Written evidence submitted by the Association of British Insurers [ASC 041]

Executive Summary

The insurance and long-term savings industry has an important role to play in the future of social care funding. While it is unlikely that there will ever be a “silver bullet” insurance product that covers people for all their care costs, our members have the potential to produce a suite of products to help many people pay for care. This evidence focuses on funding care in later life.

The need for reform of private care funding, and the need for additional public funding, are connected but distinct issues and should not be conflated. People will always rely on a mixture of public and private funding to meet their care costs. Following reform, it is important that the private market for care funding through financial products is able to support those people who do self-fund, in whole or in part.

We urge the Government to consider the many changes it could make in order to create an environment where products are more likely to develop. Most importantly, it is vital that the Government urgently provides long-term clarity to individuals about the level of support they will receive from the government to pay for care. The current means-testing system is too complex and confusing, leading to inaction. Currently, ABI polling found that 89% of over 65s have made no plans to meet their care costs [1]. Knowing the extent to which the government will support with funding will allow people to plan more holistically for their retirement.

The Government also needs to communicate this level of funding far more widely and clearly in order to raise awareness. Individuals cannot plan to pay for something if they do not know that it is for them to pay.

Other principles for reform include recognition of the behavioural barriers that discourage individuals from planning for their own care, providing mechanisms to incentivise people to overcome these, providing clarity for the long-term without the risk of future change and keeping reform simple to understand, with easy access to advice and guidance.

The ABI and our members advocate for a simple universal care offering to everyone in England, with eligibility based on age and need, with an optional top up to meet ‘hotel costs’ or to pay for more expensive or ineligible care.

The ABI and our members stand ready to work with Government on any proposal that is brought forward.

How should additional funds for the adult social care sector be raised?

Increasing spending on care will inevitably come from a mixture of public and private funding; and it is clear that the Government expects a substantial increase in private funding [2]. As any new system is debated and introduced, the Government will need to be clear on the interaction of public and private funding, how it expects self-funders to pay for care, and how this responsibility will be communicated to the public.

Insurers and other long-term savings providers have an important part to play in supporting self-funders to pay for care. We are not in a position to comment on how much money the government should raise to fund social care, or the mechanism for raising additional public funds. However, just as important as how the government raises money to fund social care, is how the government spends money on social care. Any reformed system should be designed in a way that also enables a market for private care funding to develop.

Individuals need to know what they are entitled to from the state, and how much they need to fund privately themselves. The extent to which our industry will play a larger role in care funding is largely dependent on how the government chooses to spend further funding raised: whether on a more generous means-test, or a cap, or a universal service, as well as how far the state meets people’s needs.

The clarity of the offer from the state to each individual is fundamental. In turn, this will also help raise awareness. The extent to which individuals are required either to self-fund or to top up will impact the demand for products.

There is currently a small market of products which specifically help people meet their care costs:

Immediate needs annuities – pay out a guaranteed income for life to help cover the cost of a customer’s care fees in exchange for a one-off lump sum payment.
Life insurance policies with care cover included – provide customers with lifelong care cover that pays out on death, or crucially, if they suffer an illness which leaves them permanently incapable of looking after themselves.

Our members also provide a range of products which self-funders draw upon to fund care:

Pensions and retirement income products – the pension reforms introduced in 2015 allow customers to use their pension pots far more flexibly than in the past, which can include supporting with care costs.
Equity release/lifetime mortgages – allow customers to release some of the equity tied up in their home to provide either a lump sum, a regular income or both, which can be used to meet social care costs.

We know that self-funders currently expect to draw upon a variety of sources to fund their care. For example, polling in 2020 [3] showed that 28% of people would expect to use pension income to fund residential care. The same study also suggests that 34% would expect to use savings, while 33% would expect to sell their home to fund care. The recent NAO report on adult social care markets [4] shows the lack of data available on self-funders and recommends that this significant gap is addressed. There is also very little data available on how self-funders currently use assets to pay for care and how this might evolve in future; the DHSC and / or Office for National Statistics should examine this in detail. The report also reveals the Government’s expectation of a 113% increase in privately funded care to 2038, based largely on reduced eligibility for publicly funded care due to rising homeownership by over-65s.

Insurers used to provide “pre-funded” insurance specifically for long-term care, a product where people would pay single or regular premiums in return for cover against the possibility of needing long-term care benefits sometime in the future. While some of these policies are still in payment, they are no longer generally sold. The products were introduced in 1991. ABI data shows that there were 45,000 in force in 2010 and 24,000 in 2018.

We believe it is very unlikely that there will ever be a universal, “silver-bullet” private care insurance product. This is in part because people have very different circumstances and needs. We also don’t believe that social care in the UK can be funded purely through private insurance given there is not a single country in the world where this is the case, and a great number of those with care needs, especially working age adults, have no income or assets to pay for care.

Social care funding will therefore always be a mix of public and private funding. Our industry will be vital in supporting those who are required to self-fund and could offer a suite of products to help them meet these costs. These will be a mixture of pensions and investments, insurance and products based on property wealth. The product offering would also likely change over generations as the distribution of assets – especially pensions and housing – changes over time. Similarly, insurance products will likely offer care benefits in different ways – for example, they may or may not be attached to another insurance product, and could be either a lump sum payment or multiple payments; and the premium could be a one off payment or multiple instalments.

