Paul Avis: Why it’s worth expanding closed or limited schemes

Paul Avis

The expansion of closed, limited or executive schemes to new employees can make a lot of sense, says Canada Life Group Insurance marketing director Paul Avis

Executive or limited category group risk schemes that are being quoted on are still out there. I wrote my first article on this topic in 1992 and I hate to say it but not a lot has changed. However, it is still worth remembering the benefits of expanding these schemes to all employees.

We must be doing something right in the group risk world. Since 2006 we have added 2,294,778 employees, of which about half were added after 2011, demonstrating the value that existing insured employers place on these benefits. Expansion is very much on the corporate agenda, so have you tried quoting additional, budget options for new categories?

The market now covers 11,513,425 employees, with death benefits for 8,861,092 comprising the largest category and group critical illness for 546,153 being the smallest, while group income protection covers 2,106,180 people. So where employers have schemes it seems they understand the importance of differentiating themselves to both retain and gain employees – especially as all now have a pension – and so are expanding membership.

Much expansion has occurred on the back of things such as auto-enrolment – for example, where pension scheme eligibility is retained – and includes the newly automatically enrolled, continuing welfare reform – which highlights the ever-increasing need for GIP – and the increasing presence of online and flexible benefits. For CI this is particularly important with 66 per cent of this market by premiums bought through flex.

There are further advantages of expanding schemes, specifically in the SME market, regardless of product type. First there is the budgeting side, where schemes of less than 10 to 20 insured employees attract a specific, ‘single premium cost’ and so each member has a specific cost allocation. Where an employer has more than 10 to 20 covered employees, insurers offer a ‘unit rate’ where the rate of premium applied is a percentage of salary or benefit that can be guaranteed for two to three years. The cost in pound terms will vary, but not the rate.

Organisations that intend to expand in the following year can plan their budget accordingly. However, if the scheme membership or benefits rise or fall by more than 25 per cent, the terms of the guarantee may be broken.

While single premium underlying rates are guaranteed for two to three years, there can be substantial cost increases if the membership remains static. This will be due to the workforce growing older and annually going through age bands. Closed membership schemes will get only more expensive as employees get older.

Unit-rated schemes work on the average workforce age so, by including younger workers, specifically those who tend to be less senior, the rate percentage of benefit/salary can fall substantially. In effect, the more people covered by getting to a unit-rate position means potentially less cost as a percentage of benefit and salary roll as well as improved budget certainty for the organisation.

For premiums to be an allowable expense against corporation tax, they should form part of a remuneration package and be ‘wholly and exclusively paid for the purposes of the trade’. In most cases, tax relief will be granted unless HMRC can demonstrate a non-trade purpose for the deduction. If all scheme members are included in the calculation of the unit rate, the cost is the same per percentage of benefit or salary roll. So a further benefit to unit rating is that the likelihood of premiums being allowable can be argued.

If these are not good enough reasons to expand schemes, remember that the more people included in a scheme, the higher the ‘free cover limit’ will be. This is the amount of benefit each person can gain without medical underwriting being required.

Although these limits have increased, the more people who are included, the less need there is for higher earners/decision-makers to be medically underwritten.

In summary, if it can cost less per pound of benefit/salary, is more tax efficient and provides cover for senior people without the hassle of being medically underwritten, why wouldn’t you expand closed, limited or executive schemes to new employees?