Jane Wrightson wants changes to the fast-growing retirement village industry where there is growing tension between big business on one side and increasingly vulnerable individuals on the other

Jane Wrightson wants changes to the fast-growing retirement village industry where there is growing tension between big business on one side and increasingly vulnerable individuals on the other

This article originally appeared in LawNews (ADLS) and is here with permission.


In her first big move since taking up the role of Retirement Commissioner in February last year, Jane Wrightson has taken aim at New Zealand’s $17 billion retirement villages industry – and found it wanting.

She is recommending major reforms to the industry’s legislative framework in a 40-page white paper. While she has no power to effect the changes, Wrightson has released the discussion document in her monitoring role to “poke the bear”. Feedback is invited by 26 February.

The “bear” is an industry that makes its money from ageing residents. Its five biggest listed players have a combined market capitalisation of $14 bln. The framework under scrutiny involves the Retirement Villages Act 2003, the industry’s Code of Practice (code), the Code of Residents’ Rights (CoRR) and an occupation rights agreement (ORA).

The Act, regulations and both codes are inter-dependent, which sometimes means residents are not sure of their rights because they don’t understand the relationship between the documents.

Wrightson says her aim is to start a conversation and encourage a framework review by the Ministry for Housing and Urban Development (MHUD).

Fundamental tension

The retirement village industry is growing fast. At its heart, she says, is a tension between big business on one side and increasingly vulnerable individuals on the other.

Wrightson wants the government to take a good look at the framework but knows it will never be high on the agenda.

The paper recommends a policy review to consider:

  • an improved resale and buyback process for units;
  • restricting the charging of weekly fees after a resident vacates a unit;
  • reviewing the code, including the ORA provisions, with a view to establishing best practice and to better balance operator control and residents’ rights;
  • a clearer and simpler complaints process;
  • whether changes are required to better support retirement village residents’ welfare;
  • if consumer protections are strong enough for future trends and investigate whether different models should be encouraged;
  • if disclosure documents should be simpler and more accessible; and
  • the extent to which the presence of care changes the nature of a retirement village from housing to health and whether the definition of a retirement village needs modifying to include a wider range of lifestyle developments.

The report has ruffled feathers in the industry but consumer organisations say it is long overdue.

The operators’ industry body, the Retirement Villages Association (RVA), argues that only minor tweaks to the framework are needed. RVA executive director John Collyns declined to be interviewed but emailed a statement saying the review contains inaccuracies and the regulatory framework as it stands is “world leading”.

Collyns says there will always be potential for improvements at the margins and the RVA supports minor amendments to the disputes process and disclosure statement regime.

But its counterpart, the Retirement Villages Residents’ Association of New Zealand (RVRANZ), says the white paper has canvassed the issues fairly and accurately, including the “unfair obligations” on many residents to maintain fixtures, fittings and chattels owned by the operator. The organisation wants immediate relief for residents, with interim changes to the code in relation to buyback accrual of deferred management fees once keys are handed back, interest paid to outgoing residents while the unit is vacant and a shared allocation of any capital gain.

Lawyers interviewed by LawNews questioned whether the report raised policy questions rather than strictly legislative issues, with one suggesting education might be the answer.

The business model

The business model is usually based on the sale of units to residents under an ORA. Residents pay weekly service fees. When they leave, they get back their original purchase price, minus 20% to 30% in deferred management fees (DMF). It is rare for residents to share in any capital gain.

The retirement villages framework developed to put regulation around the existing business models. It’s a system based on disclosure, not prescription, says Peter Orpin, special counsel corporate at Lane Neave. Orpin is not convinced that moves towards more prescription, as suggested in Wrightson’s paper, would work.

“The big benefit of a prescriptive system is that you can go to the legislation for the answer,” he says. “It’s black and white. From a resident’s point of view, it becomes an enormous paper war because instead of getting a document that that [can] be 10 pages, you’re presented with a document that’s 60 pages.

