The Dilnot Commission has raised the profile of long-term care. Could disability linked annuities be the answer? Greg Becker investigates a Singaporean solution.
435,000 people are currently in nursing or residential care in the UK. This suggests that there is a need that could be met by long-term care (LTC) products.
Products that cover LTC needs should be highly desirable as they kick in when people are at their most vulnerable, are unlikely to be able to work again and thus accumulate additional assets.
Currently, with uncertainty in the duration of care - one in ten are expected to incur more than £100,000 in LTC costs - individuals with sufficient resources should be clamouring to purchase products to ring-fence their LTC outgoings.
But in the UK, this is unfortunately not the case: it seems that the average customer does not have cash or a significantly long time horizon, but does have a belief that the state will provide in future.
In some countries, solutions have been found. It could be argued that different solutions are needed for different generations and that there are three types of potential LTC product:
- One aimed at workers with many years before retirement, who still have time to save for their LTC needs
- One for those entering retirement who are looking to purchase an income for their retirement, and
- One for those who are in retirement, have failing health and are about to enter LTC.
While an immediate-needs annuity is the obvious solution to the third category (that are available in the UK), one could argue that a compulsory solution could be a good solution to the first category. A way to convert pension resources into LTC protection at retirement could be a useful solution to the needs of the second category.
FAR EAST AUTO-ENROLMENT
Singapore introduced a novel public-private partnership in 2002 known as ElderShield. All citizens and permanent residents are automatically enrolled into the scheme when they turn 40, with enrolment being with one of three selected insurance companies: Aviva, Great Eastern or NTUC Income Insurance Co-Op.
Individuals can opt-out, and when this was initially launched, opt-out rates were high (at 38%).
However, after an extensive advertising campaign, opt-out rates fell substantially (to 14% by 2006).
The premium is determined by the age at entry, and the benefits consist of a monthly cash payout to help with out-of-pocket expenses for the care of a severely-disabled person.
The cash payments are in the region of S$300 to S$400 (£151 to £200), and cover the first 60 or 72 months.
The trick here is to get people to start saving for their LTC needs while they have many working years ahead of them, so that the necessary premiums can be built up over time.
For those that have not taken care of their LTC needs prior to retirement, products exist that convert their pension savings into an annuity income with certain LTC benefits that are triggered on illness.
Great Eastern offers Long-Term Golden Care, an annuity product that also meets the LTC needs of a person in retirement.
The annuity comes with the following additional benefits: on failing two out of six activities of daily living (ADLs), the annuitant will receive a lump sum equal to three monthly payments, and their annuity will be increased by 50%.
On failing another ADL, the benefit rises again - this time to double the initial annuity payment paid to the annuitant when healthy.
These cash flows match the needs of the patient over retirement. The lump-sum can be used as a contribution to the reconfiguration of their living quarters on losing mobility, while the increased annuity payments can be used to fund carers and nursing staff, with the payments reflecting the annuitants' decreasing abilities as they progress down the road of life.
The Dilnot Report has raised the profile of LTC in the UK, and its proposals are possibly on their way to legislation.
Some believe that this is a long road, but some quick wins could be considered in the short term.
Cannon Lincoln launched an annuity that had an uplift on the annuitant failing certain ADLs (or hitting age 85) in the UK in the early 1990s.
Sadly, the product was withdrawn due to the then Inland Revenue's concerns that a LTC benefit was being purchased using tax-relieved pension contributions.
While regulatory uncertainty will hold back all solutions, we should encourage the reversal of this ruling.
This could have a beneficial impact on public finances and allow this type of product to make a speedy return.
While this would not solve society's LTC needs, it could be part of the solution for the generation entering retirement.
Greg Becker is product development actuary at RGA