How can the adult social care market be stabilised?

Future social care reform requires the government to be clear about how much the state will contribute to a person’s care, allowing individuals to know what level of private funding they may need to make provision for. This could allow a market of financial services products to develop to help people plan for their care costs, if other conditions are satisfied.

Currently, the extent to which the government may contribute towards a person’s care costs depends on their financial means and is confusing. This does not provide people who need social care with the clarity and certainty that they and their families need during difficult times. It may not be possible to provide complete clarity and certainty, but helping people plan should be part of the policy goals for reform.

This uncertainty does not only impact people who currently have care needs, but also people who will need care in the future. ABI polling has found that 89% of people over 65 do not have plans to meet their care costs. Without government reform, individuals will continue to find it extremely difficult to plan holistically for their retirement.

Only 35%[5] of individuals have their care home costs fully funded by the state. In fact, there is no country in the world where social care is funded solely by a private insurance market. In the examples which are most frequently described as exemplary, public and private funding complement each other, such as in Germany. Therefore, it is vital the government recognises that any future reform needs to provide parameters which would allow a market of financial services products to develop and support people.

Substantial and long-term reform is needed to the social care funding system, to allow public and private sector solutions to interact effectively. Specifically, we would like to see the Government make the following changes, which would give a private market the best chance of developing in partnership with the state offering.

Keep it simple and clear: Any new settlement needs to be straightforward to communicate to the public, and there needs to be a clear delineation between State, local authority and individual responsibilities.

The existing state system of benefit provision is very complicated and should be simplified to enable consumer understanding of which non-means-tested benefits are available to them. ABI polling [6] has found that the public underestimate the level of support the state offers through the State Pension and Attendance Allowance.

Raise awareness levels: It is imperative that any new system raises people’s awareness of their (potential) liability to pay for care, as well as the costs involved.

Help individuals plan: The Government should explore a range of policy levers that could help engage individuals and should improve access to advice and guidance about planning for later-life, leveraging the Money and Pensions Service.

Incentivise people to make provision: If following reform, some individuals are required to self-fund, effective mechanisms should be in place to incentivise and encourage these people to plan ahead. This would overcome behavioural biases which discourage people from planning ahead.

Research from the Pensions Policy Institute [7] has found that 37% of people could benefit from targeted government incentives. These individuals have savings above the means test threshold, but less than £200,000.
For example, if the government were to grant tax relief on payments from a pension to a care provider, it could give individuals a significant increase in purchasing power for care services.

Plan for the long-term: Individuals need to be able to plan for the long term and have confidence that the system in place is robust and will remain largely unchanged for a reasonable amount of time.

Support a varied market: There needs to be clarity that the care funding solutions for those who can afford care will be, for now, a range of products that can be used individually or in combination, rather than a single, voluntary and comprehensive, “silver bullet” product.

We recognise there are different approaches to reform, and we will work to create solutions that would integrate with any settlement. Based on these principles for reform, given the simplicity of its message, we are attracted by a universal offer from the state. This would provide a clearer foundation on which people can plan and make their own provision, where they need to top up.

In such a system, there would be no means test on the basic offering but, realistically, there would need to be a means test for accommodation costs. A universal system like this could:

Increase awareness that social care is not free at the point of use and that there is a limit to the care provided (should free care be offered);
Encourage people to make personal provision or top up the state provision;
Support those who make or have made provision;
Reduce an incentive for individuals to deliberately deplete or hide their assets in order to qualify; and
Fulfil the Government’s aim that no-one must sell their home to pay for care

The conditions for eligibility should be based on age as well as need, as different solutions may be needed for working age adults. An offer should be easy to understand, include detail on any threshold for support and tell the public what the government will provide. Any communication of “free” or “universal” care should also be clear that there are limits to what the state will provide.

Any social care reform should include incentives or nudges for individuals to make their own provision, such as payments from a pension to a care provider being tax-free, or payments to an insurance product receiving tax relief. These incentives could encourage people to make personal provision if they are not penalised for doing so and ensure there is opportunity for people to top up a basic provision.

The Health Foundation and the King’s Fund estimated a system like this would cost £7 billion if introduced in 2020/21 [8]. To avoid catastrophic accommodation costs, the Government should also explore a cap. But any cap should be seen as a way for individuals to avoid catastrophic costs, and not as way to enable a private market – in itself, a cap will not prompt a market to develop.

In addition, Government should also build cross-party consensus to avoid short-term changes and allow the market to continue to develop to meet customers’ needs. The Government should raise awareness about how much individuals are expected to pay for their care costs, both now and in the future and improve access to advice and guidance so that social care funding is considered holistically as part of policy and financial planning for retirement. Any proposal brought forward by government should be consulted on publicly.

About the ABI

The Association of British Insurers is the voice of the UK’s world-leading insurance and long-term savings industry. A productive and inclusive sector, our industry supports towns and cities across Britain in building back a balanced and innovative economy, employing over 310,000 individuals in high-skilled, lifelong careers, two-thirds of which are outside of London.

The UK insurance industry manages investments of over £1.6 trillion, pays nearly £16 billion in taxes to the Government and supports communities across the UK by enabling trade, risk-taking, investment and innovation. We are also a global success story, the largest in Europe and the fourth largest in the world.

The ABI represents over 200 member companies, including most household names and specialist providers, giving peace of mind to customers across the UK.

April 2021