“To me, some of what’s being suggested in this paper is starting to move too far down that line towards prescription rather than disclosure.”

Happy campers

Most retirement village residents are content with their choice of living arrangements and most operators provide good services and care, Wrightson says. Her own father is one of those happy residents.

The paper notes, however, that problem-solving could be improved and the advice given to intending residents can be confusing, with some not understanding the implications of what they’re signing up for. “They sometimes jump off the diving board like they do when they buy houses,” Wrightson says. “Then they realise there’s no water in the pool.”

Some of the more difficult aspects tackled in her report include buyback arrangements when a resident vacates, ongoing payment of weekly fees after the unit is vacated, the complaints system and the inability of the code to be easily varied or reviewed.

Buybacks

Operators and residents (or their estates) may have competing demands when it comes to repayment of capital once a resident leaves. Clause 53 of the code requires operators to buy back a unit upon termination of a resident’s ORA at any time before entering a new ORA with a new resident. Units might be refurbished and sold within months but can remain empty for more than a year, leaving the capital in limbo.

Wrightson says one issue raised by residents is their belief that village operators might prefer to sell new units or that they have no sense of urgency if the resident or estate is required to continue paying weekly fees (though not all villages require ongoing fees).

“Those are really hard questions,” she says. “And it’s time, I think, to have a conversation about them.”

Outlined in the paper are alternative options to the existing model for buyback. They include introducing a guaranteed timeframe, interest payable during the vacant period and allocation of any capital gain on sale between the resident (or his/her estate) and the operator.

The paper notes the possibility of action under the Fair Trading Act 1986 or the Consumer Guarantees Act 1993.

Capital gain

On the issue of sharing capital gain, Anthony Harper partner Jenny Baldwin says in the past some operators offered complex arrangements for sharing capital gains. And departing residents also faced the risk of capital losses. She believes the current system is simpler.

Compulsory repayment before resale could create liquidity issues for operators, especially smaller or not-for-profit organisations.

“That could be detrimental to the interests of all the other residents who are still living there,” Baldwin says. “I have in the past acted in relation to a retirement village that needed to be wound up because it had some provisions in its ORAs which required a compulsory buyback and it couldn’t meet those demands. I just don’t want any retirement village to be in that position.”

Weekly fees

When residents leave, some operators continue to charge weekly fees until the unit is refurbished and sold which can be months down the track. Some reduce or halve that amount after a set number of months but there is no time limit on how long this half-charge might go on. Many operators such as Ryman Healthcare have taken it upon themselves to stop weekly fees immediately or after a certain period.

Wrightson’s paper recommends a policy review to consider options to restrict the charging of weekly fees after departure by amending clause 54(2) of the code. Some operators argue the ongoing weekly fee is essential for the cashflow of their business and to sustain services for other village residents.

Moving to care

Transfers from independent retirement village units to serviced care or care facilities can be especially tricky under the current legal framework, says the commissioner.

When residents move into care they are required to end their existing ORA and sign a new one or a variation. Wrightson’s paper notes that clauses 24 and 25 of the code appear to be drafted to cover shorter-term respite care in the village rather than full-time residential care in a care facility.

“Some residents or their families understand the full impacts of some transfer terms only when their individual circumstances change,” she says. By then, they may have insufficient capital to buy a new unit.”

The paper notes there is no standard operator practice for transfers from independent units to care facilities and that ORAs might not be fully compliant with the code. The paper recommend the ORA provisions in respect of transfers to care be reviewed to balance operator control and residents’ rights.

The interface between retirement village living and care is an area where the industry does need to improve, says Orpin, although he believes this can be done through education. He adds: “I think the industry could help itself by certainly being much more open and honest about how far care will extend in a village.

“I’m dealing with it as a live matter at the moment where a resident moved into a village, believing that the level of care was available for increased health needs. When those health needs did increase, [he] was then told by the village, ‘I’m sorry, we don’t deliver that level of care’. They have to move somewhere else. To me, that is evidence of an issue.”

