ILC-UK Seminar - The Private Sector's Role in Care - supported by partnership
-
Upload
ilc-uk -
Category
Economy & Finance
-
view
761 -
download
2
description
Transcript of 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
The Future of Care Funding
Seminar Series
Baroness Sally Greengross
ILC-UK
The Future of Care Funding
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
Income asset map with bands
Income £11,600Assets £60,000
Band EPublic contribution
£1,390Shortfall£12,510
Income £8,600Assets £10,000
Band APublic contribution
£14,760Shortfall£1,640
Income asset map with bands
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
Income asset map with bands
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
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
The Future of Care Funding
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.
The Future of Care Funding
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
The Future of Care Funding
Seminar Series
Nick Starling
ABI
The Future of Care Funding
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
The Future of Care Funding
Seminar Series
ILC-UK Seminar:The Private Sector’s
Role in Care
5 April 2011