApril 2011

Commission on the Funding of Care and Support

Terms of reference:

• The best way to meet care and support costs as a partnership between individuals and the state

• how an individual’s assets are protected against the cost of care

• how public funding for the care and support system can be best used to meet needs

• how to deliver the preferred option including implementation timescales and impact on local government

Report by July 2011 and response by DH in Autumn 2011

Green paper proposals• Self funding: Everyone would be responsible for paying for their own care. The

Green Paper rules out this option because ‘people cannot predict what care and support they will need’.

• Partnership: Everyone entitled to care would have a proportion of their basic care and support costs paid for by the state. The remainder would be paid for out of pocket.

• Insurance: Everyone would be entitled to some support just as with option 2. but there would be additional enabling support based on insurance - either state or privately operated.

• Comprehensive: Everyone over retirement age who had the resources to do so would be required to pay into a state insurance scheme (suggested range £17k to £20k)

• Tax funded: People would pay tax throughout their lives which would be used to pay for all the people currently needing care. This is also ruled out because ‘it places a heavy burden on people of working age’

Strategic issues arising• The number aged 65+ will increase from to 9.8m in 2009 to 12.4m

2020 and the number aged 80+ from 2.8m in 2009 to 3.6m in 2020

• A female reaching 80 in 2001 had a 2.7% chance of reaching 100 whereas a female of the same age in 2020 has a 12.3% chance

• Male and female life expectancies at age 50 appear to be converging at ~35 years by 2020

• The gap between Healthy Life Expectancy and Life Expectancy is increasing and so potentially more years will be spent needing care

Affordability of long term care based on income and savings by household type

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

<1 1-2 2-3 > 3years

years of long term care theoretically able to be financed from own resources by household type

(income plus savings)

num

ber

of p

eopl

e (0

00s)

male households 65+

female households 65+

couple households 65+

all households

Assumed cost of LTC £500 p. wk.

Only 400k out of 6.5m 65+ households can afford institutional care for more than 1 year on the basis of income alone, but this increases to 3m if savings are included

House prices versus RPI

0

500

1000

1500

2000

2500

3000

3500

4000

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

year

index (

1971=100)

nominal house price index (1971=100)

RPI + 1.5% (1971=100)

House prices versus RPI:

Chart shows how house prices have moved relative to the RPI. In 1971 the value of a house would have roughly pay for 3.7 years worth of care. In today's prices it would pay for approximately 8.8 years.

But not everybody will wish to sell up…

Affordability of long term care based on total wealth by household type

-

1,000

2,000

3,000

4,000

5,000

<1 1-2 2-3 > 3years

years of long term care theoretically able to be financed from own resources by household type (income plus housing welath)

num

ber

of h

ouse

hold

(00

0s)

male households 65+

female households 65+

couple 65+

all households

If housing wealth is included then 4.6m households could afford care for more than 1 year

Of the 1.8m households that cannot afford care for more than one year if housing wealth is included, 0.9m are female

Financial products for LTC

3 classes of product: ‘point of need’, ‘point of retirement’, ‘any time’

• Equity release products• Top up insurance• Immediate needs annuities• Accelerated life insurance• LTC bonds/trust fund• Disability Linked Annuities

Why LTC bonds?• There is a large population that cannot afford any LTC• Would pay out only if LTC needed, otherwise go to

estate or pay for funeral expenses• Would pay monthly prizes e.g. like premium bonds• Would accrue interest just as in a bank• Evidence tells us that people on low income buy

premium bonds, lottery tickets etc.• Would at least be a contribution and would attune the

population to saving for care in old age

How do DLAs work?

• Works likes a pension annuity and is actuarially fair

• But:– Higher payments if become disabled– Even higher payments if go into care

• Can apply to any kind of pension – defined benefit or defined contribution, public sector and state pension alike

Example of a DLA based on an initial lump sum of £100k

ADLs = Activities of daily Living

Units £000s p.a

uplift healthy Failed 2

ADLs Failed 3

ADLs male 1/1/1 6.73 6.73 6.73 1/1.5/2.5 6.03 9.04 15.07 1/2/2 6.08 12.17 12.17 1/2/3 5.76 11.51 17.27 female 1/1/1 6.07 6.07 6.07 1/1.5/2.5 5.28 7.92 13.20 1/2/2 5.34 10.68 10.68 1/2/3 4.99 9.97 14.96

What is the market?Income-wealth map and market penetration

A

D

B

C

A

D

B

C

KeyA= Equity releaseB= Top up insuranceC= DLAD= LTC bonds

Something for everybody…………

Interfacing products with means testing

• Current system too complex and not equally applied

• Disincentive to save and deters low cost private finance solutions

• Unfair because people just above the threshold have no state support or limited means to insure against risk

• Its not what people want! (Green Paper consultation)

