Care: Financial Services Industry

Baroness Brinton Excerpts

Wednesday 26th February 2014 Lords Chamber

[Baroness Brinton (LD)]

My Lords, I congratulate the noble Lord, Lord Lipsey, on securing this important debate that joins together progress in health and social care for the elderly and how our financial services can help deliver this from 2016—two years’ time—in the wake of the Dilnot commission reforms.

The rising cost of care, however, has become an increasingly worrying issue. Two years ago, the commission estimated that the cost of the reforms was approximately £1.7 billion. Inevitably with an ageing society and limited resources, the state does not have sufficient funds to meet the increasing demand of social care for the ageing and disabled population. As Bruno Geiringer noted,

“with demand for older people’s social care expenditure currently touching £8 billion and actual spending sitting at around £7.25 billion, the gap between supply and demand is alarming”.

In 2011, the amount spent on care and support was 1.2% of GDP. However, in the same year, the figure was estimated to rise to 1.7% of GDP after the implementation of Dilnot.

As we have heard from other speakers, currently, individuals are meeting costs by drawing down equity from their housing assets, purchasing insurance, or taking from their pension funds. Where they do not have access to these sources, many have to sell their property, while still alive, to fund their nursing care, but, frankly, this is such a hard decision at a very difficult time in people’s lives as they face reducing their independence and losing their home. It is evident that there is, or will be, a market for the financial services to support the older generation. With a cap on the individual’s lifetime contribution, this can be much more clearly defined than under the present system.

The challenge is that the financial services industry must take greater initiative in funding these reforms. Several key financial products, some of which have been mentioned, are possible sources of funding. The disability linked annuity works by reducing the income of an otherwise flat annuity, but then doubles or trebles the income once care is required. In marketing this product, customers need to be aware of the tax treatment of annuities because they are treated as pay as you earn under current pension taxation rules. The second source of funding is products linked to housing assets. Many people fund their social care by utilising a portion of their housing equity to meet costs by either downsizing or taking out loans that are secured on their house, payable on death. The third source is linked to insurance. There is an opportunity for critical illness or life insurance policies to cover care costs. Similarly, top-up insurance can also assist individuals in the amount they spend on general living.

However, no providers currently offer pre-funded insurance, mainly because there is a lack of demand for it. This is why pre-funded insurance products have failed in the past, and consequently are no longer available on the market. However, such products could fit the new profile needed to fund social care in the future. I ask the Minister, if these insurance products are indeed beneficial in covering care costs, how can the Government help the industry stimulate demand for the products? A potential alternative to the previous options is a deferred payment scheme. Under this, people could pay insurance fees after they have died. This works by taking a portion of an individual’s life insurance and applying it towards paying for care fees.

Despite the potential of these products, there are many concerns that have been raised by both the Dilnot commission and the Government. As I have outlined, some products exist but face low take-up due to demand-side barriers, including reputational issues, a lack of public awareness, and the cost and complexity of the products. I am sorry to say that reputational issues have led to a loss of trust by many people in financial services. Research conducted by the Chartered Insurance Institute in late 2010,

“found that one in five respondents will never trust financial services again and 72% of people have not very much trust or no trust at all in financial advisers and life insurance providers”.

The most serious problem is the lack of awareness of social care costs. In several consumer surveys it was noted that most individuals do not know how much they will be paying for care in old age. The Local Government Association says that it found in a survey that,

“63% of individuals wrongly estimated the average cost of a care home as less than £25,000 per year”.

It is imperative, then, that we address issues related to engagement barriers in an effort to encourage people to seek private sector solutions. We must increase marketing for the products and raise awareness on the amount that people are likely to have to pay in future for their social care. This must start early. Worrying about it when you are 55 is, frankly, too late.

The Government have already established an expert working group that will involve the Government, the financial services sector, local authorities and the care sector. It is exploring ways in which individuals can best be directed to truly independent financial advisers, and will build links with pension benefits and other services. However, it is shocking that out of 53,000 self-funders in residential care only 7,000 received financial application advice in 2009. This may be a possible explanation as to why one in four self-funders ran out of money and sought help from the state. Clearly, there is a necessity for the support of financial industry in the form of products and advice. The Department of Health expects the financial services industry to respond by 2016. However, that is only two years away and most financial products take between five and 10 years to design before they come to market, let alone general take-up. I therefore ask the Minister, if this is the case, then where are these financial products and where is the early launch of information and advice to reassure the public on the adequacy of these financial options?

To conclude, there are too many individuals unaware of the social costs related to healthcare and the ability of financial services to help them finance costs. Although there is broad consensus that action needs to be taken, there is also a real fear that the commission’s recommendations could be left to rot because of the lack of products. This issue must be dealt with now because the financial services industry has the potential to minimise the full-scale effect of these costs on the lives of the ageing and disabled population. Equally importantly, it will remove the lottery of how much people have to pay for their social care, which has been a scandal for years.