Employers face significant cost increases for their group income protection policies if they do not prepare for big reductions in state benefits from next April warns Aon Employee Benefits.
The consultancy says the latest stage in the reduction of state provision, which takes effect from April 2017 when the ESA benefit paid to those in the ‘Work Related Activity Group’ will be significantly reduced, exposes employers that link their benefits offerings to state benefits.
Under the changes claimants will lose the Work Related Activity Component of the benefit and so will only receive the basic ESA rate. Based on current figures this represents a drop of nearly 30 per cent for those aged 25 and over. In addition, rates of ESA for those in Work Related Activity Group have been frozen for four years from April 2016.
Aon says historically many employers took the fact that individuals who were ill or disabled for an extended period received a generous state benefit when designing their GIP scheme to ensure there was an incentive to return to work. But in recent years, the Government has significantly tightened state provision. State Incapacity Benefit was replaced with Employment and Support Allowance (ESA) in 2008, with further restrictions made in 2012. State benefits are now lower, harder to qualify for and are commonly only paid for a limited period of one year, with re-qualification needed for future payments.
ESA will eventually roll into Universal Credit, which will result in even more complexity and potential restrictions for state benefits, warns Aon.
Aon Employee Benefits chief broking officer, health & benefits UK and EMEA Matthew Lawrence adds that the planned approach proposed by a small number of insurers, of implementing a default benefit basis by for example having a fixed value deductible that is not linked to state benefits, should avoid an immediate increase in benefits and costs but may end up confusing members.
Lawrence says: “This issue is not new but many employers have still not taken positive action to review their insured GIP policy. They continue to have a benefit design which means that without action the level of insured benefit could increase, with significant proportionate increases for lower paid members. Consequently, employers could be subject to significant premium increases at their next rate re-test.
“While a default benefit basis is a positive step from a price perspective, it could be more confusing to members if the benefit design has an arbitrary monetary deductible. In addition, while insurers have differing default stances, we have recently seen a number of insurers change their stance, with some insurers not applying it consistently – differentiating between existing and new business. As this is an evolving situation it makes it vital that employers review their benefit design to make an informed decision rather than just rolling into their insurer’s default stance.
“The issues do not stop here. We would recommend that wherever possible any reference to state deductibles in the benefit design is removed. This can be done on a cost neutral basis. It could also potentially eliminate any implications of a ruling by the Financial Ombudsman Service, if GIP claimants who lose entitlement to state benefits, look to their employer or the insurer paying their GIP claim to top up the claim payments to make up for the lost state benefit.”