Strategy Steps Blog

Aged care is undergoing the biggest reform since introduction of the Aged Care Act in 1997, but the question is whether this is just smoke and mirrors or real reform? Initial responses from industry and retiree groups have been positive but I think it is hard to make a judgement call until we see more of the details.

We will see real reform in the removal of the distinction between low and high care and a single rule for accommodation (entry) fees for all residential care. Fees will vary across providers but rather than individual resident negotiations, bonds will need to be approved by a central authority. I suspect one of the government’s main reasons for this change is to remove the current opportunities to individually negotiate higher bonds in exchange for lower care fees, which may increase how much the government pays in age pension payments and/or care subsidies.

Having said that, it will create greater transparency and may be welcomed by residents and families who are nervous about costs and sceptical about how the bonds are set. But I fear that it could lead to higher average bonds. Residents and families should be careful not to shop on price alone. Just like when buying a home there may be a reason for the lower price. Critical to the decision process is the need to seek financial advice on affordability, restructuring assets and the impacts on age pension and income generation.

From comments in the government’s paper and from my experience over many years of training to financial planners, accountants and aged care staff, there is no question that the system is confusing and many people have not understood the options that currently exist.

Residents and their families need to change attitudes. If we can no longer live in our home is it really so bad if we have to sell it to help pay for the next home – albeit that home may be an aged care facility? Remember bonds are refundable. So it is not money lost. The home should be seen as a financial resource and financial advice is key.

The proposed reforms seem to focus on achieving greater consistency of fees and shifting more of the cost back to those who can afford to pay. This will mean winners and losers but hopefully overall it will mean a more sustainable aged care system.

We still have a long process to go through before all the reforms are implemented and all the details are known. But for now what should we be doing? None of the changes are imminent and the first changes will start to have an impact from 1 July 2013. So no immediate actions are required.

But anyone moving into aged care now or in the imminent future should seek financial advice to understand their options and strategies for how to structure finances to ensure they can afford to age where they like and with the dignity they deserve.

Whether intra-fund advice is a threat or an opportunity depends on how it is implemented and whose point of view you are considering.

The government’s aim for intra-fund advice is simple – make advice affordable and accessible to the large numbers of Australians who do not currently access advice. If this can be achieved it opens up enormous business opportunities for the advice industry. But it requires a low cost service with operational efficiency as well as relief from some of the legislative requirements that apply to full advice.

A major concern is that despite the good intentions, intra-fund advice may not serve the best interests of clients and instead may pose a threat to their financial security.

Intra-fund advice relies on the client asking a question and receiving information about the fund to answer that question. However, it is often the answers to questions that the client does not ask (or does not know to ask) that will provide the most value.

The delivery method of intra-fund advice is important for its success. If it is merely an information service provided by staff with low skill levels the outcome for clients is likely to be negative. This can devalue advice. Advice needs to be delivered through a system that allows access to skilled advisers with the ability to investigate beyond the question raised to help the client to implement financial solutions.

The limited advice under intra-fund rules should be confined to simple issues. Issues such as death benefit nominations, retirement planning and transition to retirement strategies are complex areas and it is dangerous to expand intra-fund advice into these areas. This expansion will pose a threat for clients.

If the rules around intra-fund advice allow a level playing field for advisers operating under any AFSL as well as those employed by the superannuation fund trustee, it can create an opportunity to build advice businesses.

Government, industry and the community are all finally focussing attention on the issues of longevity and the pressure it places on retirement funding.

New income stream products are starting to emerge that will provide clients with some protection against a long lifespan. But until clients grasp the reality of just how long they can live in retirement and how much it may cost them, we will struggle to deal with the problems satisfactorily.

A 65-year-old couple retiring this year will need a quarter of a million dollars to pay for medical expenses throughout retirement according to Fidelity Investments Annual Retiree Healthcare Costs Estimate. This is based on a US experience but in Australia the costs of aged care and medical expenses (including insurance and gap payments) can also create a significant financial burden. The average accommodation bond for low-level care in capital cities is around $350,000 and is increasing.

Most clients are not doing enough to plan for these expenses and do not understand just how long they could expect to live. Not only are Australians as a total population living longer but individuals are increasingly outliving the statistical life expectancies.

New products will help to solve the problems but planners cannot wait for products to solve all the problems. Financial planners need to implement solid financial planning strategies for retirees that include the following steps:

• Step 1 – accumulation of sufficient savings
• Step 2 – appropriate asset allocation
• Step 3 – management of income drawdown
• Step 4 – rebalancing strategy

This process requires ongoing management for the client and will help to create an ongoing value proposition for advice.

Products fit in as one part of the solution but the cost of the guarantees may be expensive. The guarantees can be attractive to clients but only if a full cost analysis has been considered and disclosed so that the client can determine whether the cost represents value for the peace of mind they receive.

The challenge is whether you as a financial planner really understand the longevity risk and can incorporate appropriate discussions and strategies into your advice process.

Welcome to my blog!!

Technology catches up on us all and I am embracing the whole concept of blogs. I hope to use this blog to generate discussion and debate so that together we can explore ideas to help your business grow and create value for clients.

2010 is set to be an interesting year as we see the Rudd Government gearing up to the next election and developing policies from the reviews conducted over the past 12-18 months.

The Henry Tax Review handed its final report to the government but the report is still a closely guarded secret with some "leaks" slowly hitting the market. Combine these leaks with the Intergenerational Report released this week, IFSA's findings on the growing savings gap and the lobbying for reforms in aged care and a picture starts to emerge that the Government has some big issues to deal with around longevity and an ageing population.

One thing is for sure, this year's Federal Budget is bound to bring changes that will impact on financial planning strategies. Don't forget to check this website on 12 May for an update. Mark it in your diary! This may seem a long way off .. but it is the highlight of a techo's year, so it is already in my diary.

I will add to this blog on a regular basis and invite you to also participate in the discussion. Let us know what you think!

Louise