Glance at the value of the weekly state benefits listed in the table on the next page. Could you cope if they were your only income?
Does the above sound familiar? It certainly should be. Making clients aware of what the welfare state can, and cannot, do for them is a basic part of many advisers’ roles in helping people plan for the future.
Governments of both political colours have tried to trim the costs of the welfare state over the years, but it still pays out almost £100bn each year – a third of public spending. And despite first impressions, the value of some of the benefits is not to be sneezed at; modest though the guaranteed basic state pension is, at current annuity rates it would cost just under £100,000 for a man aged 65 to buy the equivalent annual income for life.
But for most people, government benefits are no longer the comfortable safety net people once took for granted. On the protection side they fall well short of most peoples’ needs.
Private insurance has been bridging the gap between what the state will provide and what families need, or expect, for many years. A host of products ranging from creditor insurance on loans, to income protection help people create their own protection against the worst. But if the current Government has its way, the gap will get wider for most people and the bridges will need to be longer.
In March, social security minister Frank Field published his green paper on the future of state provision, A New Contract for Welfare
. Field, appointed with the specific brief of “thinking the unthinkable”, was challenged to produce a blueprint for the welfare state which would be sustainable and affordable into the next century.
His document is long on rhetoric and short on detail. But it does set out a coherent strategy for the future of welfare. At its heart is a reiteration of the Government’s desire to help people help themselves, which translated to benefits, means more private provision and less public welfare.
“The public and private sectors should work in partnership to ensure that, wherever possible, people are insured against foreseeable risks and make provision for their retirement,” says Field.
How this will work in practice is still unclear. At its core, however, will be the principle that those who can afford to pay must, so as to free resources to improve the lot of those who genuinely have nothing. In particular, the entitlement to benefits will be dramatically changed so that fewer people can claim them. And although not explicitly stated in the paper, the underlying logic seems to suggest that universal entitlement to most benefits could go, including such sacred cows as child benefit or the state pension.
To sweeten the blow, those in work are likely to be allowed to channel more of what currently goes as national insurance contributions to help meet the cost of buying private protection. Entirely new benefits may also be introduced. For example, the Government is looking at mortgage protection benefits for those who find it hard to qualify for existing insurance.
Incentives, and compulsion, to go private should be good news for those who provide financial products. Avenda Burnell Walsh, corporate communications manager at Permanent Insurance, says: “We have seen a big upswing in the market for income protection recently. It started last November and has continued solidly since.” The upswing is not confined to Permanent. Income protection providers across the board are reporting growing sales.
Burnell Walsh feels that there is starting to be a fundamental change of public attitude: “I think that people didn’t really believe the last Government when it said that you have got to start making your own provision. But now they are hearing the same message from a Labour Government, people are starting to take it seriously.”
Intermediaries are well placed to capitalise on this new attitude. Products such as income protection and critical illness are difficult to sell off the page.
John Barry is an IFA with Edinburgh-based firm Edinburgh Risk Management. He says: “I find that most clients, and women in particular, are now getting more receptive to the idea of providing for themselves.”
Barry feels it is important to think about benefits when working through a client’s protection needs: “I don’t disregard state benefits. But I do suggest to clients that the real value of these benefits is being eroded over time.
“What people then tend to try and look for is something from me to help fill in the gap between what they will get from the government and what their expectations of a decent income are.”
But advisers must not get too carried away expecting a flood of extra commission. At the moment, it costs more for the average person to buy a given level of protection through the private sector than by paying national insurance. Profits, selling and regulation costs all count against the private sector. For customers on below average earnings, the current insurance-based solutions are simply too expensive.
To meet the necessary target of making private provision affordable for the vast majority of the workforce, the industry will have to find ways of squeezing out cost.
Burnell Walsh concedes: “Cost is still a big issue. To some degree, the more people that have income protection, the cheaper it will become because we will move away from problems of adverse selection against insurers. In the meantime it is up to us all, intermediaries included, to look at ways to bring this protection within reach of as many people as possible.”
At the moment, ways to bring down the cost of income protection include choosing a longer deferred period, accepting any occupation, rather than own occupation, cover, or by picking a more modest monthly benefit.
Gerald Pepper, marketing director of national IFA, Heath Consulting, feels that it is unlikely that intermediaries will be able to effectively serve those on lower earnings. “They simply do not have the disposable income to make it cost effective for advisers like us to work with them,” he says. “Transaction costs eat up far too much of their modest monthly premiums.”
In the future though, the Government is thinking about more fundamental changes. It has already started discussing switching the focus of regulation from the process of selling onto the products themselves. Products would have to match up to independent standards, and only those which hit tough targets on price and flexibility would gain an official seal of approval, the Government’s so-called kitemark.
However to be both cheap and flexible, distribution costs will have to fall. This suggests direct selling, distribution through the workplace, and by the Government’s favoured route of selling through affinity groups such as trade unions.
Such kitemarking is likely to be introduced for investment and pensions products first but, if the public warms to it, would quickly be extended right across financial services. The big question for financial advisers is how many of their customers will be tempted to defect to these products.
For the immediate future however, the outlook is bright. More people are looking to build their own mini-welfare systems. And by matching the existing modest state benefits with the right range of private top-ups, the intermediaries and insurance companies alike can help both the customer and themselves.
Stephen Womack is a financial correspondent for the
Mail on Sunday.