Where should welfare reform focus? Sometimes it seems the government is so involved in bringing lifeless bodies to the surface that it can’t see the ones going under for the third time. Welfare reform centres on getting people out of the poverty trap, away from the benefits system and back into work. All fine and commendable stuff, but surely the real message should be the social cost of letting families sink to the bottom in the first place.
A man or woman on a decent wage with a modest mortgage, two kids at school and a medium sized car in the drive, is often just one pay cheque away from a lifetime on welfare. Yet this prevention side of welfare reform is in danger of being overlooked.
If it were the social norm for workers to be covered by income protection insurance, then many people could avoid becoming a burden on the State in the future. And doesn’t it make sense to throw a small line of maybe a tax-incentive to those still swimming strongly. In fact, it seems to make Tony Blair-type sense, so why isn’t it happening?
Let’s backtrack for a moment and remember how the Welfare Reform Bill works. After the consultation documents last year, the Welfare Reform and Pensions Bill was issued on February 10, 1999, but, rather than going into detail, the Bill grants the Secretary of State the authority to interpret and implement the legislation.
This means there are now explanatory notes, issued by the government, to say how the Act will operate in practice, but these notes are not endorsed by parliament.
This is where it all starts to go wrong. Clear reform was needed – but some elements of the Welfare Reform Bill are already as clear as mud.
The way it reads at the moment sounds like a penalty on prudence. For all the Alistair Darling rhetoric of “creating a private/public partnership where the State can concentrate funds on those who need it”, the reality looks like a formula for encouraging the heedless and the reckless.
The proposed changes to incapacity benefit mean that anyone sensible enough to make self-provision will be penalised. Andrew Smith, public relations officer for UNUM, explains: “We may have sorted out the group scheme penalty problem, but what has come to light now relates to individual schemes.”
If an individual claims incapacity benefit, but has a pension scheme in place, the government now says it will take into account the notional value of the pension that could have been drawn-down early (even if it wasn’t) when assessing State benefit. So, for every pound over £50 a week, of the notional value of the pension, a claimant will lose 50p of incapacity benefit.
“There are two situations,” says Smith. “If you have both income protection and a pension, you claim the income protection and lose your State benefits. But if you have just the pension and have to draw it early you’ll lose incapacity benefit of the same amount, but you’ll also be penalised by the actuarial reduction on the early pension. That means you lose twice.”
So should financial advisers be suggesting clients take income protection as a way of protecting their pension fund as well as their lifestyle?
UNUM is currently talking to the DSS about this problem but this is less about the government backing down over one issue and more to do with the whole approach. If the government wants welfare reform to work, it should look to a system which extends a helping hand to anyone that tries to help themselves. Maybe compulsory income protection is the answer, or perhaps group schemes would be a better way forward. But the principle is the same. Unless the steady stream of people slipping away from self-sufficiency can be halted, then society will face an even greater problem in the future. Surely the third way is to encourage people to think for themselves. John Ravenscroft, protection marketing director for Zurich IFA Group, thinks the carrot is better than the stick: “In the past, the real way people have been encouraged to do anything is by providing some kind of a tax incentive. It’s surprising what people do if they think they are saving tax. You really need to encourage people if you want them to do it. We’re going the wrong direction with this thing.”
Working in partnership, government and industry together, is what Andy Chapman, managing director of Permanent, is keen to see. “We wanted something more specific from this welfare reform debate,” he says “Some indicator of a way forward, but none has been forthcoming. It looks like the onus is back on the industry to provide the solutions.
“The message from central government has done nothing to help the protection industry,” Chapman says. “We now know the government is not comfortable about funding those whose lifestyle slips away from them because of ill-health, but it has not come up with a sound solution.
“What we are still waiting for is a definite proposal. We want to hear what government intends to do about it.”
Simon Barwell, personal finance marketing manager for Swiss Life, also wants to see the incentive of tax relief on premiums: “The idea is to buy the protection and hope you don’t need it. We’re trying to encourage people to get into a win/win situation. The insurer wins as insurance becomes the norm and risk is spread; the individual wins because he has protection and, the State wins because we have changed society’s attitude to risk.”
When Beveridge designed the social welfare system he never intended it to replace insurance by the individual. In his 1942 paper he wrote: “The State in organising security should not stifle incentive, opportunity, responsibility; in establishing a national minimum, it should leave room and encouragement for voluntary action by each individual to provide more than that minimum for himself and his family.”
Beveridge proposed a partnership between the State and the private sector, both to provide insurance and to manage benefits. He realised the dangers of offering cover only from the State. Half a century ago he warned of a lapse in personal responsibility.
Sarah Scott, marketing analyst at ERC Frankona, says the ultimate goal of self provision will only be realised with a clear and simple public awareness campaign on the benefits of having cover or, more importantly, the realities of not having it.
“It would be a huge step in the right direction,” she says, “and may help realise the massive sales opportunity welfare reform presents to the industry.”
Welfare reform should focus on handing back responsibility to the individual and this needs to start with wide-spread insurance. Recent research from Norwich Union shows that an average of £1,205 a year is spent by each household on insurance, yet only a fraction of this is for income protection. Much of it goes to protect the house and the car from damage.
But the stark truth is that these are in danger of repossession the moment the first pay cheque is missed.
So would a national marketing campaign be out of the question? It has been done before and with less reason. A huge spend on television adverts, posters and mailings heralded the start of privatisation with the sell off of British Telecom. The public was persuaded to invest in the future with images of a high technology industry which was, at the time, a rather antiquated telephone company. But then, the UK is good at propaganda. Why not a marketing drive to make us proud of a move to social change, where we accept responsibility for our futures and tax incentives encourage us to put ideas into action.