Many LTC bonds failing to provide for clients’ needs

Investors who bought bonds they hoped would pay for long-term care until they died are facing demands for tens of thousands of pounds from product providers as a result of poor investment performance and rising costs.

Some of the UK’s biggest pension providers, including Prudential, Scottish Widows, Axa, Bupa and Norwich Union – sold thousands of long-term-care bonds during the 1990s and early 2000s.

The bonds were marketed to people as a way of insuring against any eventual care costs they might incur.

However, the products relied heavily on investment performance outstripping the rising cost of care. A combination of poor investment performance, overly optimistic growth ass-umptions and increases in life expectancy means bonds which many investors expected would pay for care until they died are running out of funds early.

One case seen by Money Marketing involves an 87-year-old woman who is in a care home. The woman, who wants to remain anonymous, bought a Prudential long-term care bond – capital growth, expecting it would pay for her care needs until she died.

But Prudential wrote to the customer in December last year telling her that cover could stop when she reaches 93 and she would then no longer be able to make a claim.
In order to support her chosen level of long-term-care cover, the client was told she would need to make an additional investment of £21,739. The provider calculates the current value of her bond to be £12,728.

Beaufort Asset Management director Simon Goldthorpe, who is representing the bond holder, says his client is now unsure whether she will be able to afford to pay for her future care needs.

He says: “She bought the product thinking that she was being sensible and covering any future care needs she might have. Now she has been told she needs to pay £20,000 more. She is in a blind panic, as you can imagine, because this has come out of the blue.”

A Prudential spokesman says: “While I could not discuss an individual’s details, the market literature which accompanied the product clearly states that for cover to continue, it may be necessary for an additional investment to be made at some future date.

“A bond sold to a client in 1998 would be reviewed in 2003, 2005, 2007, 2009 and 2011. On each review, the option to top up, if required, to maintain maximum cover is made clear in letters to the adviser and the customer.

“If the reviews in 2003 and 2009 suggest top-ups because the cost of providing cover has risen more than the investment performance can pay for, and the adviser or client takes no action, it stands to reason that the review in 2011 will suggest a larger top-up.”

Data from the Association of British Insurers suggests there were more than 8,000 long-term-care bond policies in force in 2009.

Accurate figures from 2010 onwards are unavailable bec-ause they are included in the trade body’s pre-funded policy statistics.

IFG Financial Services executive consultant Nigel Stratton says he advised four clients to invest in long-term care bonds during the 1990s but he says none of his clients relied solely on the products to pay for nursing care.

He says: “The problem with the product was that the insurance companies failed to understand how nursing fees could go up in the future. And they relied far too much on an assumed growth rate.

“Growth rates were often assumed to be 6 per cent on these bonds. What has happened is the funds have not performed because the stock market has been on a downward slide since 1999.

“Also, the charging structure of the bond meant that you probably needed to get returns of at least 10 per cent per annum to maintain the desired level of cover.”