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Determining reserves for aged care providers

PFS Consulting Actuarial News

Aged care providers must hold funds in reserve to pay for refunds of accommodation deposits. When residents have paid lump sums to partly or fully fund their accommodation costs, these deposits are refundable when they leave or pass away.

These amounts are potentially useful to the business for investment in permitted capital expenditure, such as new locations or buildings. However, the provider needs to ensure they maintain sufficient liquid reserves to satisfy regulatory requirements, which are based on the amounts expected to fall due in the following 12 months. An aged care provider’s Board and management will also want to maintain some prudential margin over and above the minimum regulatory requirement.

In determining an appropriate level of reserves, the provider should first consider possible adverse scenarios that might impact their liquidity. These scenarios may include:

  • a fall in property prices, and hence in incoming accommodation deposits
  • incoming residents taking longer to pay than expected
  • new residents paying higher proportions of daily accommodation payments, rather than lump sum accommodation deposits
  • vacancy rates increasing.

Emergency reserves

Aged care providers also need to have reserves to cover the business in the event of an emergency, such as a fire, that requires a sudden and large payout of accommodation deposits. The impact of such an event will vary depending on the size and nature of the provider’s facilities, and the diversification of the business.

Operational risks

An aged care provider may also want to set aside reserves as protection against specific operational risks identified, or a period of general operational underperformance.

Setting reserves

Given these requirements, it can be difficult for aged care providers to decide on the amount to be held in reserve, and how this should be invested. As a result, aged care providers also face difficulty in accurately assessing the capital available for expansion and investment in the business.

Of course there is no one-size-fits-all solution. The proportion of the organisation’s total funds that are to be held in reserve, and therefore the amount that is available for investment in the business, depends on the organisation’s size, diversification, risk appetite and tolerance for possible losses.

PFS Consulting’s approach

PFS Consulting advises aged care providers on the assessment and investment of their reserves, based on factors such as:

  • the provider’s expected resident turnover
  • the potential impact of random variations or changes in experience
  • our insights into the events for which reserves should be held
  • the provider’s current and projected cash flow position and associated risks
  • the organisation’s strategy and plans for deployment of capital.

In establishing this advice, PFS Consulting investigates the rationale for any previous reserving basis, builds a financial model of the provider’s projected cash flows, conducts stress testing, analyses the likelihood and impact of various operational risks, and assesses the organisation’s risk appetite.

This comprehensive approach gives our clients greater clarity regarding the purpose of their reserves, the risks identified and how reserves might vary in the future depending on organisational growth. This also helps our clients better understand the rationale for holding reserves, and the range of outcomes that can reasonably be expected.
Based on the provider’s projected cash flows and their risk appetite, we can then recommend how the reserves should best be invested.

To find out how PFS Consulting’s holistic and integrated approach to financial modelling, risk management and investment can help your aged care organisation better manage its reserves contact Stephen Crump or John Newman today.