Care units fall within the health system so the Code of Health and Disability Services Consumers’ Rights applies.

Complaints

Wrightson describes the complaints system as being “all over the shop”.

The RVRANZ says it is onerous, lengthy, stressful and unsuitable for retired people who are seeking a life of peace and harmony, yet [are] keen to have their rights respected. It says many residents are ailing, lack confidence and are keen to please. “They are not fit to engage in a lengthy and unnecessary battle.”

Residents with formal complaints who don’t get satisfaction from their operator can escalate their complaint to the statutory supervisor, mediation or to a disputes panel, where they could face opposing counsel. Wrightson’s paper notes the process can be adversarial and intimidating.

The disputes panel is rarely used. Residents risk having costs awarded against them, although Baldwin says this has happened only once and the sum was relatively small.

Wrightson, who was previously chief executive of the Broadcasting Standards Authority, a complaints body, says a proper complaints system would avoid lawyers. The answer, she says, would be to appoint an independent complaints body similar to the ombudsmen in banking and insurance.

“A decent complaints system works well both ways. It’s a relief valve for residents, and it’s an independent area where operators’ concerns would be listened to.”

Baldwin says the complaints process was updated as recently as 2017. The new procedure included several steps to try to resolve complaints and disputes in a less formal manner.

Michelle Burke, Anthony Harper partner and board member of the RVA, says mediation offered by the supervisors at no cost to the resident is similar to an ombudsman-type service, getting all parties to talk to each other in a forum.

“Does our country really need to get more ombudsmen or commissioners? I don’t know,” she says. “I don’t believe that there are sufficient complaints to justify it.”

Orpin says the answer might be to get statutory supervisors more involved in solving complaints and disputes. If a resident had an issue and the supervisor formed a view that it affected many or all residents, it could help broker a solution. “From my experience, a lot of these issues were helped enormously by simply talking about them.”

Some residents believe statutory supervisors are not independent because they are appointed by the operator. One supervisory company has the lion’s share of the business.

Code of practice

The paper recommends a review of the code itself. Under s 90(4) of the Act, the minister can approve a variation to the code. Two such variations have been made, one in response to the Christchurch earthquakes and the second, in 2017, involved amendments to the complaints process in response to a monitoring report by the Commission for Financial Capability (CFFC).

Structural anomalies

The white paper also considered structural and drafting anomalies to the legal framework. It notes that the Act, regulations and both codes are inter-dependent. Operators often duplicate the code’s minimum standards and the CoRR’s provisions as terms in ORAs. The effect is that consumers must draw on a range of sources to understand their rights.

The paper goes on to argue that the documents should be reviewed with a view to simplification.

Burke says one area that could benefit from being changed in the Act and regulations is the duplication between the disclosure statement and the ORA, but attempts to work with residents ground to a halt previously. “There was no consensus as to what was important.”

Section 33(2) of the Act presents another anomaly for both consumers and agencies. Residents have a right to refer alleged breaches of the CoRR only to listed agencies. The right excludes referrals of alleged breaches of other key documents.  


This article originally appeared in LawNews (ADLS) and is here with permission.

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30 Comments

Retirement village industry - that last word makes that phrase quite stomach turning. These sorts of things should not be "industries"

I think you're being overly sensitive PA, it's merely a way to collectivise all the providers. Wrightson's report is probably overdue and does raise some valid issues. She should be commended for her work and starting the conversation. Hopefully the RVA will be mature about it and engage in an honest review. Any shareholders here could also enquire directly to their Company's management for their take on the paper, certainly I think I will.

I'm not really familiar with the industry but I think these villages (i.e., from the SE listed corporations) are only options for a diminishing number of asset rich, upper middle/upper class retirees. Glad there is a discussion document from the RC but -

I'm more concerned for the future non-asset owning class of retirees and the adequacy of facilities for those less well off in their old age. Are we future-proofing, or readying ourselves as a society for that?

