Adele Groyer of the IFoA’s Social Care Working Party gives an overview of the Association of British Insurers ‘Prepare for Care’ report against a background of continued uncertainty about what state support will be available in future.
With a general election looming no later than January 2025, social care should be on the agenda. In 2021 a reform was proposed whereby a lifetime cap on care costs, along with an increase in the means testing limits, was to be implemented in October 2023.
In late 2022, the government announced a further 2-year delay until October 2025. As this date is beyond the next general election, it is not clear whether there will in fact be any implementation of the reform in its current form. There has been little indication of continued commitment to implementation on this date.
In February 2023, the Association of British Insurers (ABI) published a report called ‘Prepare for Care’ (PDF, 1 MB). The report is based on research by the Pensions Policy Institute and the ABI’s analysis of consumer needs and products to help people meet the costs of care. Following the publication of the report, the ABI held a round table with various stakeholders.
The IFoA’s Social Care Working Party supports the ABI’s proposals. The working party will further support the initiative with up-to-date research on the cost of care and by exploring the costs of different product options.
Local authorities financially support those who meet the eligible care needs criteria and the means test. The current means test considers assets and income. The amount of support provided is tapered by taking into account savings of between £14,250 and £23,250. Those with assets below the minimum threshold and with insufficient income receive full local authority support. Those with assets above the threshold receive no support, regardless of income level.
The assessed income for care is eligible income plus a ‘tariff income’ which is determined based on the level of assets between the lower and upper asset thresholds. The local authority pays the difference between the local authority care rates and the assessed income.
The reform proposed in 2021 but now delayed includes:
Housing assets are ignored where the person receives care at home or if a spouse or other qualifying person is living in the home.
The ABI and Pensions Policy Institute estimate that only 20% of people have assets in excess of the proposed £100,000 upper threshold limit after the housing disregard.
For more details on the current system and the proposed reform, see The Actuary’s April piece on UK social care reforms.
Self-funder rates are typically 40% higher than rates paid by local authorities. The reform addresses this disparity via its ‘fair cost of care’ proposal which enables self-funders to receive care at local authority rates.
Currently only third parties may pay for top ups such as a better room or extra domiciliary services. The reform allows anyone to pay for top up without foregoing local authority funding.
Respondents to an ABI consumer survey noted that their needs were often underplayed in local authority assessments due to a lack of resources. They also had little choice in how care was delivered. For people to have more choice about where and how they live and get the level of care they themselves decide they need, they will have to top up.
Earlier care interventions can also delay the need to move to residential care with respondents preferring to receive care in their homes. Care in the home can be more cost-effective than residential care.
Many people would prefer a loved one, rather than a professional carer, to care for them. But the Carers’ Allowance is only £3,500 per year and comes with strict eligibility criteria. These include the requirement for the carer to provide care for at least 35 hours per week, that they don’t earn more than £139 per week after tax, and that the care recipient is in receipt of one of the state government benefits. This means that many carers do not receive financial support which may prevent them from being able to provide care.
This suggests that individuals need to make provision for meeting at least some of their own care costs.
Paying for care in later life will always require a combination of public and private funding. This is because some people want to pay for services above and beyond what is provided by the state and not everyone will be able to pay for their own care.
However, there are several barriers to expanding a private market for products and services to help people pay for care.
People are unaware of the costs they may face and what the state provides to meet their needs.
The complexity of the care system can deter people from planning ahead. People cannot easily understand what they are entitled to and what they need to provide for themselves.
People tend to be reluctant to think of themselves as needing care in the future and therefore avoid preparing for it in advance.
People have difficulty prioritising cost of saving for future care needs over the cost of current needs.
Means testing is a disincentive for private provision. The prospect of a more generous means test extends this disincentive. Additional income or capital arising from savings or insurance will only partially benefit the majority (two thirds) of care recipients. This is because the means test will take this additional income or capital into account so it would just replace some of what local authorities would have paid. The only people who fully benefit from a savings or insurance pay out will be those who will not fall under the means test for their entire care journey.
The risk of customers only partially benefitting from a product raises regulatory concerns. It undermines the product’s objectives and may fail regulatory tests of ‘fair value’, including under the Financial Conduct Authority’s new Consumer Duty. Detriment to customers could also be damaging to the public’s trust in the sector.
