Improvements in healthcare and living standards mean life expectancies are on the up in the UK. But, with many of these extra years likely to be in poor health, the government needs to find a fair way to fund social care that ensures everyone is able to access the support they need in later life.
Although a series of recommendations have been put forward since the Royal Commission in 1999, the scale of the issue means the government is still looking for a viable solution. Most recently, in the March 2017 budget, it announced that it would publish a green paper on social care to kick-start a public consultation. Two years on, and the publication date has been put back from summer 2017 to “at the earliest opportunity” after the revised date of “before April” came and went.
Fixing the crisis
With the number of people requiring care continuing to rise, social care funding remains a topic that other organisations are less nervous about exploring. The latest to put forward its suggestions is the Centre for Policy Studies, which published its ‘Fixing the care crisis’ report at the end of April.
This report, which was authored by former work and pensions secretary Damian Green MP, looks to secure the future funding of social care while also plugging the current funding gap. Central to his proposal is a new universal care entitlement. This is modelled on the state pension and would provide a weekly payment to cover the costs of a basic level of care in the home, or care and accommodation if residential care is necessary.
Entitlement would be determined by the local authority through a needs assessment, in keeping with the current system. Individuals would also be able to top up the level of care they received if they wanted more than the basic model.
Mr Green also proposes three different approaches that could be used to plug the immediate funding gap. In order of preference, these are: taxing the winter fuel allowance, diverting savings from the spending review, and imposing a one per cent national insurance surcharge on the over-50s.
Although Mr Green says this approach would generate sufficient revenue, critics have questioned his maths.
“The £2.75bn that is mentioned in the report is just for the shortfall, and it is well short,” says Steve Webb, director of policy and external communications at Royal London. “A similar approach has been in place in Germany for many years to cover social care funding, and the rate has steadily increased.”
His view is echoed by The King’s Fund, which says that a figure double that outlined in the CPS report would be closer to what is required to plug the immediate funding gap.
Looking at how the German care funding system has evolved helps to put some context around the CPS recommendations. The system introduced statutory long-term care insurance in 1995 to cover basic care costs for the elderly and disabled people of working age. This is funded through taxation, with the rate initially set at 1.7 per cent, split between the employer and the employee. Pensioners also pay into the fund, at a lower rate.
As demand for care has grown, the rate has had to rise; in 2008 it went up to 1.95 per cent. In addition, an extra 0.25 per cent premium was added in 2005 for people without children as they are less likely to receive informal care in old age. Further increases are also expected, with suggestions that the contribution rate will have to go up to 6.5 per cent by 2055.
Self-provision
Whether or not the CPS figures are out of kilter, the one important thing a formal system does offer is certainty. Knowing what the state will provide enables individuals to put plans in place to fund their future care.
The opportunity to do this also features in Green’s report through a top-up mechanism, the care supplement. This would be similar to an annuity or insurance policy that could be funded through savings, a pension, or equity withdrawal resulting from downsizing or a deferred payment when the property is sold.
All of these options have their merits. Pension freedoms make it much simpler to earmark a lump sum for future care costs, and the over-65s property market is awash with equity. Figures from Key’s Pensioner Property Equity index show that the over-65s are sitting on around £1.1tn of unmortgaged property wealth.
But, while the funds are available, Mr Webb says the government should offer some tax breaks, such as allowing people to pay for the care supplement gross out of their pension, to encourage people to use them towards their future care costs.
Calls for tax breaks also come from those advocating property as a means to fund future care costs. Research by Saga has found that the cost of moving to a new home deters 25 per cent of potential downsizers. As a result, it is calling on the government to offer a stamp duty break to this group, allowing them to move into smaller properties without incurring this tax.
Product design
As well as exploring ways to encourage self-provision, product design is key to driving take-up. This is something that the Chartered Insurance Institute has recently considered in its report – Caring for the elderly: Is there an insurance solution? – which was put together by its Society of Insurance Broking’s new generation group.
The report states that there is a role for insurance alongside government action to reform social care funding. Like the CPS report, it suggests a hybrid life insurance and annuity product that would be funded through monthly premiums, with policyholders rewarded with lower premiums if they started young. If the policyholder needed care, the product could switch into an annuity to guarantee a payment for the rest of their life.
Alongside this, the CII also calls on the insurance industry to market immediate needs annuities to younger people, rather than at the point they are required as is currently the case. This would give people an opportunity to plan ahead for the possibility of needing care.
Existing products could certainly be used more effectively were users to have some insight into future costs. As an example, Steven Cameron, pensions director at Aegon, says that an individual would be able to ringfence future costs within their pension pot and live off the remaining funds.
“If someone is asked to pay £25,000 for a care insurance product when only one in four will need care, it is not very attractive,” he explains. “Knowing that the money will go to the next generation if it is not needed for care can be very reassuring.”
Early start
Bringing forward care fees planning is also supported by Jane Finnerty, joint chairman of the Society of Later Life Advisers. She says: “Advisers should include the potential need to fund for care costs in their at-retirement reports. It is a hard conversation to have, especially without any certainty on what they would need to plan for, but it is something they should be talking about with their clients.”
Without anything more concrete than the promise of a green paper, these conversations will remain difficult. However, while waiting for the paper to be published, it is positive that possible funding options such as those outlined by the CPS and the CII are discussed. “The more ideas, the better,” says Mr Cameron.
“This enables the government to test the waters, but also helps to depoliticise this issue, which will enable it to gain cross-party support for recommendations.”
Finding a sustainable solution to the social care funding crisis is essential. Exploring a variety of options ahead of the next green paper will help to give the government the confidence and insight to ensure its recommendations are the ones that will deliver.
