Elderly offer young market
Long-term care for the elderly is not, like most matters of personal finance, a pressing issue for the majority of the UK population – even those in retirement. Thoughts of needing care for oneself or even a relative are avoided and anyway, for younger age groups, the prospect is a long way off.
However, the issue is rising in the national consciousness. The funding of elderly healthcare – and nursing and personal care in particular – as an implication of demographic shift is more frequently debated in the media, and middle age groups are discovering the need to get involved in some way with arranging care for their elderly parents.
Hitherto, the National Health Service (NHS) has not covered the vast majority of LTC needs, making state-funded care places rare. Self-funding can be onerous, and not only because, on average, care costs e22,000 to e30,000 per year. Many elderly people have equity in property, and that takes time to unlock; the situation may be further complicated by a spouse continuing to live in the home.
There is state aid for elderly care funding, although this is means-tested, which is unpopular, especially among those who have carefully husbanded their resources throughout later life and find themselves with no entitlement. Certainly there is a strong feeling that long-term personal and nursing care should be free and that the current system means the NHS is ratting on its promise of ‘cradle-to-grave’ healthcare. Opinion polls suggest that long-term care is seen as a national problem that should be solved at a national level.
Until recently successive administrations have dragged their feet conspicuously on long-term care. But Tony Blair’s New Labour has made some effort to tackle the issue – although having asked a Royal Commission to consider the problem the government sat on the recommendations for over a year. This was not unconnected with the Royal Commission’s view that funding of care should come from the state, something that the Chancellor of the Exchequer finds unpalatable. Now, though, there are signs of movement. A Health and Social Care Bill will soon be enacted. This makes nursing care free of charge. But the costs of personal care – that is, care that does not require a qualified nurse – and accommodation must still be self-funded. This, lobby groups say, is a step in the right direction, but does not go far enough.
Against this background a long-term care (LTC) insurance market has been slow in developing. It is an individual market, and small at that – to date only about 34,000 policies have been sold to a mainly 65-plus age group. There are two kinds of policy, one insuring against entering care in future, and the other an annuity-type plan for those requiring immediate care.
The government is now seeking to regulate LTC insurance. This, it hopes, will stimulate the market, on the one hand helping to raise levels of self-reliance and on the other to satisfy the consumer lobby which feels that potentially vulnerable consumers need strong protection against sharp practices – although so far LTC business has been developed in a very responsible fashion. The government is also to introduce its by now familiar ‘CAT’ consumer protection mark, which will confer minimum standards on scope of cover, access (by the insured and his or her relatives to informed decision-making) and terms and conditions.
In the consultation paper from the Treasury, four options are set out, ranging from a voluntary code for LTC alone to full regulation of products and advice for all healthcare and medical covers. The Association of British Insurers (ABI) supports the introduction of regulation. Spokesman Malcolm Tarling says: “We believe that regulation will improve consumer confidence in and understanding of LTC products. Couple this with the government’s intention to pay for the nursing element of care costs, and it makes self-funding via financial products a more attractive and affordable proposition.”
Some, though, are less enthusiastic. Peter Barnett, LTC strategist at Swiss Re Life & Health, says that while full regulation of LTC (as opposed to all healthcare products) is the likely outcome, a less onerous regime would be sufficiently effective. “We favour regulation with a lighter touch on the basis that companies have a good track record in the way they have developed LTC plans so far, and there is no evidence that there has been consumer detriment. Our concern is that any regulatory measures must not stifle the sort of innovation that will benefit consumers.”
While regulatory compliance has the potential to increase the costs of LTC plans, it is unlikely that tightening control of LTC will harm the market, though the jury is still out on whether regulation and CAT standards will give it a fillip. LTC plans appeal to an elderly market, and the lack of claims experience makes them risky business. Thus LTC is a niche market for companies and intermediaries alike, and few, if any, new entrants are waiting in the wings right now.
Because the problems of ageing are distant in time and low in people’s consciousness, LTC as an employee benefit has little appeal for employees and employers alike. Arguably, strong pension provision, either through occupational schemes or personal plans, enables those in retirement to manage their LTC funding requirements better through enhanced economic power. As the ABI’s Tarling says: “The individual market will need to develop beyond its current embryonic state before LTC enters the realm of employee benefits.”
But regulation of LTC is in reality only tinkering with private funding mechanisms: a lasting and powerful solution to widespread self-funding lies in integrating LTC with pensions or at least creating a strong link between the two. Simon Moody, healthcare and group benefits actuary at consultants William M Mercer, says: “LTC won’t be an employee benefits issue unless the government takes some sort of initiative. But one could envisage a plan along the lines of an LTC insurance option on retirement lying within and benefiting from the favoured tax treatment of a pension scheme. But this is something that employers themselves will want to fund.”
Barnett at Swiss Re points out that pensions and elderly care are both problems resulting from population ageing. “It makes sense to address them both at the same time,” he says. “At the moment there are so many rules governing state benefits, pension and insurance benefits and taxation that they don’t work together in harmony.” This message is now getting through to the mandarins in Whitehall. The Department of Social Security is exploring scenarios involving a number of pension/LTC models. Some commentators were even tipping Gordon Brown to announce an initiative in his budget statement on March 7. They may have been disappointed on that occasion, but the signs are that ‘joined-up’ government thinking is now extending to embrace two important issues at the heart of retirement finance and its funding. Now, in time that will stimulate the market for a variety of LTC plans.