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The Actuary The magazine of the Institute & Faculty of Actuaries

Profession sees Dilnot as chance to end care funding uncertainty

The Actuarial Profession has welcomed the publication of The Dilnot Commission’s recommendations into the funding of care and support, believing they will help individuals better prepare for retirement.

"The good news is that the Commission has recommended a cap on the amount people will have to personally contribute to their care," said Sue Elliott, chair of the Profession’s Health and Care committee.

"If individuals have to pay no more than £35,000, no matter how long their care lasts, it will help them better prepare for their future. This greater certainty would also allow insurance companies to design more affordable and simpler products to help individuals with their financial planning."

Peter Gatenby, senior actuary at Mazars and advisor to the last government on long-term care, says that previous attempts to provide insurance products failed because of the high cost, with what was an open-ended liability.

"The million dollar question is whether Government would seriously consider this proposal which does have a significant cost to the State and which will keep growing over time," he said.

The Profession points to a number of factors that are contributing to the problem of social care funding. The UK over-65 population is expected to double by 2058, while life expectancy continues to increase, healthy life expectancy is not keeping pace, meaning that the number of years a person can expect to live in poor health is increasing.

This problem is compounded by a change in demographics where the population is increasing faster at the older ages than at younger ages. This change will have a significant effect on the age-dependency ratio (the number of people not in the labour force versus the number of people in the labour force). Currently this stands at 25% but by 2056 it is projected to stand at 45%, before taking into account the changes to state pension age.

One in four over-65s can expect to have some kind of care and support requirement in the future and the average cost of care can range from £25,000 per year for basic private provision to over £50,000 per year for high end offerings and specialised care. The average length of stay in residential care is two years, but for self-funders the average increases to four years and for one in ten residents the length of stay is eight years.

"In terms of what products will be designed to meet the costs of an individual’s care requirements and how much these might cost, it is too early to tell," adds Ms Elliott.

"It will depend on a multitude of factors including, of course, what the Government does with the recommendations. But if Dilnot’s proposed cap becomes law, then the uncertainty which many face as they attempt to plan for their future will be significantly reduced.

Ms Elliott believes the proposed £50,000 cap for individual costs for care could help re-invigorate the long term care insurance market.

"[This” would have the effect of reducing the premiums for the insurance policy to some extent, depending on the period of coverage provided by the insurance. However, it reduces, but does not eliminate, the incentive for the insurance company to look for preventative measures to try to reduce the length of period under claim."

Private insurance could take many forms, according to the Profession, including immediate needs annuities, various types of pre-funded insurance, a link to pensions such as a disabled life annuity, or a link to housing wealth using equity release as a funding mechanism.

The immediate needs annuity market currently averages about £95 million of premium per annum, the Profession said. It reached its peak sales in 2004 at just over £110 million based on 1,730 policies which is significantly less than the 435,000 people in nursing or residential care where a significant amount would have been private pay.

The key recommendations of the Dilnot report can be found here.