Bridging the care funding gap: Where purpose, opportunity and licence to operate align
23 January 2019
As people live longer and pressure on welfare spending increases, the challenge of how to fund long-term care is one of the most critical issues facing our country.
The Government is acutely aware of the funding gap. Its focus includes a continuing Parliamentary review. A much anticipated Government Green Paper is also due this year. Possible measures are rumoured to include auto-enrolment and new products such as a Care ISA and a Care Pension.
Once published, the Green Paper is expected to provide an opportunity for life and pensions businesses to engage further on this important topic and potentially to align their future products, services and strategy to help their customers meet their future care needs. However, the proposals have already been subject to delay, reflecting both the practical difficulties and political sensitivities of the issue.
Foundations for reform
Ideally the following foundations would be in place to enable reform:
- Political parties are aligned around some core elements of a new system.
- The State has an obligation to ensure that no pensioner lives in poverty.
- The State and the individual invest more in elderly care.
- New mechanisms are identified to help citizens plan financially for old age.
Are people in a position to fund their own care? Research by Which? shows that only around one in eight people aged 55 or over are putting money aside to pay for possible future care needs.
Why is there such a shortfall? A study by the Financial Conduct Authority pointed to a lack of consumer engagement and incentives to save. Many people also wrongly assume that care is funded by the NHS or underestimate the risks that ill health or loss of mental capacity could have on their personal circumstances.
Around two in five people in residential care are fully self-funding and a further one in five contribute some money towards the costs. Yet facing average fees of £28,000 a year, which rises to £38,700 if nursing care is required, many self-funders simply run out of money.
In UK Life & Pensions: A roadmap to succeed in a fast-changing sector, PwC looks at why tackling the structural problems surrounding funding for long-term care requires new solutions and greater collaboration between policymakers and the private sector.
We believe there is a range of important ways that life and pensions companies can use their financial and risk management expertise to help bridge the funding gaps and enable people to plan for the future more effectively. Key priorities include raising awareness through a communication and education exercise akin to the one carried out for pension auto-enrolment. Product development and innovation could also help to boost savings, a catalyst for which would be possible moves towards auto-enrolment provision for care. With many homeowners reluctant to sell or downsize their properties, further openings include enabling customers to monetise assets through a trusted market for equity release.
Related opportunities include leading the debate around intergenerational fairness by highlighting the extent to which different care funding options and products align those who bear the costs with those receiving the benefits. As noted by the Institute and Faculty of Actuaries, care funding comes from a mix of current tax revenues (borne by the working age population) and personal funding (borne by individuals, most of whom haven’t saved explicitly for their care needs). Life and pensions companies could work with the Government to provide savings products that incentivise the working age population to save for their own future care needs and/or protect themselves against the risk of needing to pay substantial lifetime amounts for their care.
Cutting across all these openings is the chance to position life and pensions companies as trusted advisors in a time of change, reinforcing their corporate and social purpose. So how can they most effectively engage with this key issue?
1/ Be clear about the business case
Get on the front foot by building long-term care into strategic plans. This includes being clear about how care needs will evolve and the company’s role in meeting demand.
2/ Include care considerations in the advice model
Differentiate the quality of advice by building care funding considerations into future financial need assessments. This service is already provided by some specialist financial advisers, and we believe it could become more mainstream in future. Innovating in this area is likely to result in first mover advantage.
3/ Manage the reputational issues
From enhanced reputation to stronger customer loyalty, this is a clear instance of where social and financial return can be complementary. Yet, it’s also important to understand and manage the reputational risks of taking on more responsibility for supporting care provision for potentially vulnerable customers.
4/ Harness the potential of technology
The launch of new long-term care products presents an opportunity to make innovative use of the latest clinical technology to enhance the customer offering in areas such as real-time monitoring of an individual’s health, which can then be linked to care advice. This will enable tailored financial advice to be given to customers – for example on accumulation, decumulation and care provision.
Our UK Life & Pensions: A roadmap to succeed in a fast-changing sector report explores in more detail the opportunities to develop innovative solutions for care funding and demonstrate value to society. In accompanying blogs, we’ll also be looking at related issues including boosting financial inclusion and the advances driving rising life expectancy.