Age and the funding time bomb

Local authorities may have to consider innovative approaches if the challenge of funding adult care provision is to be met. Nathan Holden examines one possible option.

“The current adult social care funding system in England is not fit for purpose and needs urgent and lasting reform”

These are the opening words of the report of the Commission on Funding Care and Support published in July by the Commission’s chair Andrew Dilnot.

The Commission’s less than startling conclusion is that the adult social care funding system, conceived in 1948, is not fit for purpose in the 21st century. The key problem is that people are very reluctant to sell their homes to pay for care. As the Report points out, people with assets that exceed £23,250 receive no financial support and have to fund their own care. In calculating a person’s assets for the purposes of meeting the cost of residential care account is taken of their housing assets. To most this seems unfair when typically the value of their home has been built up with a lifetime of taxed earnings.

Government spending on adult social care has reached £14.5bn per annum with approximately half going on caring for older people. According to research around one in ten people at age 65 face future lifetime care costs of more than £100,000.

To ameliorate this apparent unfairness the report recommends that an upper limit is set on care costs that an individual has to meet. The Report suggests that this is set at £35,000 and would cover an individual’s lifetime. Once an individual had contributed this sum the state would take over. The basic idea is that the £35,000 acts like an insurance excess for those that have the assets; those that don’t would be funded in the same way that they are now – i.e. fully by the state.

The proposals have been very well received, but they are costly at somewhere between £1.3 and £2.2bn and it is not clear from where the money will come. There is an obvious danger that central government would look to local government to pick up the tab on the basis that local government historically has the responsibility for delivering elderly persons’ care services. That position is unlikely to change for so long as the issue remains a political ‘hot potato’.

The cost is also likely to increase. Figures produced by the Office for Budgetary Responsibility predict that spending on long term care is expected to increase by around 40%, from 1.2% to 1.7% of gross domestic product.

So what are the alternatives?

McKinsey Global Institute published a report in November 2010 entitled From austerity to prosperity: Seven Priorities for the long term. The report focuses on challenges faced by the UK economy going forward as it emerges from recession and in particular the effects of the ageing population. It points out that 434,000 people currently live in residential care (the vast proportions of whom are elderly) and that this is set to increase to 759,000 people by 2030.

The McKinsey argument is that as the state is overburdened with public debt and that it makes no sense not to try to release some of the trillion pounds that the older generations have tied up in their homes or to look at other alternatives before opting for additional funding. In particular, argues the report, too little attention is paid to equity release products, such as reverse mortgages. There is very little take-up of these schemes – there are only 120,000 such mortgages in the UK, worth around £6.5bn, or 1% of pensioners’ net housing wealth. However, the low take-up is not surprising – the products have had a chequered history. The McKinsey research identifies that although many think they are a good idea in theory the majority do not trust the providers and only half think that they give good value for money.

The solution to these problems involves a combination of measures – on the one hand to encourage (or possibly force) people to effectively insure against getting old through a compulsory scheme and, at the same time, address a wider degree of suspicion about the equity release model. The reputational issue, they suggest, could be addressed by encouraging well-know, ‘High Street’ names in the finance industry to offer these products, and further by ensuring that equity release did not have negative tax or benefit consequences for the homeowner. However, the really difficult issue to resolve is tackling the cost of equity release products. At present they are comparatively expensive and it is suggested that the costs will only come down if there is a market into which financial institutions can sell on the loans they provide.

In the United States the cost issue has been overcome by the Government National Mortgage Association (Ginnie Mae) a Federal agency. Ginnie Mae acts as a guarantor of a special type of mortgage-backed security called the Home Equity Conversion Mortgage. Under this scheme approved private sector lenders enter into reverse mortgage arrangements which are then pooled into securities and offered to the market with government-backed guarantees as to their value.

So you might ask the question, what has this to do with local government in the UK? Local government is by and large responsible for adult social care and the cost of that care is set to rise as the elderly population increases. It is therefore in the interests of councils to consider how best to meet the challenge. A proactive way of doing so might be to emulate the US model. Local government are very well placed to borrow. Indeed the new powers under the Localism Act will provide an ideal means of achieving this objective, although existing powers under section 2 of the Local Government Act 2000 will work just as well.

How would this work in practice?

• Local authorities or authorised lenders could offer reverse mortgages.
• These mortgages would then be turned into securities that would then be sold with a local authority guarantee, which would free up existing capital (e.g. lending capacity) to allow for further lending to provide further loans.

Whether local authorities decided to club together and create mutuals guaranteeing mortgaged backed securities would be down to whether it would be possible to garner enough interest in acting collectively. Furthermore, in order to deliver lower cost products, which would be in the interests of everyone, it would be necessary to have enough participants to spawn a secondary market for the product.

The other point to consider would be whether, following the LAML case, setting up a company for sharing mortgage risk lawful. In LAML the courts held that the actions of a group of local authorities to set up a company to provide insurance to themselves and other local authorities fell outside of the powers in section 2 Local Government Act 2000 to promote the economic, social or environmental well-being of their area. Setting up a company for the purposes of sharing mortgage risk is not dissimilar; however, whether the new general power of competence in the Localism Act can overcome these possible pitfalls is yet to be seen. In any event it would not be too difficult for Parliament to provide a specific power, as they did in the LAML case, if need be.

Putting aside the technical issues,  the important point is that councils should be looking into some of these innovative solutions now because the issue will only become more pressing. Taking a proactive, rather than reactive, approach is likely to be more productive in the long run for local authorities and the populations they serve.

Nathan Holden is a partner at Mills & Reeve. He can be contacted on 0121 456 8350 or by email at This email address is being protected from spambots. You need JavaScript enabled to view it..

This article first appeared in 'A Passion for Leadership & Going Beyond Austerity, published in November 2011 by the Association of Council Secretaries and Solicitors (ACSeS).

To order or download a copy from the ACSeS website, please click here.