Are we future proofing?...most unlikely given our housing situation.

Another problem kicked down the road.

Future proofing ? Not in the least. On the contrary, current monetary and taxation policies are doing exactly the opposite, promoting as they are a minority, unproductive and parasitic class of speculator landlords at the expense of the new generations, and of the productive real economy, and potentially destroying the social fabric by doing so.

Kate I'm picking that future non asset owners will be provided for as they are now - Govt subsidy and or family help. The SE listed companies have been around for a long time (even counting OCA which listed last). Certainly well before all the crazyiness regarding current house prices. We certainly won't be seeing 75yr olds tossed out into the street.

No, we are starting a lot earlier than that. 4,000 homeless kids (and their families) put up in motels at the moment.

Isn't it ironic that the lower class are put into motels, yet houses are converted into Air BnB's as an alternative to......motels.....

What an interesting point....

And in hotels as well, according to this piece;

In email correspondence with a city councillor, released to Stuff under the Official Information Act he said the use of hotels in the CBD for high-density social housing was having a real impact on the city.

https://www.stuff.co.nz/national/124259501/worst-ive-seen-in-20-years-ho...

It is a wonderful industry to be part of when house prices are growing rapidly. The resident misses out because the price appreciation goes to the retirement village owner. However many people are happy to forego that to enjoy the benefits of the village life.

Or if property prices are falling?
Doesn't the resident get a redemption value of their unit of "Whichever is lower - the investment (purchase) price or current market value"?

It'd be interesting to view an ORA of an actual resident to see if that was truly the case. Of course valuation of "current market" would be possibly opaque. My take on it is an ORA means you're effectively hiring the unit for an unspecified period of time. I think having to pay for the replacement of chattels, which you don't own, is a bit dodgy. I would have thought that maintenance/replacement costs were covered by the DMF?

I have noticed recently that most operators have dramatically increased the price of apartments simply because they can. As house prices increase they know people have no trouble selling their houses and they take advantage of this.
Also now the minimum age to go in is 70 years (as apposed to 55 about 30 years ago), most villages seem to be rest homes and not "retirement" villages. They do not want you to stay too long as most money is made when they have a high churn rate.

The operators are also subject to the same rising costs of operation as any business so it's little wonder the prices have increased. Buying an ORA gives you the right to occupy for as long as necessary, so I'm not sure the "churn rate" is any different now than it has been historically. Also the minimum age for entry is 65yrs. Not sure where you're getting your info?

I am extremely familiar with the industry. The 4 major players all have 70 as age of entry. About 10 years ago it was 65
Also, because the entry age is higher the churn rate is higher.

Soon they will ask for a medical and if you pass it they won't let you in.

itsme...So in other words they want you to die as soon as possible after you move in

But a house you live in is not an investment. Hence why their is no CGT on it. When people buy a license to live in a retirement complex, it is all spelt out to them. But if people do want to enjoy any possible gains, they can buy shares in the retirement companies. As per a property expert on the radio yesterday in terms of capital gains, it is the land the house is on that appreciates in value and houses deprecate in value, and the retirement company usually owns the land, plus the unit. But if the units were for example
, leasehold, the capital gain could be minimal, if any, when compared to inflation. Leasehold properties on NZ aren't very popular. I am not sure what any governemnt will do because they don't want to be providing these services directly and people and families have a choice to use them or not. Imo it could do with some tweaks but I don't think it broken. Unlike the NZ housing market which is a major crisis, and seriously broken. Especially for FHBs. It is ironic that the main problems are affecting the old and the young and middle aged people are relatively happy with the current situation, as long as their house is making more money than their wages each year.

