This article was originally commissioned and published in August 2013 for Investment Life & Pensions Moneyfacts publication.
Tom Murray, Head of Product Strategy at Exaxe, explores the need for greater innovation and a wide variety of products to transform the staid long-term care market.
Royal Family’s long term care
One of the reasons that the arrival of the new Prince George into the House of Windsor is notable is because here is one child whose paternal relatives already have a stunning level of longevity. His great-grandfather is in his nineties and his great-grandmother is in her late eighties. In fact, he missed out on seeing his great-great-grandmother by a mere 11 years and she managed to get to 101 years old. In addition, there are a large number of other octogenarians and nonagenarians in the royal family.
In any other family, the issue of caring for elderly relatives on this scale would be colossal, but of course the Windsors have sufficient personal income to ensure that the problems caused by ageing are easily manageable and in fact can be run as a cost on the family firm. The availability of servants and spacious accommodation means that the lifestyle of the elderly can be maintained in their homes, even if they become incapacitated. Unfortunately, this happy state of affairs does not apply to the vast majority of citizens within the UK.
Up to now, this hadn’t been an issue as very few families had the longevity of the royal family. As a result, most people didn’t face the need to support many elderly relatives. All this is about to change. In fact, the Windsors, given both the proportion of elderly relatives to working-age members and the low numbers who actually have direct income of their own, are a reasonable microcosm of the future shape of British society. By the mid-century we can expect to have a ratio of two workers to every pensioner; as a comparison, in 2010 it was three workers per pensioner and in 1901 the ratio was 10:1.
This steep decline in the ratio of supporters to supported means that the number of taxpayers available to support the needs of the elderly will be way too small. This is the biggest challenge for society this century.
Care costs will go off the scale
The problem for the ageing population is the fact that due to increasing longevity, many more people will soon be living into their nineties. Unfortunately, healthy life expectancy is not increasing at the same rate as actual life expectancy, so along with the increasing numbers who require care when they are older, we can expect each of them to spend a higher proportion of their life needing help with the day-to-day activities. The cost of day care is quite substantial and that for nursing homes is even worse. The increasing amount of people needing this care for longer periods of time means that demand is going to rise exponentially.
Without a large taxpayer base, it is obvious that the government is not going to be able to meet the costs of providing the level of support that is going to be required by the elderly when we get to the middle of the 21st century. The increasing cost of medical interventions to that age-group plus the longer time that pensions will be drawn for mean that the proportion of GDP to be spent on the elderly is already going to rise dramatically just for health and day-to-day living, leaving little room for the substantial cost of care provision on the scale that is required.
High demand betokens new opportunities
This is where a major new opportunity is arising in the protection side of the life and pensions industry. Long Term Care plans, long available as a niche product, are finally coming into the mainstream. These plans are built to provide an on-going income in the event of the incapacitation of the policyholder, in order to pay for the care needs of that individual. Similar to any health-related products, there are tests for incapacity which must be passed in order to trigger the payments but, once passed, the products will then pay out until death, a vital point given the ever-increasing lifespans that people can now expect.
The pay-out lasts for life and can be made directly to the care provider, in which case the payment will be tax-free. There are also various bells and whistles available on these plans, dependent upon the provider, such as capital protection capability, inflation protection and ability to convert to a standard taxable annuity in the event of care no longer being required.
Of course, nothing is for free. Long Term Care plans are purchased by an initial lump sum at the start which governs the amount to be paid based on the applicants existing age and the state of their health. The plans can also be immediate or deferred which can make a big difference in the cost, as the deferred plan costs significantly less for the same income.
Government support positive but limited
This market is about to undergo a major shakeup as demand rises and new entrants arrive with innovations to stimulate the market and capture market-share. Recent changes by the government have been headlined as meaning that the maximum anyone will be charged for long term care will be fixed at £72,000. However, this is not quite correct. Many of the costs of care are excluded from counting towards the cap so there can still be quite a significant cost to be covered before the government steps in to pay for the rest.
On the bright side, the government’s well-publicised changes have stimulated debate and got more people thinking about how they will fund long term care in the event that they need it and so we can expect an increasing interest in the products available in this sector. However, the entitlement culture that is currently prevalent will have to change in order to ensure that people realise that ultimately they will have to cover their care costs themselves.
Care solution will require changing mind-sets
For the generation approaching retirement, the problem is looming fast. For the majority of people, their primary asset is the home they live in. This has now become key and we can expect to see equity values being tapped into in order to provide the lump sum required for long term care. The danger for most people is not the provision of this lump sum – it is the fear that they will outlast it. Long term care products resolve this issue but consume the lump sum, generally a big fear of the elderly who are often determined to pass on some of their wealth, even at the cost of being unable to afford some of the necessities of life themselves.
It will take a sustained educational process from the government and the industry to bring home to people that the government will be unable to maintain their care from central funds and that they will have to make arrangements themselves for their own care in their old age. This should stimulate a debate about the needs of the elderly and hopefully inspire the innovation that is needed to produce a wider variety of products in this market, which is currently staid and unimaginative.
Existing market is small and predictable
There currently are few providers in the long term care market; at present it is quite a small market with a limited array of products. There are a number of reasons for this: Firstly, most people automatically think of the products as meaning a nursing home and are reluctant to plan for something that they never want to use, secondly the cost of the products are quite high and thirdly there is a belief that after a full working life it is the responsibility of the government to look after people in their old age.
These issues need to be addressed. Long term care plans need to be broadened out to cover more provision for care in the home rather than being so focused on supporting nursing home costs. This will require government intervention to allow the tax-free benefits to apply to all types of care provision more easily.
Costs of care can primarily be covered by the use of the equity in the home. This provides the lump-sum which will allow the purchase of policies to provide care. Equity release, in particular home reversion schemes, could play a big part in providing the cash needed to allow for care provision.
Many people see equity release schemes alone as an alternative but as they don’t guarantee to pay you for as long as you live, they don’t quite fit the bill in terms of replacing a proper long term care plan. The solution lies in the integration of these plans to enable people to leverage their primary, often their sole, asset in order to be able to either be cared for in their own home or to move into a residential care home when they are no longer able to look after themselves.
Finally, the myth that the government can provide needs to be burst. This has already happened successfully in the arena of pensions, where the arrival of auto-enrolment has been accompanied with the kind of media programme that has ensured general acceptance of the need for self-provision of income in old age and resulted in very low opt-out rates from the process to date. A similar programme around care will need to bring home to people the fact that provision for care in their old age is primarily their own responsibility.
We also need to start breaking the rigid attachment people have to bequeathing their assets to the next generation, which is inhibiting them from using them to provide for their own needs while they are still living. This is a significant cultural change for the UK and no-one should underestimate the amount of work involved in achieving that level of change. Nevertheless, the sooner UK citizens can be made to realise that the future lifestyle is dependent upon their own level of provision for it, the sooner we can expand this market which will drive the innovation needed to improve the products in it.
The future’s bright, the future’s grey!
Long term care is currently in a backwater of the financial product world. Taking a leaf from the success of the auto-enrolment campaign, the government and the industry need to combine their efforts to move this area into the mainstream, breaking down the myths and cultural barriers as they do it. Only then can we have the dynamic market that will lead to better value, innovative products that will be so desperately required across the next few decades as the greying of the population increases.
Google Plus: TomMurray
What do you think? Let us know in the comments below!