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The Actuary The magazine of the Institute & Faculty of Actuaries
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Grasping the Dilnot opportunity

On 4 July, Andrew Dilnot and his fellow commissioners published their report on the funding of long-term care in the UK. The report covers a number of areas and makes various recommendations, the two most important of which are an increase in the means test limit to £100,000 and a cap on the amount that people will have to pay for care out of their own pockets.

The main recommendation of the Commission is that a public/private partnership is put into place in which people who need care will fund the first £35,000 of care themselves, after which time the State will pick up the rest of their long-term care costs. If government decides to accept and implement such a cap then it will lead to the development of a whole host of financial services products to help people fund the capped amount.

Products to help people fund for the cap will range from savings and investment vehicles, equity release, disability pension annuities and long-term care insurance either on a standalone basis or added to other relevant products, such as life insurance, income protection and critical illness.

As actuaries, we will be called on to assist in the development and pricing of a number of these products.

Long-term care insurance products were first developed and sold in the UK during the 1990s but they were expensive as they were designed to cover all of the care costs from the point that care was needed, an open-ended liability. Consequently, only the wealthy or reasonably well off could afford them.

As well as the cost of long-term care insurance in the 1990s, there was an added issue in the minds of the public of uncertainty in government thinking on long-term care.

By capping the amount that an individual is liable to pay to £35,000, insurance products can therefore be developed and sold to cover the capped amount. Consequently, the cost of the insurance will be much less than the products sold in the 1990s, somewhere between one third and one quarter of the cost.

This would make long-term care insurance affordable to many more people and would really open up a potentially large market. The knock-on effect would be that the larger life and health insurers would be likely to develop products rather than a few small niche players as in the 1990s.

As well as insurance, the report also mentions the concept of the disability pension annuity. It has long been a view of mine that the pension is a natural home for long-term care. It is possible to consider three high-level scenarios for people as they age in retirement:

1. They never have a need for long-term care and therefore a level income in real terms in retirement should satisfy their needs.

2. A number of years after retirement they start to experience problems with the normal activities of daily life, perhaps as a result of arthritis, breathing problems, heart problems and so on, and may therefore have a need for a gradually increasing income in real terms in order to be able to pay for help around the house.

3. A catastrophic event such as a stroke or heart attack or a severe senile dementia such as Alzheimer’s or other major illness occurs, and there is sudden need for a large amount of expensive care either at home or in a nursing home leading to a dramatic increase in monthly outgoings.

Our current pension rules allow for point 1, but do not allow for points 2 or 3, and it has always seemed logical to me that our pension annuities should be constructed so as to allow for an increase in payments on a definable long-term care event. Dilnot suggests that such annuities should be allowed and that pension rules should be changed accordingly.

If the government does decide to implement the Dilnot recommendations then the uncertainty that has existed in the past will be removed, which means that many more people will be likely to consider using insurance, pensions and other financial services products to fund their long-term care costs.

To fail to take this opportunity to provide a fairer system for all will be a failure by the government to tackle what is a worrying and financially destructive issue for a growing number of people.

Peter Gatenby is the senior actuarial partner and leads the actuarial practice at Mazars LLP