Principles underpinning new system of public support

• All people should receive something unless they are fully self-financing

• It should be based on income and assets• It should not dis-incentivise people to save or

purchase products• It must be fair and transparent!• It should be affordable in terms of public

expenditure• People can by-pass system if they wish

Proposed system

AB

CD E

1. People are placed into ‘wealth bands’ according to the years of LTC they can afford based on both income and assets.

Stage 1 Stage 2

P

Q

2. People needing LTC receive a proportion of their LTC costs based on which band they are in as shown in example

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

110000

120000

130000

140000

0 5000 10000 15000 20000 25000 30000

Income per annum £s

Ass

ets

£s

1 year A

2 years B

3 years C

4 years D

5 years E

P

Q

Example

• Assume value of the state pension and other benefits is worth £10k per year and that care costs £25k a year.

• For illustration, assume no other reckonable income.

• Based on the rates shown a person in each band would receive:– A: £13.5k (£25k-£10k) x 0.9 shortfall £1.5k – B: £10.5k (£25-£10k) x 0.7 shortfall £4.5k– C: £7.5k (£25k-£10k) x 0.5 shortfall £7.5k– D: £4.5k (£25k-£10k) x 0.3 shortfall £10.5k– E: £1.5k (£25k-£10k) x 0.1 shortfall £13.5k– >E nothing (£25k-£10k) x 0.0 shortfall £15.0k

Rates are illustrative and actual rates would need to be affordable in public expenditure terms

Case studiesCost of care limit £s per yr

AssetsHouseSavings Total

IncomeState pensionOccupational pensionAttendance allowanceTotal

Notional years of care affordedBandPublic contributionIncome shortfall

Top up optionsTop up insuranceLTC bondsEquity realeaseImmediate needs annuityDLA

Mrs White40,0006,00046,000

5,0003,0003,60011,600

3.43D

4,0209,380

YYYNN

Mr Black0

25,00025,000

5,0000

3,6008,600

1.52B

11,4804,920

YYNNN

Illustrative public support rates: A = 90%; B=70%;C=50%;D=30%;E=10%; others: self funding

Income asset map with bands

Income £11,600Assets £46,000

Band DPublic contribution

£4,020Shortfall£9,380Income £8,600

Assets £25000Band BPublic

contribution£11,480Shortfall£4,920



Band EPublic contribution

£1,390Shortfall£12,510


Band APublic contribution

£14,760Shortfall£1,640


Capital limit under

present system

Income £14,600Assets

£100,000Un-banded

Public contribution £ (zero)Shortfall£25,000

People with access to LTC as an employment

benefit treated as un-banded


SEL

F-

FUNDING

MINIMUM

INCOME

CAPITAL RICH

Not eligible

Income and asset distribution

A

B

C

D

E

% people 65+ by band

A – 19.8%

B - 2.1%

C - 2.2%

D – 2.8%

E – 3.1%

Self funding 69.9%

Under present system

~22% could be under the threshold

Under new system

~ 30.1% would get something

Each point is an actual individual aged 65+

Income and asset distribution % people 65+ by band

A – 19.8%

B - 2.1%

C - 2.2%

D – 2.8%

E – 3.1%

Self funding 69.9%

Under present system

~22% could be under the threshold

Under new system

~ 30.1% would get something

Each point is an actual individual aged 65+

0

20000

40000

60000

80000

100000

120000

140000

Ass

tes

£s

5000 10000 15000 20000 25000

Income per annum £s

Cohort effects

% of individuals by band reaching age 85 in given years

Note that the proportion that cannot self fund for more

than 1 year goes down over time

Band 2010 2015 2020 2025 AllA 29.9 26.3 21.1 15.9 19.8B 2.4 3.5 1.6 2.1 2.2C 2.8 3.0 2.4 1.8 2.2D 2.6 3.6 2.7 2.7 2.8E 2.6 2.6 2.6 3.5 3.1

>E 59.7 61.0 69.6 74.0 69.9

Annual insurance premiums based on top up mechanism

Policy triggered by failing 3 ADLs (Activities of Daily Living)

amount of weekly state

support £s male femalemale or female

<100 778 898 838100-200 597 689 643200-300 416 480 448300-400 235 272 253400-500 54 63 59

Summary of key proposals

1. Control of public expenditure is maintained:• through the personal cap (e.g. £25k)• the banding structure and top up rates• through the unified assessment system

2. Equity through universality and equal treatment of people with different means

3. Flexibility and choice through the range of products and ways of meeting costs

4. Avoidance of gaming: ‘7-year rule’

Suggested role of the state

To:• Clarify state entitlement based on a unified assessment

system• Provide regulation of products and policy stability • Make it easier to get financial advice and direction at

points of need or contact • Provide incentives for people to take up private finance

products e.g. through the tax system• Improve the quality and efficiency of care services• Create conditions for private sector to invest

