The age old problem

Andrew Dilnot’s Commission on the Funding and Support of Care has been tasked with finding a funding solution for the care needs of our rapidly growing elderly population. The timing is significant as the UK faces a rapidly ageing population which will have a profound impact on care funding and related issues.

Numbers game

In the UK the number of people aged over 85, who need most resource to fund domiciliary and residential care and support, is now set to increase by over 60 per cent in the next 20 years (Laing and Buisson, 2009). Put another way, there are now over 400,000 elderly people in residential care. This number is predicted to increase to 750,000 in 2031 and more than triple in 2081 to 1.5m.

This significant increase in our elderly population is taking place at a time when there is a sharp decline among people of working age – from today’s ratio of 5.3 people working for every person aged 70 or above, down to just 3.7.

This puts into context the need for a funding solution that is not dependent on direct taxation. Given the scale of this issue, it is also not realistic to rely on formal care, although a significant resource, to meet the growth in care need.

The Dilnot commission presents the best opportunity to create a workable long-term framework for social care in the UK since the Royal Commission on the Funding of LTC in 1988.

We believe that the analysis of the problems contained in the Dilnot commission is correct and that the recommendations made are key to any solution.

Dilnot’s key recommendations

•    An increase in the means-testing threshold – above which you have to pay for care – from its current level of £23,250 (including property) to £100,000 (in England)

•    A cap of £35,000 total contribution from the individual towards personal social care costs

•    A contribution to general living costs from the individual of between £7,000 and £10,000 per year

•    Introduction of consistent national assessment criteria

•    Better information and advice to be made available

•    A major campaign promoting awareness of the system

Indeed, the need for universal information and advice for self-payers is an issue we have been campaigning on for a number of years. The issue is significant, with self-funders being some of the most overlooked and underserved people in the care system, which ironically they also cross-subsidise.

Under the current means-tested system for funding long-term care, 41 per cent of older people in residential care are deemed ‘self-funders’. This is equivalent to 53,000 people each year. Yet in 2009 only 7,000 received appropriate financial advice. It is hardly surprising to discover in the absence of such advice that the local government information unit (LGiU) estimated that 25 per cent of all self-funders fall back on the state because they have depleted their funds (Independent Ageing: Council Support for Self Funders, March 2011).

If self-funders deplete their assets below the current £23,250 threshold they become reliant on local authorities for care funding. When this happens, self-funders frequently have to move into smaller or shared rooms and possibly into new homes, which can be extremely traumatic for them.

The same report estimated that local authorities could save significant amounts associated with self-funders depleting their capital and falling back on the state (estimated at £1bn a year in England alone) if those citizens had received the correct advice and purchased the right financial product.

Campaign manager

Partnership is delighted that the Dilnot commission recognises this and that calls for a major campaign to raise awareness of the care system will redress the chronic lack of awareness among consumers about where to receive advice, the costs of care, how long they will live in residential care and which products are available to meet the costs of care.

However, there are some potential problems with Dilnot. We believe there is a risk that the commission’s proposals may result in greater confusion. Almost everyone we talk to believes that all their care costs will be met when the £35,000 cap has been reached. This is simply not the case. This only includes personal social care costs, and not hotel costs, which typically make up around two thirds of the costs of care for a self-funder in the south of England. This means that self-funders who live for four years will still have to find approximately 90 per cent of the costs of care if they live in a residential care home in the south of England.

In addition, only people who live on average for approximately two and a half years in residential care will benefit from the proposed £35,000 ‘cap’ on personal social care costs. Since the average life expectancy in residential care is two years three months, only the longest lived and typically wealthiest will benefit. Clearly the further the cap increases the more pronounced this effect is.

Both outcomes pose serious challenges for the fairness and sustainability of these proposals.

Moreover, the uncertainty surrounding what is actually covered within the personal social care ‘cap’ means that it is extremely unlikely that new insurance products will develop to meet the needs of people seeking to fund long-term care. In particular, we cannot see how these proposals will stimulate pre-funded long-term care products. This is partly because no one wants to buy them, but partly because no provider wants to sell them with uncapped liabilities and capping only the personal care element of the costs doesn’t resolve this issue.

Policy partner

So, are there any alternatives? Research conducted on Partnership’s behalf by the PSSRU demonstrates that immediate needs annuities will actually benefit from Andrew Dilnot’s ‘capped’ costs proposals in terms of uptake. Arguably this is the only long-term care insurance product which will do so and therefore Partnership would be a net beneficiary of their implementation.

Immediate needs annuities or immediate care plans are insurance products which are typically purchased when someone enters into care. These products provide an income for life to meet the costs of care in return for a one-off premium. If the income is paid directly to a registered care provider it is tax free. The residue of the estate can be left as a bequest to family or friends. They are portable products and follow the policyholder. They are typically purchased by powers of attorney.

We believe that the government should look to blend a ‘classic’ partnership system with some of Andrew Dilnot’s conclusions – which is the norm for many other countries. This relies on the state incentivising individuals to make provision for their own care – and reducing the catastrophic cost of care to the state – by providing a co-payment.

The government developed a viable partnership model in the 1990s, which can be rolled out immediately.

This works by the government increasing the £23,350 threshold (above which someone has to pay their care costs) to match the cost of care insurance purchased by an individual. In turn this enables the prudent saver who lives a long time in care to keep more of their hard-earned assets; when they have run them down to the level of the threshold, the state stands in to cover their care costs.

This means that if someone purchased £50,000 of care insurance the threshold would raise to £73,250 (£23,250 plus £50,000). Everyone wins. The prudent saver is rewarded by ring-fencing more of their assets, which typically can be left as a gift to family and friends, while government is safeguarded from the full costs of a state-funded care bill. This results in less taxation and a reduced burden on the young. This solution is not only easy to introduce it is fair – and rewards the squeezed middle for any contribution they make towards their own care.

Modifications of this system can result in everyone in the wealth spectrum protecting between 60 per cent and 80 per cent of their total assets at little or no cost to the state. We believe this is an alternative the government should consider seriously.

Chris Horlick, managing director, care division, Partnership