 Paul Avis, Sales and Marketing Director at Canada Life Group Insurance
When people think about auto-enrolment (AE) the initial focus is generally on the implications for the pensions market and how these products will be funded. However, the impact on group risk benefits should not be overlooked.
Indeed, where a group risk scheme has a pensions link, insurers are currently considering how best to manage the complexities of the potential influx of new people requiring cover. There are many seemingly simple requests to waive long term absence data and actively at work requirements, suggesting that the adviser market has a consulting opportunity for risk, as well as pensions, as part of AE.
So change is coming but how does the industry feel about it? To gauge people’s reaction, we undertook research on advisers in Q2 2012 and found the following:
- 72% think that, as employers seek financial advice to ensure they are compliant with AE regulatory requirements, advisers will be presented with more opportunities to speak to them about their employee benefits.
- 68% per cent think that businesses will take the opportunity to review their benefit offerings alongside their workplace pension schemes.
- But 20% take a pessimistic view, believing that AE will have a negative impact as employers will be reducing their benefits to make sure they can afford the necessary pension contributions.
- 15% think that employers will want to shy away from the additional administration implementing new benefit schemes may bring.
As you can see, there are conflicting views in our marketplace but this is a good reason for insurers and advisers to explore the challenges, considering how we can best combat them and maximising the clear opportunities presented.
However, the AE challenge is made more complex by its very nature with various staging dates and the opportunity for people to opt-in/out – all actions which require administration that has been clearly thought through by all concerned. Therefore, data integrity must be an important consideration, as less errors and omissions will lead to less confusion and disputes. If employers concentrate on getting this right, it will benefit all parties.
From a provider perspective, a less positive impact on existing group risk benefits may be requests from employers (with large pension fund costs) for rate reductions. The group risk market has been a ‘soft’ one for many years but most insurers are looking to repair their margins to sustainable levels so the price focus of employers may be met with a ‘no’ by insurers.
This is a risk too from an adviser perspective, as market commissions have reduced in this period and low costs may have compromised quality and value. Placing business at reduced rates with insurers that cannot administer policies effectively has a double impact, reducing income and increasing administration costs.
However, on the positive side, advisers with pension data have all they need to proactively quote for group risk benefits for the first time and even very basic discussions may protect incumbent advisers from ‘poaching attacks’ by other intermediaries looking to exploit group risk AE opportunities.
For employers, extending current pension scheme membership benefits to newly enrolled employees may cost more than is acceptable, although circumstances will vary. Therefore, having a sub-category eligibility (to keep the scheme benefit open) could be worthwhile to limit ageing implications, i.e. all pension members as at X date and all new members who have completed 2 years service. As a further variation perhaps an all employee benefit of 2x rather than 4x death benefits could be explored.
Traditional 4x salary death and critical illness quotes or high benefit group income protection to state pension age schemes are ‘benefits rich’ but may seem costly and compound financial concerns. It may be better to consider 1x salary or fixed benefit life or critical illness scheme, with a lower benefit, 2 year limited payment, income protection cover.
Basic income protection schemes can cost as little as 0.25% of salaries yet bring insurance protection and a huge number of valuable additional benefits (Employee Assistance Programmes, second diagnosis services, online and telephonic employer legal support etc.).
The provision of new scheme quotations could be impacted too - will employers take these up when they have a new or enlarged pension bill to pay? The opportunity for advisers is huge but the process has to be carefully thought through.
All of these changes will mean that consultation and negotiation is needed to ensure contractual liabilities are met by the employer. This may not be a bad thing for the industry as it will provide an opportunity for all concerned to work together to improve scheme design and we might see changes such as:
- Moving scheme eligibility away from pension links (to avoid anti-selection concerns);
- Ensuring closed scheme categories are expanded to avoid probable cost increases of an ageing limited population;
- Including all previous non-pension holders (often younger employees) in a defined category which may have the effect of reducing the unit rate.
All in all, AE provides an opportunity for us in the financial services market if it is properly handled. Not only will it allow us to speak to a new audience about the benefits of group risk, it will allow us to make sure current risk benefit scheme designs are fit for purpose in a 21st century workplace.
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