The time has come to make the case for bringing income protection within auto-enrolment says Aviva UK Health head of group risk Steve Bridger
State pensions were introduced in their current form in the late 1940s. On average, men who reached the state pension age of 65 in 1951 were expected to live 11 years after retirement, and women could look forward to 13 years.
Since then, due to better medicine and healthier lifestyles, the average life expectancy for both males and females has risen. On average, men retiring in 2013 at age 65 can expect to live for another 18 years, whilst women can expect to live for 21 years after retirement.
It’s not surprising then that the cost of retirement has risen. We’ve seen two recent responses to this with increases in the State Pension Age and the introduction of auto enrolment.
But with a longer career comes increased probability that illness or injury will affect the employee. The need to be able to manage and minimise any sickness becomes even more critical.
Yet we have also seen a reduction in state benefits available for those suffering disability and being absent from work. Those unfortunate enough to suffer prolonged absences from work are likely to see their savings diminish and contributions to their pension cease unless there is appropriate support in place.
One solution available is income protection. This offers a percentage of income during sickness and, in many cases, continued payments to pension savings. Insurers not only help by providing income – around £305m worth of income protection claims benefit was paid in 2012 – but increasingly by assisting with rehabilitation strategies in order to minimise the length of the employee’s absence. In more serious cases, the insurer can provide income and pension contributions up to State Pension Age.
We also need to recognise that in the event of the death of the ‘breadwinner’, dependants will need support in adjusting to their new situation. This can be especially important when families have young children or have large financial considerations, such as a mortgage. These ‘early’ years are also the point at which focusing solely on a pension will not be enough, as the fund is unlikely to have grown significantly enough to provide a dependant’s income.
With the focus firmly on auto enrolment, the need to protect those who don’t have an incident free career has taken second stage. Employers who have already linked additional benefits to their pension scheme, such as income protection and death benefits, are in some cases not providing this cover for auto enrolment members. This is unfortunate, as the support and benefits offered are of value to all.
A solution doesn’t need to add further cost and complexity to the employer though.
Using auto enrolment to protect employees’ income, pension contributions and dependants if the worse happens before retirement, as well as providing for them in retirement, may be the answer. Schemes could include life cover and income protection as well as retirement savings.
We’re not talking about more money from the Government here either – as the benefits may be entitled to full tax relief – in fact, benefits would accrue to the Government via taxes and a reduction in the need to provide means-tested benefits
Nor are we talking about more money from the employer or the employee; just flexibility in how auto enrolment contributions are used. Benefit will actually accrue to the employer, as the insurer looks to use their expertise to minimise periods of sickness absence and reduce disruption to the employer when specialist and skilled resource remains unavailable.
Alternatively we could move to full compulsion through the workplace. But in a difficult financial era, when employers don’t necessarily have the monetary resources to provide employee benefits that they have never spent on before, let alone valued, is this really the answer in the current climate?
It is up to the industry to grab the opportunity and grow the societal value of giving employees access to valuable protection benefits, whether through individual provision or via the benefits offered in the workplace.