Care: Financial Services Industry

Lord Lipsey Excerpts

Wednesday 26th February 2014 Lords Chamber

Asked by

[Lord Lipsey]

To ask Her Majesty’s Government what plans they have for the role of the financial services industry in funding care provision in the light of the Dilnot commission reforms.

[Lord Lipsey (Lab)]

My Lords, I declare my interests as unremunerated president of the Society of Later Life Advisers and a member of the advisory committee of the Equity Release Council.

The request for a debate on this was sparked by the publication on 21 January, jointly by the Department of Health and the Association of British Insurers, of a document called Social Care Funding: Statement of Intent. To be more accurate, it was sparked by the reporting of that document the next day in the Financial Times, which said that the statement meant that,

“government hopes of early products covering the cost of long-term care for the elderly”,

had been dashed. That was based on one conclusion of the report: it was unlikely that prefunded products to pay for long-term care would emerge, at least in the immediate future—that is, products that people had paid for during their working life. I am myself a journalist, but I am afraid that that really was news only to the FT. There have been no such products for a very long time, and they are even less likely in the light of the Dilnot cap on care costs. The fundamental reasons are very simple: they are supply and demand. From the point of view of companies providing them, they are very difficult policies to produce, because they require you to assess many years in advance how long people will live for, how long they will claim off the policies for and how much the cost will be. That is on top of all the usual problems of moral hazard with any insurance product. To put it technically, they are virtually impossible to price.

Even if those products were on offer, who on earth will buy them? We know that people during their working lives do not much care to think about their last years of life. We know that roughly only one in three people goes into residential care and is therefore most likely to benefit from prefunded products, and we know from talking to independent financial advisers that if you try to raise this sort of product with people during their working lives, they are not interested. They are interested in their pensions, yes, but not in care products. So they have never been a possibility and nothing in the Government’s plans has ever assumed that they were a possibility or were going to happen. If I were an insurance salesman, which thank God I am not, I reckon that I would have a better chance at selling heating to the denizens of hell than I would of selling these products on earth, if they existed. They are unsuitable and unsaleable—what is to like?

The FT missed the real story in the account, which is that there are two classes of product that are saleable and suitable and would supplement the recommendations of Dilnot as interpreted by the Government. One is point-of-use products whereby, if I go into a home tomorrow, I can insure myself so that my care costs are covered, however long I live. The second product is the enhanced annuity—that is, I start off with one pension and then, as I develop greater care needs, that pension is enhanced. I want to say a word or two on each of those products, which are essential in complementing the Dilnot proposals.

Point-of-use policies already exist. It is a small and specialised market, with about 7,000 policies extant and about 1,000 sold a year with three firms providing them. However, very few elderly people know of their existence. That is a point that I shall return to later—not, I think, greatly to the Minister’s surprise. They have a very important part to play in the Dilnot settlement. Dilnot caps costs at £72,000, or at least that is the story. But in reality, for many of the better-off people who go into a residential home it does not cap costs at £72,000 at all. They have to pay £12,000 in living costs on top of the £72,000 but, more importantly, that is £72,000 at the rate that a local authority will pay for a home. To cite the example of someone whom I know and love, who is in a home in Oxford that costs roughly £1,000 a week, she is marvellously cared for but the local authority will not fund £500 so there will not be £500 to count towards the cap. If she wants to protect herself so that she can stay in that home for the rest of her life, as she would like, one way in which she can ensure that is by buying one of the private policies. But Ministers have spoken rather with forked tongues about this. I do not mean the Minister here in particular, but Ministers from the Prime Minister onwards who have tried to obfuscate the fact that the cap covers only the cost of a home at the rate provided by the local authority. Really, the Government have to come clean with the public about what the cap is so that they can protect themselves, and know that they need to protect themselves, if they wish to.

On care annuities, the Government have a bigger role to play. There are a lot of difficult issues here. For example, there could be tax difficulties. If you have an enhanced annuity that raises your income to a level where you are paying higher rate tax, that would be quite a difficulty. Indeed, the tax situation on these annuities is not altogether clear, partly because the Inland Revenue likes to ensure that annuities are taxed. Although they are allowed to rise in line with prices, they are not necessarily allowed to rise in line with needs. The Government have more work to do before those policies can be safely marketed, sold and developed as they should be to help people as their needs grow.

I conclude with two final sine qua nons—I am sorry, that is naughty. I have used two Latin tags in one speech, but your Lordships’ House will forgive me if nowhere else will. Those sine qua nons must be met if the financial services industry is to fulfil its potential as a complement to the post-Dilnot world and not as a substitute for the government cap or assuming that the Government will pay for everything, which is the world that we are, thank God, finally leaving.

My first point concerns regulation. I am afraid that I could speak for a long time on that but, fortunately, this is a time-limited debate. In particular, I am not convinced that the standards required of independent financial advisers operating in this field are sufficiently high. Too many advisers sell too much on the basis of too little knowledge. The standards are simply not high enough. I exempt, as of course I would, SOLLA-qualified advisers, who are very fully trained and equipped—but others are not.

There is also a worry that needs a good deal of thought, and I do not have the solution to this one yet. There is something about in the industry that I would call the fear of FOS—the Financial Ombudsman Service. Many advisers who could play a very useful role for society and themselves by getting into this business are frightened that, although they sell the policies reasonably honestly, they will be found to have mis-sold them by FOS and will be forced to pay huge amounts in compensation. That is something that the Government need to look at, to see if any reassurance can be provided if we are to have the advisers available to provide the advice that people need.

The second sine qua non is the provision of information from the Government about precisely what the scheme does and does not offer as well as what it remains for individuals to provide for themselves. Does that make three Latin tags? On the subject of information, we made very good progress during the passage of the care Bill, and I thank the Minister and his ministerial colleagues for being so open-minded about this. The Government are committed to a national information campaign and to monitoring progress in public understanding, as well as to obliging local authorities to play their part in what we hope will emerge as a holistic system of advice and information. But the devil lies in the detail. I think that it is on balance right that the detail is not in the Bill, but getting the rules absolutely right is essential and giving local authorities the resources that they need to fulfil their advice functions is also essential.

There are also in the advice field complexities entirely of the Government’s own making. It is absolutely crackers to have one date on which the deferred payment scheme is introduced, whereby people do not have to sell their house, and a quite separate date when the Dilnot scheme comes into effect. Can noble Lords imagine how in that intervening year a financial adviser is to explain, let alone provide sound advice, to a client? It is simply impossible. What happens if someone comes to him a few weeks before the new benefit rules come into effect? Does he tell them to take out a deferred payment or not, when that benefits scheme may pay a lot of those costs? This is simply mad. The Minister will be glad to hear that if he agrees to reconsider his policy on this—and I hope that he will discuss it with his colleagues—the Government would actually save a bit of money.

I conclude as I began. The private financial services market has an important role to play as a supplement to Dilnot and providing a holistic system of support, particularly in helping people who have saved hard all their lives to make sure that they protect the assets that they wish to leave to their children. However, although we have passed the Bill and it is passing through another place, there is still much work for the Government and the industry to do if it is truly to fulfil that potential.