5yrs ago my parents looked into Bruce McLaren retirement home in Botany, Auckland. The fees, inability to receive capital gains and requirement that selling had to utilise the village to refurbish/refit (at their cost structure) put us off. Instead they elected to buy a smaller freestanding house. The loss in capital gains and associated costs would have equaled approx $300k.
When retirement homes quote high levels of member satisfaction, they are reflecting the quality of life, happiness in the living environment etc. Sadly, many residents do not know the financial downsides. Talk to a lawyer and accountant before purchasing. Regulation and transparency is required. #scam #fleeceoldpeople.

How can you properly estimate prospective capital gains, especially in an already hugely inflated asset class such as housing?

Comparing general housing inflation and rest home units can't be done - different market, different supply/demand, completely different product

Elected to build a 3 bedroom, easy maintenance property Nth of AKLD. Cost approx $825k, current valuation $1.2.m They wouldn't have had this gain if they had gone into a retirement home. This gain will then fund medical needs, new car when they downside in 2-3 yrs.

Lets just back the wagon up a bit Cheetah. When you speak of losses, who actually incurred the loss? Your parents estate no doubt, so ultimately the beneficiaries of the estate. Your parents may well have a better quality of life in their later years being residents of a rest home than they have owning a freestanding house with maintenance and security issues. If they'd bought into a "full care" type of facility they'd have the option of moving into a care suite in time (which they'll probably have to do anyway). Your hashtag could be interpreted as #fleecetheinheritance imv.

Haha. I'm pretty fast :-) Dont worry about the inheritance as I'm officially set-up quite well. The gain will be realized when they downsize to a 2 bedroom unit in the short-term. The capital freed up will allow expenditure which they otherwise wouldn't have had e.g. car, travel, being able to afford Sx Med Ins. ps. Have I told you about my 2002 car with 180k on the clock?

"Wrightson says one issue raised by residents is their belief that village operators might prefer to sell new units or that they have no sense of urgency if the resident or estate is required to continue paying weekly fees (though not all villages require ongoing fees)."
This an area that absolutely needs to be legislated. Maximum of three months and whether sold or not the reduced capital amount must be returned. Same limit on maintenance costs or stopped when the property is vacated.
I have an article from circa 2014 from the NZHerald on Metlifecare where it took two years to relicence (sell in my terms) the property. Of course the Metlife MD regretted this.
If the occupier would like to share in the profits they must also be prepared to share in the losses which would take a black swan event in the general NZ housing market before losses would be incurred.

Retirement village "industry" aka 21st century wealth transfer, rather than going to the family it goes to shareholders.
Scales definitely needing readjusting if this "industry" is not to end up as despised as landlords

absolute rubbish.
This comment and the entire premise of this article; "growing tension"

Where is the "growing tension"?
Retirement village operators have the highest customer satisfaction rates of any sector in the country. That's not tension.

The Retirement Commissioner's white paper just regurgitated issues that have been hashed over time, and time, and time again and solved long ago.
She's come in trying to make her mark by creating [old non-]problems to solve.

Comments so far lead me to believe that few have any grasp on how this industry works. It differs little from others where you just supply what is needed to keep the herd happy and milk them for maximum profit. Both villages and care facilities work the same way. Residents pay a lump sum up front and some ongoing fees for whatever is offered and then are provided sufficient to satisfy their needs. The lump sum is nothing more than an interest free pot of funds with which they can then do what they wish, like build more. Do the maths on a 100 unit/bed facility and ask if you would like that sloshing around in your bank. There will be turn over and then profit. The game is to realize the most you can from the original lump sum by fees before churning the unit/bed. The residents are simply stock they will have no claim of any type to any of the "asset"and it will only ever be an outright cost, up to 100% of the original payment if it can be done. If you think or expect anything else prepare to be disappointed.

I have been fascinated just how polarised the responses to this paper have been. Obviously the comments have been written either by owner/operators or residents/family. The different sources are plain to see. The whole system is skewed to the management side of matters from the content of the decisions to the way in which the decisions are made. No or very little consultation with the resident group. No recognition of the life and/or work experience of the resident group - just we (management) know what is best for you!!
BTW I am a resident, incase you were wondering.