An insurer’s policy paper, advising the introduction of a ‘care pension’ is gaining some traction. It aims to help tackle the continuing, worsening crisis the country faces in paying for care services.
Treasury officials have expressed interest in the idea, devised by Sir Steve Webb, former pensions minister under the 2010-15 coalition government and now director of policy at the insurance company Royal London.
The plan would allow people approaching retirement to take money from their pension pot – without paying income tax – as long as they use that money to pay premiums on a new form of insurance for long term care costs.
Return of the cap?
In order to be effective, the government would need to resuscitate their scrapped policy to cap care costs for individuals. Much like a train on an ailing rail franchise, the policy was repeatedly delayed before finally being cancelled, with no indication of an alternative.
Back in 2013, Jeremy Hunt, announced a cap on care costs at £72,000. This would mean that after £72,000 the government would pick up the bill for people’s care. The policy was finally meant to come into effect in 2020.
It was scrapped in December 2017, following the Conservative’s general election disaster. A disaster which was largely blamed on what Labour and many Tory backbenchers called a ‘Dementia Tax’. This was the name given a separate policy that could see anyone with assets over £100,000 selling their homes to pay towards the costs of their care.
Without a cap on care costs, insurers could face bills running into hundreds of thousands of pounds. This has made them far too wary to introduce any packages to cover the costs of care in later life.
How care pensions could work
The ‘Care Pension’ would utilise the existing ‘drawdown’ reforms. These currently allow people to draw money from their pension pots to spend or invest when they reach age 55. In a policy paper setting out the proposals, Royal London state that: 1. introducing a care cap and 2. Making drawdowns for care funding tax free, would remove the barriers preventing insurance providers from introducing policies specifically to cover care costs.
Rather than being marketed as care insurance, Royal London’s policy paper suggests policies could be classed as ‘inheritance insurance’, because they would prevent people digging into savings and assets to fund their care.
The policy has received the blessing of Damian Green MP, yes the one who supposedly downloaded pornography at work. Mr Green is working with the Resolution Foundation think tank on a project to address aging issues.
Prior to his ejection from government in the furore surrounding porn-gate, Mr. Green was responsible for heading up the work of multiple departments on the social care green paper, which is set to be published in summer 2018. This makes the former minister a potential window through which we can view the general direction the green paper was heading, at least until his departure on the 20th of December 2017.
Speaking on BBC Radio 4’s Today Programme, Mr Green said: “We need to look at the way people contribute on a personal basis in what is effectively an insurance policy.” He suggested that those who are now nearing the end of their working life could “put aside” money to fund care, while those aged 35-40 should consider making their own investment to “fund the potential for social care in later life.”
The MP for Ashford also said that he hopes the green paper, now under the supervision of Jeremy Hunt’s department, would “throw up some radical ideas” and urged “serious public debate” on care funding.
This has been floated before…what were the challenges?
This is not the first time insurance has been touted as the key to solving the crisis in social care funding.
After the original care cap policy was formulated in 2013, ministers had believed that a new market in care insurance would develop. But when the government put the feelers out in early 2015, the insurance companies’ responses were lukewarm to say the least. What were the problems then and what challenges would a government face in adopting a model like this in 2018?
What is capped?
Firstly, insurers complained that the care cap did not factor in food or accommodation costs. This scepticism was strengthened when local authorities said they would only count costs incurred in what they defined as meeting “reasonable care needs”, rather than looking at the actual, total fees that individuals are paying for care services.
Speaking generally, care insurance does not represent the most lucrative market to insurers. What percentage of people who pay for car, home or mobile phone insurance actually make a claim? Not that many, this is how insurance companies make their money.
Compare this to how many people who took out a care insurance policy would need to cash it in. This is the difference between accidents and inevitabilities, insurance companies prefer to deal with the former.
Over the past few years the media have highlighted the critical shortage of funding for social care, alerting more and more people to the issue. However, most people still have an ingrained view that care in later life is something funded by the state, like the NHS. How this would affect demand was a concern of insurance companies in 2015 as it will be today.
The current criteria for care funding, the hypothetical situation under a cap and the one that might incorporate an insurance component are all complex, in terms of how people’s ability to ‘self-fund’ is assessed and what proportion, of which element of care, the government will fund.
Overcoming this complexity and making it clear what people need to buy, will require considerably bold messaging from government, in the face of attacks from those who feel that a hypothecated tax is the answer to the care funding crisis.
Can it work
Potentially it could, assuming the hurdles above are overcome. There would need to be a combination of new social care policy, creating a healthy environment for a new insurance market. This market would need robust regulation of policies and pay-outs, while all concerned would need to supply strong messaging to drive the message home the situation is changing for the better.
Overall however, it sounds like a rather lightweight solution to a heavyweight problem. This particular proposal amounts to not much more than people increasing to their pensions to fund care in later life.
This could help ameliorate the care funding situation in the future, but do nothing from the situation currently. As Sir Steve Webb admits: “It is not about solving the problem of today’s 85-year-olds – it’s too late to solve that. This is about the next generation, people who are around the age of 60 and now making choices about their pension pot.”
To tackle the care funding crisis now and to do so for the population as a whole, a mix between new modes of insurance for those who can afford it, with greater taxation to help those who cannot, is what will be required. The options for taxation are themselves varied, from a full strength hypothecated tax to semi-hypothecated and the kind of local taxation which has already been tried, albeit to little effect. Perhaps indicating which option the government should go for.
The task to reform social care and sources of funding is a mighty one. Years of ignoring problems have exacerbated them. The forthcoming green paper will need to take a holistic approach and properly formulate each policy and function to work correctly with one another. It will need to have a long term vision to transform care into everything it can be. The solutions will, as Mr. Green says, need to radical and far reaching, much more so than this most recent proposal from Sir Steve Webb and Royal London.