Life - Articles - Revolution Not Evolution: AE for GIP

 In a landmark series exclusive to Actuarial Post, Canada Life’s Paul Avis sits down with Editor Ellie Burns to put forward his ground-breaking argument on automatic enrolment for GIP. In the first of three Q&A’s, Paul highlights why AE for GIP is so urgently needed for the market, individual and employer and why it should be regarded as the priority benefit.

 EB: Paul, why are you bringing this subject, Automatic Enrolment for Group Income Protection, to the attention of theindustry?

 PA: I believe that unless we see a dramaticchange in this market place, and I amtalking revolution not evolution, then the market will continue to stagnate. We need to start this revolution by putting anautomatic enrolment style income protection product on everyone’s agenda. The DWP has said that it is open to discussion on what our industry can offerin terms of Group Income Protection, and it is vital that we pick up this mantle andmove the discussion and debate forward. This will, however, be much more farreaching than purely a product discussionand will address the very core of the benefits world, how we manage UK-wide disability and the clear historical propensity towards pensions that we have.

 EB: You mentioned a ‘clear historical propensity towards pensions’, and pensions has certainly very much been front and centre due to automatic enrolment. Are you questioning this pensions focus and how does GIP compare to pensions costs?

 PA: The Government had to focus on pensions because, put simply, pensions was the biggest DWP bill. The 2011/2012 DWP figures showed £159 billion in costs,of which £74.22 billion was for pensions, equating to 47% of the DWP’s total costs. What is less known, however, are costs for disability and sickness benefits. The cost of Disability Living Allowance between 2011 and 2012 was £12.57 billion(1), but this figure does not take into account other sickness and disability benefits. When you break down all benefits aligned with disability the total comes toover £20 billion. If you take the costs of Disability Living Allowance with the costs of ESA, Incapacity benefit, Industrial Injuries Disablement, Severe Disablement Allowance and Statutory Sick Pay you have costs totalling £25.41 billion between 2011 and 2012. This excludes additional costs for areas such as Housing Benefit/Rent Rebates, Carers Allowance,SSP etc. and so could have been considerably more. In December 2013 theDWP reported that 2.48 million people were claiming disability benefits, around  10% of the working population, and whilst this is overshadowed by 12.87 million pensioners, the cost is not only in the benefits they receive but also the simultaneous loss of tax and national insurance contributions. You can clearly see that while the state was correct to tackle pensions first, sickness and disability is a significant bill that has never really been quantified or captured. Furthermore, the £20 billion plus disability bill per year gives an indication of the size of the opportunity in getting this appropriately managed.

 EB: So the costs are significant, but not nearly as high as pension costs. Yet, amI right to assume, you think Group Income Protection is more important than pensions?

 PA: Everyone in the Employee Benefits industry has been brought up with pension priority. My colleagues say that income protection is as important as pensions, but I have always argued that group income protection should be the priority benefit. When you think about it, what is a pension but a deferred income? Therefore, why wouldn’t you protect your income whist you are at work? People are willing to pay ahigh percentage of their salary for something that is going to benefit them in 26 years, rather than a much smaller percentage for something that could benefit them in 26 weeks. Group income protection is much more affordable than a pension and provides invaluable financial protection if an employee finds themselves unable to work through illness of injury. Let’s get down tothe core of this argument; there is a clear business need for GIP, the state’s attempts at providing clear processes and infrastructure for sickness and disability is sub-standard in my view and the costs and implications of an ageing workforce need to be addressed. If we do not transform and revolutionise the GIP market it could die, with sick and disabled people left in severe financial distress. GIP is not only a financial solution, but it also serves society better and we are fully committed togrowth in this important market.

 EB: Why do you think the state’s approach to sickness and disability is sub-standard?

 PA: I will address this in more detail in the second article but the state has a major problem; it can only afford to support the most sick and most disabled people in society, and the processes by which it assesses individuals needs reviewing. Qualifying for state disability benefits is much harder these days as they are only intended to go to the most needy, with the Work Capability Assessment being used to assess whether the claimant qualifies for benefits using a strict disability definition. The flaws in this system were highlighted by a damning comment from The Citizens Advice Bureau (2), ‘The work capability assessment is broken, and innocent peopleare caught in the middle. We need urgent root and branch reform with this whole system. Assessments are unreliable, often incorrect and can result in people with extremely tough medical conditions waiting months to get decent treatment and fair outcome. This is a failing system which ministers need to fix.’ Further narrative from the Citizens Advice Bureau revealed that taxpayers have had to pay more than £60 million for appeals against bad decisions, with the CAB helping over 465,000 people with ESA problems between October 2012 and September 2013. Another damning report from The Work Foundation, which works alongside the DWP, said that the assessment was an ‘unsympathetic quota driven gateway to ESA’. In the evolution of this system are new measures such as universal credit, where I understand even a penny of income will remove any rent or mortgage payment support, benefits capping and the replacement of disability living allowance with personal independence payments,which means that there is reducing support for people needing an income tomorrow. Right now we have a cradle to the grave approach to welfare in the UK, but we need to take stock of how automatic enrolment for pensions, for the first time, showed a clear departure from the state with an emphasis on employer and employee funding. The state cannot afford to continue to take care of you, so employers and employees must take morer esponsibility for financial support during sickness and disability.

