Probably the most significant current agenda item for employers is the introduction of auto-enrolment from 2012 . But this also presents an opportunity to stand back and consider the bigger picture, says Katharine Moxham, Spokesperson for Group Risk Development (GRiD).
In the pensions space, the savings gap is well appreciated by Government and policymakers, as evidenced by the introduction of NEST and auto-enrolment from 2012 to combat “under-saving” into pensions vehicles. Daunting though the prospect of auto-enrolment may be, this shouldn’t be viewed in isolation by employers. Auto-enrolment is just one of the many expectations that will fall squarely on employers as the State steps back and Big Society and greater personal responsibility emerge.
The programme of Welfare Reform currently underway in the UK has been likened to the reforms of post-war Britain following the Beveridge Report. Universal Credit, the Work Programme and now the Sickness Absence Review are just a few of the initiatives.
Taken together with NHS reforms and Department of Health initiatives, we are facing a new system of welfare support which aims to encourage more positive behaviours and which will pave the way for a major influx of workers back into the jobs market.
The call to action for business is clearly outlined in the recent Department of Health paper, “Healthy Lives, Healthy People”, which stated that businesses must take greater responsibility for the health and wellbeing of their staff. The Sickness Absence Review is looking at changes required to help people stay in work and whether the balance of absence costs are appropriately shared between individuals, employers and the state. There has also been some suggestion that the review could even go so far as questioning the role of statutory sick pay, thus necessitating a complete overhaul of employer absence policies.
So where should one start when considering the bigger picture?
Back to protection basics
Inadequate provision of life insurance remains a major issue for the UK. Latest industry reports put the national life protection gap at £2.4 trillion (£2,400 billion) equating to half the UK adult population (about 24 million people) having a life protection gap averaging £100,000 . When the worst happens, the State is often required to help restore equilibrium through the benefits system – a huge strain particularly in today’s age of austerity.
The burden on the Welfare State would be far greater were it not for company-sponsored insured benefits. Life assurance has traditionally grown up alongside UK corporate pension provision and has often been linked to pension scheme membership. Perhaps it would be better to extend this valuable benefit in a lower cost format to a wider section of the workforce?
According to GRiD’s latest employer research, almost half (49%) of the employers that do not already offer group risk protection benefits said they would consider implementing a group life scheme alongside pensions auto-enrolment – potentially making major inroads into the country’s growing life assurance protection gap.
Additionally, State support is changing significantly for those who are ill or incapacitated for any length of time.
As part of DWP reforms, Employment & Support Allowance for the contributory Work Related Activity Group will be time limited to one year. This change alone is expected to affect 1 million people .
The current 2.1 million working age people who are still on old style Incapacity Benefit will be reassessed and moved onto Employment & Support Allowance or other more appropriate benefits using the Work Capability Assessment. Both the pilot and initial roll-out results have indicated a significant number being found fit for work or able to take up work with a little help.
There will be less State support for less time and support will no longer be unconditional for the majority of claimants who will be expected to move towards work. This will ultimately result in the brunt of responsibility for vocational rehabilitation lying with employers.
UK businesses already make a sizeable contribution towards protecting the UK population against the financial devastation of loss of earnings as a result of illness, accident or disability. The fact that 75% of all UK insured income protection cover is provided by employers is particularly important when considering Welfare Reform. However, a more significant fact is that this only represents around 6 to 7% of the working age population so the vast majority of workers still do not have this valuable protection through their employer.
This is also pertinent given the loss of ill-health early retirement provision that is often the case on the closure of a Defined Benefit (DB) pension scheme. Early retirement is evidently inappropriate where there is an expectation of recovery in any case. Yet GRiD’s employer research for both 2009 and 2010 indicated that the knock on effect that closing a DB scheme could have on corporate sickness policy has been overlooked by as many as 25% of businesses. Moreover, of those who understand the implications, a further 49% are still considering how they will deal with the situation.
HM Treasury’s discussion document “Restricting pensions tax relief” recognised that when the reduced tax-relieved annual pension savings allowance came into force in April 2011, Group Income Protection (GIP) schemes would be a way to avoid the hefty tax bill that might otherwise result from taking an enhanced ill-health pension.
There is an exemption for those retiring on the grounds of severe ill-health but this has been defined by HMRC as applying only to those who are not expected to survive beyond one year. The needs of those who might otherwise take ill-health early retirement are likely to be far better served by a GIP policy going forward (advantages include scope for rehabilitation, active claims management, lower and known costs, continued pension accrual and other benefits such as life assurance). The fact that the Treasury recognised the potential for GIP when looking at a pensions issue is of pivotal importance. If the Treasury is joining the dots, employers should too!
A GIP scheme provides a continuing income for employees if illness or injury prevents them from working for a prolonged period of time. It can also replace lost income where an employee has to take a part-time or lower-paid position because of illness or injury.
But a GIP scheme doesn’t only protect employees. As well as the financial advantages of having insured their liability to continue salary in the event of long-term disability, given that vocational rehabilitation is a primary feature of most GIP policies, an employer with a current generation GIP policy in place will be well-equipped to manage an employee’s absence and provide the support they need to get back to work.
Many employers will be looking at flexible or voluntary benefits to enable a shift to the role of facilitator or to enable them to reduce costs. Even outside of voluntary or flexible benefit structures, there are opportunities to release money by revisiting benefit provision and removing overlaps. For example, Critical Illness cover could be offered as an alternative to providing cancer drugs cover within a Private Medical Insurance scheme. Efficient use of group risk free or discounted services (such as absence management, Employee Assistance Programmes, GP help-lines, online health assessments, second opinion services, occupational health etc) can release savings to reinvest elsewhere.
If employers include a reappraisal/restructure of protection, ill-health and sickness absence provision – instead of just reviewing pension provision - they get something back in return. Providing a fit for purpose benefits package alongside auto-enrolment could even release the money to pay for itself!
About GRiD Employer Research
The Group Risk Employer Research study was undertaken in October 2010 among a sample of 500 UK businesses. Research was conducted by Lightspeed Research for Group Risk Development (GRiD). Alico, Aviva, BUPA, Canada Life, Enrich, Friends Provident, Legal & General, Marsh, Mercer, Munich Re, Portus, Swiss Re, Unum, Towers Watson and Zurich Corporate Risk sponsored the project.
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