Paying for care: what matters is how you get there


The Government’s announcement today concerning the level of the ‘lifetime cap’ on personal and nursing care fees is an important landmark in the emergence of a new settlement for the funding of long term care.  While the announcement has been quickly pushed off the headlines by accompanying statements on negative GDP growth, the stalling of plans to reduce public borrowing, and the abandonment of plans to reform inheritance tax, the care funding package merits attention for the particular answers it provides, as well as some outstanding questions.

The reforms, set to take effect from 2017, have largely applied the principles recommended in the Dilnot report, which (as well as recommending some efficiency improvements to delivery which were largely endorsed in the 2012 White Paper) focused on the funding of long term adult social care.  The latest announcement, which progresses the implementation of the Dilnot recommendations – with some significant changes – has answered a number of questions left unresolved by the Government’s earlier response to the Dilnot Commission’s Report on Long Term Care

The funding issues addressed in the latest announcement are anchored around three core questions: the levels at which care costs are capped; the scale and spectrum of means-testing to qualify for state contributions to care costs; and the ‘accommodation costs’ that people living in care contribute towards ‘bed and board’ charges.  The Dilnot report recommended that the Government set a financial limit on the total exposure of any individual to care fees, between £25,000 and £50,000, with £35,000 recommended as a fair and sustainable level.  While the idea of a cap was welcomed in the Government’s initial response to Dilnot, the 2012 progress report on financing long term care gave an early clue as to the preferred approach, when it indicated that its consultations with stakeholders – specifically with the financial services industry – had suggested that a higher cap of up to £75,000 would be considered reasonable.

Running parallel to the cap, the Government has indicated plans to adopt a more generous approach to means-testing, whereby the state – through the local authority – would contribute to the costs of care at source on a sliding scale for those with up to £123,000 in ‘held’ assets.  This represents a significant expansion of eligibility for means-testing, from the current upper limit of £23,250, and in excess of the £100,000 proposed by Dilnot, but with only £14,000-worth of assets likely to remain fully protected.  Nevertheless, in a complex settlement between individual responsibility, central and local government contributions and the role of the financial services market, this aspect of the funding package is likely to be viewed as challenging for local authorities unless specific arrangements – for example, a separate budget line – are put in place to underwrite this cost beyond the proposals for efficiency savings outlined in the White Paper.

A third pillar of the financial settlement relates to the contribution to living costs payable by people in residential accommodation.  Dilnot, extrapolating from the state pension level, recommended that this contribution should be priced at between £7,000 and £10,000, but the Government has proposed a higher rate of £12,500, with consequences for the rate at which income and assets will be depleted above and beyond the capped costs of residential care itself.  So, a household in which two partners require residential care might expect to spend up to the cap of £150,000 plus £12,500 per person for each year spent in care.

Since it published its initial response to the Dilnot report, the Government has deflected anticipated criticism of the significantly higher cap by arguing that it is having a cap that matters, not the level at which it is set, as the certainty of knowing total lifetime exposure will enable the financial services industry to develop and offer appropriately priced insurance products.  This reinforces the narrative of self-responsibility: while the state is promising to absorb a degree of collective risk for individual cost exceeding £75,000 through the creation of a cap, individuals will be encouraged to make provision for their portion of the bill through insurance.  The financial services industry is poised to welcome this development, as the insurance market for long-term care is currently under-developed.

A final piece of the puzzle is the promise that the system of deferred payments – currently offered by some but not all local authorities – will be universally rolled out so that no one has to sell their home to meet the costs of care in their lifetime.  In principle this represents a potentially progressive mechanism through which the state can enable home owners to fund their own care costs (in excess of the cap) without having to liquidate the equity in their home during their lifetime, whether by selling or by using an equity release product. At present, some local authorities offer deferred payments schemes, but provision is patchy as local authorities are not currently permitted to charge interest on these rolled-up costs.  In previous reports indicating Government support for universal deferred payment schemes, it was acknowledged that local authorities would need to be able to charge interest to enable them to offer this cost neutrally to the state.  It is not yet clear how the pricing model for deferred payments might compare with the pricing model for equity release products currently available on the market. Based on current loan-to-value ratios (LTVs) for equity release, a single 75 year old would typically need £180,000 in held equity to liquidate £64,800, suggesting close to £200,000 held equity to realise £75,000 in released equity. The high conversion cost of ‘held asset’ to ‘liquid asset’ for housing equity underlines the true cost of housing asset spend on care (and other welfare needs) and reveals the true level of the proposed cap for older people who hold their assets in housing. Taken in the round, the settlement suggests that, with the lower limit for the means-test cap set to remain at £14k, the total potential exposure for individuals holding up to £200,000 – or for couples, potentially much higher – is not likely to change considerably under the new proposals.  Rather, it is households with higher levels of wealth who will make significant savings.  With this in mind, and against a backdrop in which the care funding proposals have been announced in tandem with a delay in the planned increase in inheritance tax exemptions, it is interesting to reflect on the extent to which the changes will affect any significant redistribution, or whether this appears more like moving some middle-income deckchairs.

 

In anticipating how these changes are likely to affect older people’s ability to preserve a portion of their assets, much will depend on take-up of care insurance on the one hand, and the pricing of the deferred payment scheme, on the other.  Previous efforts by the state to encourage people to take responsibility for planning for their financial futures have not always been taken up with the anticipated degree of economic rationality, and it is widely recognised that the ability to plan for the future (both in terms of social capital and financial resources to fund insurance products) is unequally distributed.  For those who remain personally liable for charges up to the cap, the £75,000 figure represents the cost at source, but the true cost will depend on the charging model applied by vehicles – either by the state’s deferred payment scheme or commercial equity release products.  Again, with only 27% of homeowners aged over 65 owning homes worth £300,000 or more (which can in these circumstances be viewed as a particularly illiquid asset, especially if another member of the household wishes to continue living there), the promise of deferred payment promises to keep available the possibility of the roof overhead but the financial protection it offers in terms of ring-fencing assets will be significantly greater for higher, rather than lower, asset-holding households.

Once again (see earlier blog), the most recent announcement has revealed some elements of the funding settlement for long term care.  Yet, until we can model the impact of financial vehicles relating to the planned arrangements, in the context of consumer behaviours, the ultimate implication of this latest announcement on the calibration of responsibilities for long term care between individual, state and market – and particularly the allocation of benefits across different asset-holding populations – remains to be seen.

 

Prof Lorna Fox Mahony

University of Durham

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