Timing issues

• New products will take time to mature e.g. LTC bonds may take 10 years or so to reach a steady state

• Implies that private finance funding mix will gradually evolve with equity release likely to be most popular initially

• Investment in computer systems would be borne largely by private sector providers

• Some public investment in IT might be needed for monitoring and regulation purposes

[email protected]

Mayhew, L., M. Karlsson, and B. Ricklayzen, B. (2010) The Role of Private Finance in Paying for Long Term Care. The Economic Journal, Vol 120, Issue 548, F478–F504, November 2010

Karlsson, M., Mayhew L, Rickayzen, B. (2007), 'Long term care financing in four OECD countries: Fiscal burden and distributive effects', Health Policy, 80(1), p.107-134

Karlsson. M, Mayhew L, Plumb.R, Rickayzen.B, (2006), Future costs for long-term care: Cost projections for long-term care for older people in the United Kingdom, Health Policy, 75(2), p.187-213

END

mailto:[email protected]


Seminar Series

Chris Horlick

Partnership

The role of insurance in paying for care todayChris Horlick MD Care Partnership

What exists today?

One specialist insurance product, the immediate needs annuity

Equity releaseInvestment bondsPensions and savingsMoney under the mattress/bank account

No pre funded care products available in Britain today

Why?

“Market failure” “Demand failure”

What exists today?

A private care and support market of over £5 billion paAn insurance market of £100 million pa

Chronic lack of awareness of the fact that self funders existChronic lack of understanding that insurance products exist, how they work, how to buy them, how they can helpChronic failure in general by the deliverers of social care to signpost their self funding customers to financial advice

Why?

Who fails to sign post?

Local AuthoritiesCare homesDomiciliary Care providersHospital discharge managersGP’s

Because of a lack of funding advice, many self funders run out of money

Source: Oliver Wyman Research

130,000 new care home residents per annum

14,000 get financial advice

68,000 need of financial advice every year

7,000 talk to a qualified advisor

75,000 privately funded

53,000 Fully self funding

22,000 co-funding

The Outcome

The average stay in a care home by a self-funder is 4 years

£116k-£168k

Laing & Buisson, Care of Elderly People, 2009

1 in 10 self funders is in care for at least 8 years

£232k-£336k

* Partnership data

The Care Funding Plan benefits all parties

Immediate Care PlanImmediate Care Plan

Average premium £85kAverage home equity £165k

Individuals face three care risks 1. Will I need care and support in old age? 2.How much will it cost me if I do? 3.How long will I need it for?

Age 80+ at point of need

Age 65 to 80 post accumulation

Age 45 to 65 opportunity to plan

What else could we look at developing post Dilnot?

Re introduce pre funded care

products

Home income plans for domiciliary care

Deferred annuity tail risk for dementia

Joint life claim products

Pre funded care or life insurance

Name:Contact number:

Partnership is a trading style of The Partnership Group of Companies, which includes: Partnership Life Assurance Company Limited (registered in England and Wales No. 05465261), and Partnership Home Loans Limited (registered in England and Wales No. 05108846).

Both companies are authorised and regulated by the Financial Services Authority. The registered office for both companies is Sackville House, 143-149 Fenchurch Street, London EC3M 6BN.


Seminar Series

Andrea Rozario

SHIP

Andrea RozarioDirector General

SHIP equity release

Introduction to SHIP equity release

Trade body representing the providers of equity release plans, accounting for approx 90% of the market in terms of volume

Established 1991Strict code of conduct for all membersAim - to aid safe growth of the market and

educate the general public, civil servants, journalists, MPs etc about the realities of equity release as it is today

SHIP code of conduct

NNEG – No negative equity guaranteeFixed interest ratesIndependent legal adviceAbility for customer to move without financial

penaltyClear easy to understand plansFull advice process from specifically

qualified advisers

What is equity release?Two main products :

Lifetime Mortgage – from age 55Home Reversion Plans – from age 65Also:Sale and Rent back – not age related and not a

typical equity release productDownsizing – most popular option – 29% of

working people according to the PPI intend to sell up and downsize to help fund retirement whilst just 5% currently intend to use equity release products

Housing WealthHousing wealth is the biggest asset held by the

retired with approx £907 bn tied up in bricks and mortar increasing to an estimated £1,274 bn (40%) in 2030. (PPI Retirement Income and Assets 2010)

Unequal distribution of housing wealth:Correlation between general wealth and higher

housing wealthBaby boomers have more housing wealth than

any other generation, older or youngerAge of a first time buyer, unassisted is now 37

Costs of long term careTotal LTC funding was approx £16 billion in

2008-2009 (Policy Exchange – Careless Report 2010)

Previous Government projected a £6 billion funding gap for LTC by 2026

1 in 4 – 65 year olds can expect to enter residential care at some point in their lives.

