UK figures for sales of long-term care (LTC) insurance plans make pretty depressing reading. Although LTC has been available for a decade, the Association of British Insurers (ABI) has published industry figures only since 1998. That happens to have been the best year, with 3,000 annual-premium and 4,000 single-premium plans sold. In 1999 sales slumped to 2,000 and 3,000 for annual- and single- premium policies respectively, and have remained more or less at that level since. Single premiums, which include purchases of ‘emergency’ immediate care annuities, amounted to £100m (c160m) last year, but annual premiums totalled a mere £2m.
Peter Barnett, product manager at Britannic Retirement Solutions, puts slow sales “down to the high cost of LTC products, a lack of trust in the industry and a great deal of uncertainty about how products dovetail with state provision”. LTC commentators are agreed that the lack of a clear public policy framework and consumer uncertainty are big problems, although there are signs that things are improving. Baroness Sally Greengross of the International Longevity Centre, a think-tank specialising in ageing issues, says “The long-term care debate and the establishment of the Nursing Care Standards Commission (that will oversee and regulate the care industry) mean that people are starting to have a better understanding of their care options. But, overall, that understanding is still poor.”
Consumer confidence is not helped by the emergence of regional variations on how long-term care is funded in the UK. Government policy is that while nursing care is free (that is, state-funded), personal care (help with washing, dressing, etc) and accommodation costs must be met by the individual. However, the Scottish Parliament has exercised its authority and ruled that personal care will be provided free from July this year, and there are signs that the Welsh and Northern Ireland Assemblies will also adopt a policy different to that prevailing in England.
On the positive side, LTC products will be regulated in due course by the Financial Services Authority (FSA) and the Treasury will be introducing ‘CAT-mark’ criteria (for Charges, Access and Terms) that will denote a consumer-friendly product. This sort of progress makes Sandy Johnstone, LTC strategy manager at Norwich Union, a key player in the LTC market, pretty cheerful. “A lot of the uncertainty has now been resolved,” he says. “In the last few months we have seen our sales increase by a third. That’s a very encouraging sign.”
But Baroness Greengross believes that more needs to be done. “The government seems to think that it
has addressed the issue by granting free nursing care,” she says. “But this leaves a sizeable funding gap between what the state will pay and what a
care home charges. For some that could be as much as £15,000 a year, still well beyond the reach of most retired people.”
What the ABI’s figures don’t reveal is that LTC sales are typically to women in their late 60s. There simply is no market among younger age groups for insuring the LTC risk. As yet there is no sign that changes in state funding policy and CAT marking will induce the public to think long-term about retirement and financing it. While the pensions message is getting through to some of the more sophisticated, better-off consumers, many in low- and middle-income groups are just not saving enough. For low earners, it is simply a lack of money. For those higher up the earnings scale it is a question of priorities. As one participant in a recent focus group said, “I can’t afford a pension. I’ve just spent £1,000 on a water feature for my garden.”
The retirement funding shortfall is huge. Consultants Oliver Wyman, working on behalf of the ABI, estimate it to be currently £27bn, but that is likely to be a conservative figure given the shift from defined-benefit to defined-contribution pensions. The problem is further compounded by low interest rates and increasing longevity. Maturing pension plans don’t buy anything like the income they used to.
LTC plans, as we know them today, are just not compelling enough to make even a tiny dent in something that is part of a huge problem. There is widespread agreement that educating consumers is key – together with the acknowledgement that this is a tough nut to crack; you don’t transform the financial habits of a nation overnight. The FSA has consumer education as part of its brief, but has no specific plans, as yet, for long-term care issues.
Might the UK look across the Atlantic for inspiration? In the US LTC is better established, although it is still a relatively small market. But thanks in part to the self-provision culture, there is greater consumer awareness of elderly care funding. Around a quarter of new LTC sales
are individual employer-sponsored plans, bought either for the employee or, often, for parents or older relatives.
David Gulland, health director at B&W Deloitte, points to the setting up of an LTC insurance scheme by the Office of Personnel Management that is responsible for the HR needs of around 20m federal employees. This arrangement, membership of which is voluntary, is run jointly by Metropolitan Life and John Hancock and includes education as a key feature. Gulland believes that this potentially huge scheme will boost LTC’s appeal to a wider market. “If a new culture towards insuring LTC risks and involving employers develops in the US,” he says, “it may be that something similar could happen in the UK, given that US developments are often precursors to our own.”
Since April 2001 the UK has had simple, value-for-money stakeholder pensions. Employers with six or more staff are compelled to make a stakeholder plan available unless they already have a comparable scheme in place. Might there be a case for ‘stakeholder LTC’ too? The introduction of such plans might well increase consumer awareness of the problems but, as with pensions currently, there can still be a sizeable gap between awareness and motivation to buy. And given that stakeholder pensions are unpopular with employers – yet more red tape, it is felt, introduced by New Labour – an LTC plan is likely to be viewed the same way. Richard Baron, deputy head of policy at the Institute of Directors, confirms that employers would be unwilling to shoulder the burden of a stakeholder-type scheme.
There is an argument, though, that socially responsible employers should be preparing their employees for retirement through counselling and financial advice. It has even been suggested that such advice should be offered as a tax-free benefit. Johnstone at Norwich Union believes that retirement seminars will develop as an important access route for LTC.
Norwich Union believes the LTC market could grow by as much as 20% a year. Even though in the shorter term that would still make it pretty small, healthy growth fosters yet more growth. And market development could well be adviser-driven: hungry for income as a result of the introduction of low-margin products like individual savings accounts (ISAs) and stakeholder pensions, advisers may hit on LTC as a source of replacement earnings – assuming that CAT-marked products have sufficiently high margins.
Alan Tyler, health and welfare strategy manager at Swiss Re Life & Health, thinks that LTC funding will become a routine aspect of retirement planning and that a variety of approaches will be adopted. “People will be increasingly willing to use the value of their home to fund care needs,” he says. “And although the focus now is on funding institutional care, this will switch to the ability to remain in one’s own home for as long as possible.”
Addressing long-term care funding effectively means addressing the bigger picture. Richard Brooks of the left-of-centre think-tank IPPR says “Let’s be realistic. The private sector alone can’t solve the long-term care problem. The financial services industry needs clarity, consumers need a simple, straightforward product, and both need a stable, safe public policy environment.”
Long-term care remains inextricably bound up with retirement funding, retirement planning and pensions. Together, those issues assume Herculean proportions. Alan Pickering is a partner in Watson Wyatt’s benefits practice and the man charged by Alistair Darling, the Work and Pensions Secretary, to simplify the pensions system. In a recent interview Pickering said that dictating that
people should retire at 65 “is a nonsense” and that “the state’s definition of old age should move to 70 by 2030.”
Clearly, radical solutions are needed. It looks as though the many people aiming to retire between 55 and 60 are in for a shock. Overturning complacency about the realities of retirement financing will crack the conundrum of long-term care too. But it won’t be an easy task.