This article was originally commissioned for the June 2016 edition of the Actuarial Post.
The BBC consumers’ programme ‘You and Yours’ recently ran a report on the number of care homes that are struggling financially or are heading into receivership. Their findings showed that about one quarter of the 20,000 care homes in the UK are likely to go into receivership in the next three years. The problem is that the care homes themselves are carrying too much debt and make too little profit to invest in the level of renovations that are required. And as nearly 85% of the homes are over 50 years old, the renovations required to provide a 21st century standard of care are extensive.
So, where is the investment coming from to fund the renovation of the existing stable of care homes and for the expansion needed as the ageing of the population and increasing longevity causes demand for residential care to soar? Austerity cuts means that the amount paid for residential care by the local authorities is lower than required and it is getting harder to off-set these with the fees of those who are paying for their own care. The recent entry of external investment funds into the mix is to be welcomed but these funds usually are looking for relatively quick returns on their money; with the average care home making about £17,500 per annum in profit, these are unlikely to be seen as good long-term investments for the funds, except at the higher end for wealthier clients who can afford to pay over £80,000 p.a.
The ability of people to fund their own care is dropping as pension freedom has increased the numbers who are in danger of burning out their savings just as they reach the stage when long-term care might become a necessity. Therefore, simply increasing the amounts charged by the care home is not enough. It will lead to more homes restricting their intake to the wealthier retirees and refusing to admit those from local authorities who require cross-subsidisation.
This means that the only realistic policy options are to increase government subsidy of the care system or to increase the amount of people who are in a position to pay for their own care. The latter could be achieved by increasing the sale of long-term care products that would enable people to essentially insure against the costs of care. The sale of long-term care products is a relatively small business and only covers a small section of the population, leaving the rest reliant on their lifetime savings and the liquidation of their primary asset, i.e. their home. Primarily, this is because the need for care when one is incapable of looking after oneself is an issue that most people don’t want to face when they are young enough to be capable of provisioning for it.
The same could be said for pensions, in that many people didn’t want to think about their old age when they were young and ended up under-provisioned. To combat this, a system of auto-enrolment into pension schemes is being rolled out nation-wide to try to nudge people into doing the right thing. One would think that this would assist with the care issue, but there is a problem as the introduction of pension freedoms, allowing people to draw down their money at the point of retirement, is likely to ensure they run out of their savings a few years before they die. This is precisely the point at which care is most likely to be required.
If started early enough, care policies could accumulate enough to allow people to pay for assistance to stay in their own home when they are older, and then ultimately go into a care home if their needs grew so great that living alone was no longer an option. The difficulty is getting people to think about their possible needs that far into the future and persuading them that it is worth spending the money to insure against it.
The government needs to devise a policy to get people saving for care home costs. They cannot continue to have it both ways, promising people that they can hold onto their homes, yet not providing enough money to pay for the care costs when they arrive. Getting people to face unpleasant facts isn’t easy, and most politicians tend to try and duck issues that require that approach. Yet, the reality will catch up with them soon enough in the form of substantial segments of the population that can no longer look after themselves but yet are unable to afford to pay for help. Either they must realise that they will have to liquidate their primary asset, their home, or they will need to insure against the need by buying long-term care products. Linking a system of saving for long term care to the auto-enrolment process is something that needs to be looked into without delay.