Average lifetime cost of care for a 65 year-oldMale: £22,300Female: £40,400All: £31,700

Current LTC SystemLTC paid for out of general taxation – small

contribution from council taxComplicated and convoluted system with

regional variances.Different treatment between residential and

domiciliary care – house taken into account in assessment with residential care but not with domiciliary care

Inequality Between Generations

Rapidly increasing longevity leading to many issues including the need for care:

2012 – 2.75 million people will need care2040 – 4.75 million people will need care

Fewer young working people with a higher tax burden

Inequality Between Generations

They will also see older people holding most of the political power and wealth

The able young might emigrate to more attractive economic climates

The average student debt is approx £15700 which on the average starting salary of £22300 will take approx 12 years to pay off.

Why isn't equity release more popular ?

Customer concerns

Supply issues

Distribution issues

Customer Concerns

Appears to be too expensiveComplicated process, difficult to find an

adviserFear of loosing their home or not leaving

an inheritanceNegative perception compounded by

press reports and historical reputation

Supply and Risk IssuesRISKS / ISSUES COMMENT MITIGATION / ACTIONS

REPUTATION Media has been negative to the point of scaring off brands, distribution and consumers.

Progress is being made – respected brands supporting effort e.g. Aviva, SAGA, Age UK.

SOLVENCY II As firms tackle uncertainty around Solvency II, their focus is on their core business issues – ER is immature and is generally the junior product line.

Action needed to ensure risks /rewards are understood by firms /FSA – so they can be sensibly reflected in capital and pricing.

REGULATORY/LEGAL/EUROPE

Short term capital treatment of equity release – potentially disproportionate to the risk. Changes in Europe – gender / distance selling. New FSA lending rules may encourage banks to re-examine current books, which are held by retired consumers.

FSA & BoE could review proposition to lighten / change capital requirements. European dimensions add uncertainty, e.g. annuity funding – but UK govt and FSA appear to have this in hand.

MORTALITY & PROMISES

Consumers/ trustees/ IFAs don’t fully understand mortality, so undervalue some of the promises, e.g. no negative equity guarantees.

Consumer education work of CFEB and others. No government proactive support yet, although LTC may be a driver.

Supply and Risk IssuesRISKS / ISSUES COMMENT MITIGATION / ACTIONS

LENDING/ACCOUNTANCY Accounting basis / changes, IFRS, differences in treatments between banks and insurance firms. Lending criteria by firms and valuing of property is disenfranchising some consumers – limited funding means firms can be risk adverse.

Accounting changes / Solvency II all adding to better assessment. House value / volatility impact on consumers and lenders. It tends to short term – rather than longer term solutions – improving capital /reward treatment could transform availability.

FIRMS LACK MORTALITY IP Only a few firms are really able to price and value mortality risks.

A more mature market and incentives would encourage development. But also markets in trading the risks.

CONSUMERS – RISK & REWARD Providers can obtain greater margins /profits from shorter term mortgage products. No profit incentive to support longer term consumer needs. Also Equity release could be seen as under priced / good value, considering the length of the promise.

Uncertainty – drives firms and consumers away from long term savings and commitments. Equity release is only starting to be “normalised”.

Distribution Issues

No high street lenders

One or two large distributors, some small advisers.

Which therefore leads to :

Difficulty for the customer to find advice

So what is the answer ?Education – A need for clearer understanding around

equity release – Financial advice becoming an integral part in the LTC advice process

More providers encouraged into the market by addressing the supply issues

Regulator , Government and general view needs to be that housing wealth has a role to play in funding care

Ease of access to products with incentives such as tax breaks for those using housing assets to pay for care

So what is the answer ?

Closer working relationship between industry and Government to work out potential solutions

More understanding around the inequality between the generations and the personal responsibility to pay for care

Reframing and rebranding equity release ?Specific products for LTC/Domiciliary care –

packaged and promoted as part of a solution

THANK YOU


Seminar Series

Nick Starling

ABI


Seminar Series

Martin Green

ECCA

Martin GreenChief ExecutiveECCA

ILC-UK

The Independent Sector's Role in Care

5th April 2011

Current position

Demographics and increased need Financial challenge/funding cuts No creative approach on cuts Systems in transition Separation between health and social care Regulation – fragmentation Bureaucracy and transactional costs

Opportunities

Integration of health and social care Creative approaches from the sector Diversification Development of sub-acute services Hubs for the management of long-term

conditions Efficiencies and outcomes

Contact Details

Martin Green

Chief Executive

English Community Care Association

[email protected]


Seminar Series

ILC-UK Seminar:The Private Sector’s

Role in Care

5 April 2011

Economy & Finance

ILC-UK Seminar - The Private Sector's Role in Care - supported by partnership