In the wake of auto-enrolment for pensions, could making group risk benefits mandatory for employers help to close Britain’s protection gap? Nic Paton reports on an industry that isn’t so sure that compulsion is the best way forward
Back in January, in a report looking at how people with fluctuating health conditions such as asthma, depression and rheumatoid arthritis could be better supported at work, the think-tank The Work Foundation argued one solution might be to develop models that would “promote wider uptake of income protection insurance through the workplace”.
The recommendation was just one of number of innovative suggestions, encompassing everything from “part-time” sick leave to employee “health at work” records. But it neatly highlighted a debate intensifying within the insurance industry, namely whether widening access to group income protection insurance (GIP) could be one answer to the country’s spiralling welfare and healthcare bill as our working population ages.
Whoever wins the next election, the argument goes, at some point the country’s “protection gap” will need to be addressed in much the same way as the UK’s “savings gap” has at least begun to be tackled through pensions’ auto-enrolment. Indeed, could auto-enrolment, where employers are being compelled to set up and pay into a company pension for their employees, even act as future model for some form of mandatory GIP provision?
Last October the Association of British Insurers (ABI) published a report looking at the possible role of GIP in relation to future welfare reform, including suggesting a number of models and alternatives that could be considered.
But it also illustrated the extent of the shift that will be required if employers are to be encouraged – voluntarily or otherwise – to embrace this form of financial safety net insurance for their employees.
It cited the Chartered Institute of Personnel and Development’s 2013 Absence Management report, which calculated that just 11% of employers at that time offered GIP to all staff, with a further 4% offering it to “some”. Nevertheless, the ABI argued: “The factors that led to the introduction of workplace pension auto-enrolment, and the lessons that have been learned from the experience of designing and delivering it, demonstrate that the workplace offers great potential as a means of increasing access to, and use of, IP.”
Indeed, in recent research with the Centre for Economic and Social Inclusion, the ABI has argued to government that, if IP coverage were to rise from its current 11% to the 27% seen in the US, this would save the Exchequer around £300m a year under the current welfare system.
“Everyone recognises the government has a deficit problem, and a welfare budget problem within that. But is some form of public/private partnership part of the solution going forward?” questions Lee Lovett, head of business development at Munich Re and chair of the industry group protection body Group Risk Development (GRiD).
GRiD’s position, Lovett argues, is that, while there may indeed be an opportunity here, there is unlikely to be much appetite – among businesses or politicians – for an auto-enrolment model.
“Rather than forcing through a requirement for employers to provide cover, perhaps there is another option around incentivising employers to provide cover or penalising employers that do not put cover in place, perhaps through higher or lower National Insurance contributions,” he says.
“It could be a natural evolution developed through competition in the market. Auto-enrolment pensions are never going to be the most exciting proposition, so if you can offer better protection too, that can start to differentiate the proposition,” he adds.
“I think auto-enrolment has to be completed as a project before, realistically, the government will even turn its attention to health and wellbeing issues,” says Iain Laws, managing director UK healthcare and group risk at Jelf Employee Benefits. “So, given that auto-enrolment is not going to be completed until 2018, if anything this is likely to be an issue for the general election after this one. But I also think there would be quite a lot of resistance. You do not hear organisations like the CBI or the CIPD arguing for this as a solution to the protection gap. At the moment the more immediate, pressing concern is around the pension and savings gap.”
Insurers, understandably, are keen on the idea “because it represents an opportunity to increase the market by an enormous factor”, he suggests. But even if a future government bought into the idea, the likelihood is there would have to be some form of state-backed or social IP company put in place, much like the National Employment Savings Trust (NEST) set up for pensions’ auto-enrolment, Laws points out.
Realistically, the opportunity therefore is likely to be less around how, or whether, GIP can be extended via auto-enrolment and more about how advisers can be using pensions’ auto-enrolment to open a debate with employers around group life insurance and, from there, to offer competitive solutions, argues Paul Avis, marketing director at Canada Life Group Insurance.
