Desperately seeking solutions

Chris Horlick discusses the findings of the recent OECD report into rapidly ageing populations and asks what it means for long-term care funding.

We should not consider for a moment that the UK is unique in ­having concerns about its rapidly ageing population and how to pay for long-term care.

The OECD has recently conducted a far ranging review of member ­countries who are all grappling with the consequences of rapidly ageing populations.

The figures are stark. In 1950, less than 1% of the global population was aged over 80-years-old.

By 2050, the share of those aged 80 years and over is expect to increase from 4% in 2010 to nearly 10% across OECD countries.

The projected impact for government and private market spending on long-term care is estimated to be as much as 1.5% of GDP on average across the OECD, this is estimated to double or even triple between now and 2050.

The report is extremely relevant given the recent Law Commission Report on long-term care and Dilnot Commission on the Funding and Support of Care due in early July.

The general themes underpinning the report are wholly recognisable within the UK where the most significant impact among our ageing populations will be among people aged over 85 who need most resource to fund domiciliary and residential care support.

Their number is now set to increase by over 60% in the next 20 years. People aged over 75 will increase by around 70% in the same time period (source: Laing and Buisson 2009).

Clearly one of the most important aspects of the report is What financing policies help to reconcile access to care with costs and identifies the need to facilitate the development of financial instruments to pay for the board and lodging costs of people in care (known as hotel costs).

We welcome its recognition that “Home ownership can provide a means to help users mobilise cash to pay for such cost, for example, via …equity release schemes …. and combinations of life and LTC insurance policies.”

This is because we believe the use of property through equity release and the use of insurance is an inescapable conclusion of any appraisal of this area when seeking to meet these costs.

Limited incomes

If we review the UK again, many people in retirement have limited income, with up to 23% of pensioners or 2.5 million people now officially living out an impoverished retirement (research conducted for PICA by think tank Oxford Economics and the ONS).

However, people aged over 65 collectively own property worth £765.18bn on which they do not have a mortgage (Key Retirement Solutions – based on analysis of ONS and Land Registry Data, 2010) which can provide much needed sources of income through equity release.

This in turn, can fund long-term care insurance products. For example the immediate needs annuity (INA), or immediate care plan which, in return for a one off payment, will pay income towards the costs of care for life.

These products, which are tax free* if paid directly to a care provider (domiciliary or residential) provide peace of mind to the policyholder and limit their liability, enabling them to leave the residue of their estate typically as a bequest, to family.

Given the value of products such as INAs, the failure of insurance markets to grow to achieve their potential is examined.

The potential value in the UK is significant, for example, recent research by the Public Social Sciences Research Unit has demonstrated that on the basis of affordability and net benefit tests, for people with a limited appetite for risk, INAs could benefit up to 40% of all self funders.

Developing market

In the UK, we believe the principal reasons why the long-term care insurance market has not developed have been a chronic lack of consumer awareness about what the state will pay for and what costs the consumer will be expected to meet.

This, we believe, is also matched with a chronic lack of awareness of the costs of care, how long people will live in care, where to get appropriate financial advice and which products are available to meet the costs of care.

The Dilnot Commission will at long last provide the clarity that consumers need to plan for their care and will play a significant role in the growth of any future market for long-term care insurance.

It is inevitable that any care funding solution promoted by Andrew Dilnot will face criticism from differing entrenched political interests, however, the scope of the OECD report will provide consolation that he is not alone in seeking solutions to these important issues of public policy.

* The rules governing ­taxation are subject to review and can change and depend on ­individual circumstances

Chris Horlick is managing director of care at Partnership