Group IP products do not sit well within a simple products framework. So is compulsion, soft or otherwise, a realistic alternative asks Canada Life Group Insurance marketing director Paul Avis
When the government launched stakeholder pensions in 2001, the plan was that they would be a simple, low cost and easy to access pension that every employer had to offer, by law, to encourage more long-term saving for retirement – particularly among those on low to moderate earnings. Although many stakeholder pensions have been taken out, consumers did not suddenly rush to start saving for their pension and only 1 in 3 private sector employees ended up saving in a workplace pension. Clearly this was not the hoped for outcome. As a result, from October 2012, the rules on stakeholder pensions changed. Employers no longer had to offer these and instead the government introduced automatic enrolment into workplace pensions to take over the intended role of stakeholder pension schemes. The onus is on the employer to enrol all qualifying employees into a pension scheme, with pension contributions from both the employer and the employee. Employees are required to opt out if they do not wish to be included.
The Government’s approach on pensions has emphasised the need for self-provision. Individuals can no longer expect the State to provide for them and this is demonstrated, perhaps even more strongly, with the Government’s welfare reforms.
In a similar vein to pensions, the Government, via the Sergeant Review of Simple Financial Products, has recognised that consumers are not purchasing enough financial products to meet their needs in times of difficulty.
It is important to understand why consumers do not buy income protection benefits. Is it the belief that the State or the employer will provide when an employee is sick? Is it the complexity of the tax regime? Or is it simply that people do not believe serious illness will ever happen to them?
To try and overcome some of these barriers, the Sergeant Review recommended that trade associations representing insurers should develop simple financial products, which can comply with a set of high-level principles. One of these key principles is the need for the individual to be better off as a result of the benefits provided by purchasing the insurance. Whilst that principle sounds very reasonable, it can be quite difficult to meet in all circumstances on an individual product, as any benefits may be means-tested against State benefits. So, work on a simple income replacement product review has started, under the stewardship of the ABI and Grid with a focus on workplace distribution.
So if individually purchased products are not the answer, what are the options? The planned introduction of the Health and Welfare Assessment and Advisory Service demonstrates their awareness of the financial benefits of early intervention in absence to manage sickness.
A compulsory, employer-sponsored GIP product may be the way forward. If the Government were to advise every employer that they have to contribute an extra 0.5 to 1 per cent of salary roll on top of already stretched pension funding it could be unpopular. But the reality is that this would offer a reasonable level of absence management protection. Another approach could be for the employer to be able to opt in on a case-by-case basis. For example the government could say that employers could use up to 0.5 per cent out of their 3 per cent employer contribution to provide a limited benefit payment income protection plan, with the remaining 2.5 per cent continuing to support pension provision. Either way, this would enable employers to support employees in the workplace, as well as when they have left service.
So what happens to GIP if this initiative is not introduced? My concern is that, until consumer demand is established, the workplace marketing of income protection will never achieve growth for our industry, whatever we do as an industry on simple income replacement. If a compulsory or opt-in disability product does not happen then where does this leave the GIP market?
We had almost 2,000 less policies in the market in 2012 than we had in 2006. With only 17,224 UK employers providing GIP cover for their employees, this seems to be a woeful level of penetration. Whilst we can hope that post recessionary Britain will help employers value the staff attraction and retention benefits that group benefits provide and that they start to appreciate the worth of the rehabilitation support and third party services, such as EAPs and second opinion diagnosis services, that GIP providers offer, I am not confident the market will grow by employer numbers without this funding opportunity becoming a reality. The benefits for all parties from a compulsion or opt-in disability product are great but we need to start to articulate them fully. All of us should be working to make the possible probable.