An old problem that won’t go away

The introduction of the Employment Equality Age Regulations in 2006 made it unlawful for employers to apply different terms and conditions, including benefit provision, on the basis of age. The regulations include a national default retirement age of 65. Employers can require an employee to retire at age 65 or older as long as proper retirement procedures are followed, and this will not currently count as age discrimination.

This means that employee benefits such as group income protection can be set up so that they cease at the planned retirement age.

It was always intended that the default of the retirement age would be reviewed in 2011. This has now been brought forward to 2010 and it is widely expected that the default retirement age will be removed at that point. In addition the use of a default retirement age has been challenged in the courts – the Heyday age discrimination case, the judgment of which was handed down in March.

GRiD, the group risk industry body, is talking to Government to ensure that the removal of the default retirement age does not mean that it will be unlawful to have an expiry age for benefits such as group income protection. The arguments being put forward include the use of an expiry age for group income protection is essential for insurers to be able to price the product as it enables the maximum potential liability to be calculated.

We are also arguing that without an expiry age, income benefits could become an open-ended commitment payable until death at any age. Even if it was possible to price the product on this basis, which is unlikely, this would make the cost prohibitively expensive.

Furthermore, the expiry age often ties in with the age at which an employee becomes entitled to a pension benefit, so the pension kicks in when the income protection benefit ceases. This mirrors the approach taken by the State where entitlement to Employment and Support Allowance ceases at the age the State pension becomes payable in order to avoid overlapping provision of benefits.

We have also flagged the fact that income protection benefits that were payable indefinitely could be seen as a means of topping-up a deficient pension. Income protection is not designed or costed to be a pension.

There is a concern that the financial incentive to return to work once a person becomes entitled to a pension benefit would be greatly reduced. For example, if someone had a pension that paid 30 per cent of salary they would be better off continuing to claim income protection benefit, especially if they could take a pension at the same time.

We have also pointed out that group income protection policies are usually set up with a two-year rate guarantee. The policies currently in force will all have an expiry age and many of them will still be in force in 2010.

The removal of the use of an expiry age is likely to lead to group income protection becoming prohibitively expensive or for the cover provided to be reduced in some way.

The ability to continue to use a default retirement age will ensure that group income protection insurance can be provided in a cost-effective way.

Group income protection provides far more that just a monthly income benefit. Group income protection insurers can work with employers and employees to help incapacitated employees return to work. Insurers have rehabilitation expertise and access to resources which may not otherwise be available to employers.

The benefit will be a proportion of the employee’s salary and frequently also includes cover for pension contributions (so that a pension will be available to the incapacitated employee when they reach the pension age).

And insurers will usually provide a certain level of cover for all members of the scheme without any medical underwriting and irrespective of their state of health (a free cover level). This simplified approach not only reduces the cost of providing the insurance but also makes cover available to people who may not be able to get cover as an individual (or could only get cover on unfavourable terms). The inclusive nature of group risk insurance is one of the many advantages of this type of contract.

There are currently 1.67 million people who are currently covered by group income protection schemes. It is vital that the industry gets the benefits of group income protection schemes to both employers and employees so that scheme members continue to receive this valuable benefit and are not left to rely solely on the State in the event of prolonged illness.