Residents are giving aged care facilities interest-free loans

You may opt to live in a retirement home or village where someone else manages your day-to-day stresses. But what happens if you can’t tend to your health, let alone the garden?

In some cases, it means a transition into aged care. It’s a difficult decision you, or your loved ones, might have to make while you’re ill.

It's tough transitioning to aged care

Josh’s aunty and uncle were residents in a Ryman Healthcare (Ryman) retirement village under a licence to occupy. Unfortunately, Josh’s uncle had several strokes. Unable to return to his villa, he was discharged into the hospital wing of the village, a part of an aged residential care (ARC) facility.

A couple of days before the move into the ARC facility, Ryman called Josh’s aunty into a meeting. Josh attended to support her.

Josh said it had been a challenging few weeks for his aunty. “She is over 80, and the stress of having her husband nearly die and then be quite unwell was certainly showing.”

Josh thought the meeting was going to be focused on the logistics of relocating his uncle to the hospital wing and his ongoing care needs following the stroke.

But it wasn’t what Josh expected.

“In fact, it was a discussion about my aunty and uncle purchasing a RAD.”

Refundable accommodation deposits

A RAD (refundable accommodation deposit) is a relatively new method of paying for premium accommodation at some ARC facilities. If a resident opts to pay a RAD, instead of stumping up with a weekly fee for a premium room, they pay a lump sum upfront to the operator of the facility, typically anywhere from $350,000 to $450,000. When the resident dies or otherwise vacates the room, the lump sum is refunded.

A premium room offers features above the minimum government requirements for an ARC facility, such as a slightly larger floor plan, an ensuite, or a room with a view. Residents can also be charged for receiving premium services. These are things like special outings or Sky TV.

Premium rooms and services go towards enhancing the quality of life in accommodation, rather than adding to the quality of care.

Ryman's no-strings attached source of funding

A concerned Josh contacted Consumer NZ about his experience. “A loan of almost $500,000 is a substantial investment for a couple in their 80s, and the rate of return (in the form of avoided fees) seems low to me.”

To Josh, the RAD amounted to an interest-free loan made by the resident to the facility’s operator - and he’s right.

In its 2022 annual report, Ryman said “the interest-free source of funds we receive from occupancy advances and refundable accommodation deposits is a tremendous value creator for the business. Our long-term success and the financial strength it has created allows us to reinvest to create even more value as well as generate returns for shareholders to reward them for investing in us.”

Ryman said there were other aged care providers in New Zealand that use RADs but couldn’t tell us which. The Retirement Villages Association, an industry representative, said Ryman was the only one. Metlifecare, one of the “big six” retirement village operators, offers a similar way to pay, but it isn’t a RAD. Instead, the lump sum payment is subject to a deduction of up to 30% to cover things like the management of the village and refurbishment costs.

It was Ryman that pioneered the use of RADs in New Zealand. “Following a soft launch in late 2020, we have collected over $100 million in RADs, which are effectively interest-free loans that are repaid with the funds received from the next incoming resident.”

In fact, the bank of granny and grandad has now loaned Ryman almost $200 million interest free.

But Josh had another concern. “There’s no way to tell what the risk is that the money will be lost,” he said.

Will the RAD be paid back?

If a resident dies, Ryman says it will refund the RAD to their estate within 30 days.

The same refund period applies if a resident changes their mind and wants to pay another way, their care needs change, or they wish to move out completely.

The risk that the RAD won’t be repaid rests on the financial position of the ARC facility and its liquidity.

Ryman said the funds are secured by a memorial lodged on the title of the residential unit, and by a first-ranking mortgage held by a statutory supervisor, someone licensed by the Financial Markets Authority (FMA) to oversee the financial position of retirement villages. Ryman said this means the supervisor can redeem the mortgage to secure the funds for a resident, and a resident has priority over other creditors to the recovered funds.

But a resident still has to join the queue of creditors, and a mortgage isn’t a failsafe. Its protections are vulnerable to a few pitfalls, not least the volatility of the property market. Ultimately, repayment of the lump sum isn’t guaranteed.

Australian protections still leave residents at risk

RADs were established in the Australian aged care sector in 2014. The Australian government said RADs “underpinned a significant increase in investment in new and rebuilt aged care homes.”