 EB: What are the clear business needswhich GIP fulfils?

 PA: There are immediate business needs for managing sickness absence. Having bought a pension, if an employee is absent from work due to sickness then the employer still has to continue to pay that pension whilst they remain in service. You can still provide a waiver of premium if pension contributions are covered in addition to salary continuance. Specifically important if the pension is used as collateral security e.g. for commercial premises. Other benefits employers traditionally purchase are private medical insurance and death benefits; but when do you need them? When you are sick! So what is the point in having private medical insurance and death benefits when after 28 weeks statutory sick pay an employer ceases the employment contract? In summary GIP continues to fund the pension, medical and death benefits when employees are absent through illness.GIP also addresses other business needs; employers have the cost of not only occupational sick pay but also the cost of statutory sick pay. In April 2014 the Percentage Threshold Scheme was removed, meaning employers no longer receive rebate from the government for high levels of short term absence. The fact that employers have to comply with the Equality Act (2010) and retain employees in service (using reasonable adaptions) shows how important and cost effective GIP can be. So GIP is an immediate benefit which is non-transferable, affordable, protects other benefits, provides legislative compliance and clearly serves business needs. Yet employers, individuals and the government are still prioritising pensions.

 EB: But, Paul, this is all ‘if’ work. Critics will say that pensions are more valuable as people know they are going to retire, whereas many people do not think they will get sick or disabled. How do you react to this criticism?

 PA: You are correct! People simply don’t believe that it will happen to them as evidenced in Swiss Re Term Watch 2014 (4) where total new sales in individual income protection were down from 120,094 in 2013, to 90,794 in 2014. I have already outlined that the state will not provide and that GIP fulfils clear needs for both employer and employee. We also have the issue of the ageing workforce. Our ageing research (3) showed that 66% of people were planning to work beyond 65: this has almost doubled since October 2012. 31% said that they were considering working beyond 65 but are now likely to have no alternative. So are current AE pension contributions enough? Employers need to address this increasing ageing workforce by managing health more proactively as age is the single biggest determinant in absence incidences. Employees must realise that in older age sickness is more common and that they will need to protect their income to avoid gaps in pensions planning leading to even more time in work.

 EB: Will the current poor performance in the group risk market undermine confidence in the undertaking of a Group Income Protection ‘revolution’?

 PA: The Swiss Re. 2014 Group Watchsurvey (5) would initially have us thinking positively about GIP. For the first time we have over 2 million people covered(1.963m to 2.039m), a 3.8% increase in numbers. At the same time in-force premiums have increased 6.2% to nearly £600 million, with benefits increasing by5.5%. But 31 fewer employers were covered, with 17,193 schemes in 2013 compared to 17,224 in 2012. So premiums and employee numbers are growing, but no new employers are purchasing this benefit and fewer individual policies are being sold. I do not think this should be seen as a negative. It should be viewed as a challenge to educate and inform the marketplace about what the state alternative to insurance provides, the tangible outcomes from GIP and the multitudinous business benefits.The survey said that AE for pensions may support growth in group risk, but one intermediary commented, ‘I do not envisage too much growth in the number of schemes but the number of employees covered by those schemes is likely to increase’. I think they are right: too few new to market schemes will be seen coming off the back of pensions AE as employers, pension providers and advisers struggle to cope with the requirements of compliance. My gut reaction is that AE for pensions will grow the group life market but income protection, again, will be lef tbehind, even though there is a more natural fit between GIP and AE.

 EB: What factors do you think are hampering new customer sales?

 PA: One of the main issues is the lack of knowledge and understanding of GIP. At the beginning of the year we surveyed (6) 200 employers and asked them a range of questions. What we found was a startling education gap in the HR world about GIP. We found that 18% of HR professionals knew very little about group life, 27% of HR knew very little about GIP, with a further 32% unsure about the cost/value of the product. The main barrier was that 66% thought that it would be an expensive benefit and 21% thought their staff would not understand it. Other concerns included that it supports an absence culture and 31% believed the company's sick pay was sufficient to cover absence. In March, Canada Life held an event, attended by 50 employers, where we asked the attendees to answer a series of questions. The results show that there was a significant gap between those who thought it was a valuable benefit and those who offered it to their employees. You then see, in the final question where nearly 98% saw GIP as more than just a salary replacement tool, a complete repositioning of the benefit as a service rather than being an insurance product. What that concludes to me is that HR knows very little about this benefit.

 EB: How can we plug this knowledge gap?

 PA: We need to get our adviser community to educate them. Not only will this benefit HR professionals but also advisers, who need to think about where their revenue streams will be coming from in the future. Post-RDR and in a world where advisers will not get DC commissions and where there are few DB schemes, group risk presents an untapped opportunity for revenue replacement. Our research clearly showed that where advisers are involved, employers understand and value GIP.