Care Act reforms should create opportunities for new care-funding products but doubts over a viable market still persist, says expert

Out-Law News | 21 May 2014 | 11:14 am | 4 min. read

Fundamental reforms to the way in which social care entitlement in England is assessed and funded should create opportunities for innovative providers of pensions and protection products and solutions, but it is still unclear whether there will be a market for them in 2016 when the reforms begin, an expert has said.

Commenting on the Care Act which received Royal Assent last week, Bruno Geiringer of Pinsent Masons, the law firm behind Out-Law.com, said that the changes could lead to a new market for insurance and pensions products aimed at helping people provide for future care costs.

"Having hosted an industry conference in our offices earlier in the year on social care aimed at indentifying whether there might be a market for social care insurance products, we very much welcome the enactment of the new Care Act and will be looking to work with the life and pensions industry if they want to develop new products and advice solutions," said Geiringer

The Care Act will cap the local authority care costs for those over state retirement age at £72,000, but those with assets over £118,000 will have to pay for their own care. A study has suggested, though, that only 8% of men and 15% of women would reach the thresholds for the cap. The cap will not include daily living expenses or top-up fees above the amount the local authorities are willing to pay.

"For these expenses and the self-funders, this is where the product providers might be able to fill the gap as these costs could be very high. The problem today is that many people have other savings priorities and some do not consider that they will ever have a need to be cared for. Others believe that the state will provide for them if they do. As a result, it is by no means clear that there will be a market for specific social care costs products," said Geiringer.

A number of proposals have recently been made looking at ways in which pension-style savings could be used to cover the cost of social care. The Institute and Faculty of Actuaries has proposed the creation of a care-specific savings pot that would operate in tandem with pensions saving and would be tax free, but critics have said that it is unrealistic to expect people to save more when existing pensions saving is not sufficient, and have said that people are unlikely to be able to know earlier in life how to apportion savings between pensions and care plans. Also, the pension pot would not be available until aged 55 if they needed it earlier.

Thinktank the International Longevity Centre last year proposed the creation of pension care savings bonds, a cross between premium bonds and national savings certificates where each bond would be entered into a regular prize draw and winnings could be added to the fund. This idea has been criticised as unworkable because people will not wish to consider social care costs that early in their lives.  

Although a tax incentive specifically for contributions into social care products is unlikely to be provided by the government in current circumstances, there are other solutions available today to meet the needs in this area, said Geiringer.

"Increasing longevity and the changing structure of the traditional family imply that more and more of the elderly will spend their last days in a residential home. We believe a market will develop for pensions, savings and insurance products aimed at helping people provide for care costs," he said. "It is just not clear at the moment when that day will come. At the moment there are four options: pre-funded insurance plans, immediate needs annuities, short-term annuities and investment bonds. Each has certain advantages and disadvantages. Whilst future demand for products is still unknown in the new post-budget at-retirement world and there is currently no single solution which would be suitable for many, we expect the insurance market to look closely now at how it can ensure better outcomes for these customers."

Currently, 70% of long-term care is provided informally by relatives and friends and does not involve a care home, Geiringer said. However, a recent study by the CASS Business School at City of London University estimated that the demand for formal home care would rise by 60% by 2040, he said.

The changes are also due to take effect alongside new pension freedoms in April 2015. From April 2015, the government intends that members of defined contribution (DC) pension schemes will be able to access their savings in any way that they choose once they reach the age of 55. The House of Commons Treasury Select Committee has already predicted that change will lead to the creation of new, more flexible financial products designed to provide retirement savings and income provision.

According to the Department of Health, the Care Act has been designed to "put people and their carers in control of their care and support" for the first time. It will introduce a single national 'minimum eligibility threshold' governing when local authorities will have to provide support, rather than allowing them to set the threshold themselves as under the current system. It will also introduce a cap on care costs along with increasing the means testing level so that government help kicks in earlier than before.

A study has suggested, though, that only 8% of men and 15% of women would reach the thresholds for the cap.

Local authorities will also be required to offer information and advice on available support to their residents, and to offer a 'deferred payment scheme' meaning that individuals will not have to sell their homes during their lifetimes in order to pay for residential care. In their recent report on this year's Budget announcements, the Treasury Committee said that it would be important for the information and advice provided by local authorities to be coordinated with the financial 'guidance guarantee' which will be introduced alongside the new pension freedoms at the point of retirement.

The Care Act will also introduce a new duty for local authorities to consider the physical, mental and emotional wellbeing of individuals in need of care, new rights and potential support for carers and new powers for the chief inspector of social care to hold poor-performing providers to account. The Department of Health is due to consult on draft regulations and guidance connected with the provisions of the Act in the near future, it said.