While enabling this investment, the Australian government also put protections in place to ensure residents can get their money back.

The Accommodation Payment Guarantee Scheme guarantees the repayment of lump sums paid by residents moving into ARC facilities. It also ensures that in the event of bankruptcy or insolvency of the retirement facility, residents will be paid back what they’re owed in all cases.

Additionally, RADs in Australia must be paid back within 14 days of vacating the facility or after receiving probate. After that, if the sum isn’t refunded, interest accrues. Once a resident signs up to a RAD, there’s also a 14-day cooling-off period.

But the same can’t be said for New Zealand. The Australian import is taking hold in Aotearoa with all the benefits for the village but none of the protections for residents. The sector in Australia has become reliant on RADs, but as their popularity rises in New Zealand, residents are at risk.

However, even with the protections in place in Australia, residents there still face issues.

In 2018 a Royal Commission in Australia began an investigation into the quality and safety of ARC facilities.

In its final 2021 report, the Commission found that providers were pressuring residents and their families into paying a RAD, even when other payment options were available. The Commissioners also heard there was a power imbalance during payment negotiations between providers and incoming residents.

The Commission considered that “RADs should be phased out, and that the Australian government should establish an aged care accommodation capital facility to replace this source of capital.” It would mean ARC facilities could still access funds key to improving and growing their facilities and businesses, without offloading risk to residents. However, the Australian government is yet to act on this recommendation.

An emotional decision

ARC facilities have a vested interest in getting residents to pay RADs, and we’re concerned that, like in Australia, older people may be vulnerable to being influenced or pressured into this form of payment.

Josh's aunty and uncle didn't purchase the RAD. "They didn't have the available money, and they can't leverage their licence to occupy the same way a homeowner could to obtain cheap debt. If they’d been able to borrow money from a bank at the time, the repayments on that borrowing would be less than they're now paying Ryman for their premium room," Josh said.

Even though Josh's aunty and uncle didn’t have the money to pay for a RAD, it's easy to see why a resident could be tempted to pay.

In a statement to Consumer NZ, Ryman said "RADs are a way that residents can save money on room premiums […] our competitors charge up to 30% in deferred management fees. Our residents get a full refund of the RAD so do not lose money in deferred management fees.”

But paying a RAD is likely more complex than balancing the costs. It’s inherently emotional, and it might feel like a resident’s health, wellbeing, and quality of life is also on the line.

Many might feel that despite the cost, they’ll bite the bullet and pay for the RAD anyway, especially when it’s marketed as easier, cheaper, and seemingly risk-free. For example, when the facility is the closest to family, or like Josh’s aunty and uncle, its adjoining retirement village is where the resident’s spouse lives.

Because RADs are a reasonably new payment method, it's difficult for residents to find independent sources of information about how they work. In the process of this investigation none of the government departments I consulted could tell me about RADs. These included the Retirement Commission, the Aged Care Commission, the Financial Markets Authority, the Ministry of Social Development, Office for Seniors, and Te Whatu Ora. Only Ryman Healthcare could answer.

Some protections offered under the Retirement Villages Act

Residents might be incentivised to purchase a RAD to secure protections under the legislation.

Ryman said its RADs were offered under an Occupation Rights Agreement (ORA). An ORA is any written agreement that gives a person the right to occupy a unit or care suite in a retirement village and sets out the relevant terms and conditions of occupation.

ORAs are regulated by the Retirement Villages Act 2003. Residents in an ARC facility who sign an ORA are theoretically considered retirement village residents and are protected by the legislation.

Regulations protecting residents of aged residential care facilities are largely concerned with the safety and suitability of health services. When it comes to retirement villages, the legislation is more focused on consumer protection, including the financial implications of moving into a village. When signing up for an ORA, there’s a 15-business-day cooling-off period.

The legislation is supposed to protect the interests of residents and intending residents of retirement villages. Still, we don’t think it's fit for the purpose of protecting residents of ARC facilities. The laws are outdated and aren’t adequately protecting retirement village residents, let alone ARC residents.

What needs to change

The Ministry of Housing and Urban Development is undertaking a review of the Retirement Villages Act. Consumer NZ welcomes the review and will be calling for better protection for consumers, including for residents who opt to pay for their ARC facility with a RAD.