U.K. Proposal Addresses LTC Funding

By Lisa S. Howard

LONDON EDITOR

LONDON--The U.K. government is moving closer toward creating a public-private partnership to address the problems of funding long-term care, based loosely on four indemnity partnership schemes used in the United States.

Under the current system, elderly people in need of long-term care risk losing all but £10,000 of their assets if they are unable to meet the costs of such care.

According to Swiss Re UK, Social Security statistics indicate that fewer than 3 percent of people between 55 to 70 years of age have sufficient income to pay for such care.

As a result, the U.K. government is proposing "a wide range of incentives to encourage people to save for their needs in later life," said Stephen Dorrell, secretary of state for health.

In a speech at the House of Commons recently, Mr. Dorrell said individual citizens have the principal responsibility for making sufficient provisions to be able "to enjoy a comfortable and fulfilling retirement."

"By creating a partnership between the state, individuals and their families and the relevant financial institutions, the costs to all parties can be kept within reasonable limits," said a government consultation paper, called "A New Partnership For Care In Old Age," which contains the proposals.

The government recently collected industry and consumer responses to the proposals and is considering legislation.

There is some concern that should the government change next year from Tory to Labour any legislation passed now could be overturned unless there is cross-party agreement on these proposals, said Alan Tyler, manager, health strategy, for Mercantile & General Reinsurance, London.

The government proposes two options to increase the level of asset protection as incentives for individuals to buy long-term care insurance:

A partnership scheme that would protect an extra £1.50 of capital for every £1.00 of insurance benefit paid out.

In other words, if a long-term care policy provided a total benefit of £40,000, assets up to £70,000 would be protected before the need for a means test, said the consultation document.

(This is calculated by multiplying the £40,000 times 1.5 and adding the £10,000 minimum level provided for asset protection before the government pays for long-term care.)

The general feeling within the industry is that this should be increased from £1.50 to £2.00 to provide greater asset protection and wider coverage, said Sue Elliott, marketing actuary for M&G, who works in the company's Cheltenham, England office.

However, she emphasized it's a very positive step in the right direction.

A partnership scheme that would provide an extra £1.00 of capital for every £1.00 of insurance benefit paid out and an extra £15,000 of capital once the individual funds his or her own residential care, with the help of insurance, for four years.

This would mean that someone who took out insurance which paid benefits of £40,000 would have £40,000 added to the capital disregarded by the means test, explained the consultation document.

"If the insurance benefits, together with his income and other resources, were sufficient to fund his residential care for four years, the extra capital disregarded would be increased to £55,000," said the document.

This would take the total amount of his capital wholly disregarded by the means test to £65,000, which includes the standard amount disregarded of £10,000, said the document.

"It was generally felt that this second option was basically for the very rich," said Ms. Elliott.

Further the government also addressed those who have current care needs but for whom insurance is not an option.

The government also proposes annuity products, "tailored to meet the needs of people certain to need or already receiving substantial long-term care."

The most common means to fund such an annuity would be through the sale of a person's house, said Mr. Tyler, because it's their biggest single asset and they need permanent care outside their own home.

The consultation paper revealed that the U.K. government is against the use of personal pensions to fund long-term care benefits because pension benefits are so underfunded.

"The government does, however, believe that there are other ways in which pension schemes can help," said the document.

"Many people have the scope to pay additional voluntary contributions to increase their retirement pension. And most pension schemes also provide a tax-free lump sum on retirement, which can be invested to increase retirement income or be used to purchase a long-term care insurance policy," the consultation paper said.

The government goes on to say that pension schemes could also help by being more flexible in the way that benefits are paid by providing a smaller initial pension in return for a larger pension later on.

However, Ms. Elliott said the pensions section seems somewhat out of place in the consultation document, said Ms. Elliott, "because it's not really addressing the long-term care issue.

"It's addressing the pension issue, which is good, but perhaps it would be better in another format," she continued.

"It's difficult to structure a pension to meet the needs of a person who requires long-term care," agreed Mr. Tyler.

He explained that there are three important variables: the age at which the care is required, the length of time the care is needed and the cost of the particular form of care needed.

He suggested instead a long-term care feature contained within a pension that would enable the trustees of the pension scheme to pool the risk between policyholders.

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