“There is a clear and present opportunity to grow the group life market using auto-enrolment and RTI data, to proactively promote that benefit. Group life is the simplest benefit to understand, and is one of the most likely to have resonance at the end of an auto-enrolment pension discussion,” he says.
But even if the principle is simple enough to understand, there is still likely to be a considerable challenge for advisers when it comes to communicating the benefit, indeed the relevance, of adding IP to the mix, especially when it comes to smaller businesses.
“Everyone expects to retire but not everyone expects to go off sick long-term or even die during their working lifetime,” says Steve Bridger, group risk director at Aviva. “So there is a lack of awareness and education around the likelihood of long-term sickness or falling into sickness absence, especially considering the fact we are likely to be working for longer.”
James Walker, head of product proposition and group protection at Legal & General, says: “With auto-enrolment everyone gets a pension pot of their own. With IP, traditionally the employer is the policyholder and has one policy for multiple employees; so it is quite different. I think it is probably a harder sell, but I do not think it is impossible to do.”
Nevertheless, it is a debate that is likely only to intensify. As Helen White, head of protection at the ABI, points out: “We are looking for some kind of legislative action from the next government or a future government that will lead to reforms in the welfare system and will make greater use of income protection insurance through the workplace part of that solution.”
WHAT DIFFERENT MODELS ARE OUT THERE?
The ABI’s report Welfare Reform for the 21st Century: the role of income protection insurance outlines a number of possible models that could be looked at.
The Netherlands model
In the Netherlands replacing income for those who leave work because of illness or injury rests on employers’ shoulders. Employers are mandated to pay their employees sick pay for at least two years, at a minimum of 70% of prior earnings.
“Employers are penalised if they do not ensure a strict and effective rehabilitation and return-to-work process and plan, or the state thinks too many of their employees are returning to work after two years of sick absence,” the report outlined.
Employer contributions also fund the long-term state disability benefits that individuals flow on to if they reach the end of their sickness benefit period, and employers have to pay higher contributions if the number of their employees that move onto these benefits crosses a certain threshold.
“This significant risk to employers, both in terms of paying sick pay and contributing to state disability benefits, has created an active market for private insurers to protect businesses against this risk. This, in turn, has mobilised significant efforts towards preventative and rehabilitative work with employees, to minimise the employer costs associated with short- and long-term sickness absence,” the report added.
The Australian model
In Australia income protection or “Group Salary Continuance” (GSC) is mainly available as a non-compulsory option within the state’s compulsory “Superannuation” workplace pension system.
“IP awareness has been raised by placing it in the context of employer-organised retirement savings, and employers offering GSC are seen as better employers to work for,” the report highlighted. There is a “Total Permanent Disability” scheme, which is a compulsory part of an employer’s Superannuation scheme.
Time-based collective insurance
Under this model, employers would be required to put in place insurance that provided full income replacement for all employees for up to one year of serious illness or injury.
Individuals or employers would then be expected (through auto-enrolment) or required (through compulsion) to have some form of income insurance to cover further absence up to a specified limit, for example five years. When this time limit is up, the state would step in to provide an income safety net.
Individual income replacement insurance
This option would mean the introduction of voluntary or compulsory “individual accounts” which individuals would pay for through their own – or perhaps also employer – contributions alongside their pension and other workplace benefits. This could be based on an auto-enrolment opt-out model, alongside NICs incentives.
The advantage of such a system would be that it would be simple and individuals would be incentivised to make provision for themselves, the report argued. But, as with the time-based collective model, issues around awareness, complexity and perceived value would need to be addressed, as would how such a system meshed with or complemented the welfare system so as to ensure the benefits of such insurance were clear.
“In addition, there would likely need to be additional state top-ups or ‘credits’ for those that could lose out due to absence from work for caring responsibilities [as exists in state pensions] or long-standing health conditions,” it added.