To meet regulatory requirements, providers and advisers will only want to sell and advise on financial products if they are certain, at the point of advice and purchase, that the customer will benefit fully from it.
As things stand, it is not possible to establish whether a customer will benefit from a product sold today when the care needs may only manifest many years or decades in the future and even the short-term state provision position is unknown.
People have been delaying making financial plans until there is clarity over the government’s reform proposals, which also shows the importance of policy stability as a factor that influences decision-making.
The ABI sets out existing and potential products, as well proposals on how to remove barriers to their take up. The IFoA does not have a stated position on whether the carve outs should become policy. The Social Care Working Party acknowledges that the ABI proposals would reduce barriers for customers planning for care costs.
Here we look at existing products, barriers to their take up, and possible solutions.
This allows customers to access their housing equity without having to sell their property.
A guaranteed stream of payments for life to cover the cost of care in exchange for a lump sum. The product is sold at the point of needing care.
Here we mean savings and investments that are general funds.
These provide an early lump sum payment from a life insurance policy in the event of need for care.
Here we look at product ideas, barriers to their take up, and possible solutions.
This allows children to insure their parents’ care costs.
This pays a benefit if a working age person needs to care for a family member.
Insurance to pay specifically for care that is unmet by local authorities, either for needs that are not recognised as eligible, or for top ups for more comfortable care.
This pays a lump sum or income in the event of failing activities of daily living at older ages after the typical expiry age for term assurance.
A barrier not listed by ABI is the high cost of insurance where the claims trigger is a parent needing care, driven by the high incidence rate of parents needing care. This incidence rate is much higher than the rate of illness and disabling events for a person of working age so parent cover will look expensive relative to other insurance products.
Some insurers have included a claims trigger on income protection products that covers working age parents who have to care for a seriously ill child. This has a low incidence rate and therefore adds minimal cost to the main income protection cover.
We note that housing wealth is an important asset that can be used to pay for care. The proceeds of the sale of a home can be used to pay for care directly or to purchase an immediate needs annuity. Equity release is also linked to housing wealth. The actual sale of a property releases bedroom space into the economy. Downsizing may be appropriate for care recipients and their household in some circumstances. Stamp duty is a disincentive to pursue this avenue.
People who set aside savings or purchase insurance to fund care costs are less likely to need state support. This reduces costs to the state. If a means test is retained, the IFoA Social Care Working Party suggests that government consider other incentives to encourage people to meet their own costs. These may include tax relief on money paid into social care savings or insurance products.
In addition to removing financial disincentives by excluding care savings and insurance benefits from the means test calculation and more favourable tax treatment of pension benefit withdrawals to fund care, the ABI also proposes the following 3 solutions.
The Department for Health and Social Care (DHSC) should work with stakeholders to develop a platform that provides clear, consumer-friendly, and nationally consistent information that helps people navigate the system.
DHSC should run an awareness campaign once the policy framework is settled. This campaign should communicate people’s responsibility for paying for their care costs and the likely extent of those costs.
The Money and Pensions Service (MaPS) should have a role in answering people’s questions and helping them navigate the system. These information sources and local authorities should provide signposting to specialist financial advice.
MaPS and providers should be allowed to go further than they currently can within financial advice rules. This will allow them to tailor guidance to consumers’ specific circumstances and preferences. Legislative changes will be needed to allow guidance to be personalised without the risk of it being considered advice.
The Financial Conduct Authority should review Conduct of Business Sourcebook advice rules to ensure people can access the right advice. At present advisers cannot provide holistic solutions and still comply with the requirements.
The Department for Work and Pensions should improve the process for claiming Carers Allowance. And it should graduate payments rather than carers receiving all or nothing.
The ABI recommends that the government sets up a cross-departmental care taskforce that can agree and implement a joined-up action plan and is independently led to bring together all these streams of work.
Very few people have set aside funds specifically to cover the costs of social care. This stems from a combination of:
While these conditions persist, along with means testing acting as a disincentive to save or insure, it is difficult to see how there will be significant take up of financial services to meet care costs.
The IFoA’s Social Care Working Party is able to suggest what form financial products could take and possible costs associated with these products. This information may help to frame a financial planning discussion but clear long-term policies and government support are needed to address the barriers that currently prevent more widespread use of financial products.
