Auto-enrolment and group risk

Pensions auto-enrolment is good news but it will have unforeseen consequences says Ron Wheatcroft, technical manager at Swiss Re

Ron Wheatcroft

Auto-enrolment places employers firmly in the forefront of financial provision. The recent decision to defer implementation until after May 2015 for companies with fewer than 50 employees will no doubt be welcomed by stretched businesses. Opt out rates may be lower if auto-enrolment were to be introduced in a more favourable economic climate but the uncomfortable truth is that the announcement defers participation for those most likely to be without any pension provision.

This is unfortunate since our latest Insurance Report, “Facing life’s responsibilities”, shows that consumers are becoming far more realistic about the cover they hold and the need to act. The conundrum is that they have become more receptive to messages just as their finances are coming under ever-increasing pressure.

In considering funding auto-enrolment costs, only 4 per cent of employers said that they were very likely to consider removing group risk cover. As this was a prompted question, it suggests that, once in place, group risk schemes are valued by employers as an essential part of the remuneration package. This, though, is no cause for complacency as the research also indicated that many employers are ill-prepared for auto-enrolment with little real thought given to how it will be paid for. Many existing benefits could come under greater scrutiny than ever before as businesses seek out every saving.

Auto-enrolment should present opportunities for advisers who are not already helping employers to meet their obligations to begin doing so. For more paternal employers, it could be a catalyst to build further their positive relationship with their workforce but, for others, the cost will be seen as a “grudge purchase” or a form of disguised taxation. Irrespective of how they regard it, advice could open up other opportunities, for example exploring the need for key person protection for the business and succession planning, markets which remain under-penetrated.

For more paternal employers, auto-enrolment could be a catalyst to build further their positive relationship with their workforce but, for others, the cost will be seen as a “grudge purchase” or a form of disguised taxation

It is concerning that the provision of advice to smaller employers may not be viable if they are reluctant to pay fees for advice or agree to fund the cost through consultancy charging. We see direct parallels here with likely changes in the retail market for lower earners once the RDR comes into force. Employers who do not have advice are likely to enrol their employees into Nest.

The research also considered if the workplace could be a convenient access point for employees to purchase life or protection insurance. Overall, 46 per cent of employees said that they would be comfortable with this, rising to 56 per cent for employees under 45. This suggests that where auto-enrolment is presented positively, or where there is already a suite of benefits in place, there may be opportunities to build the relationship through facilitating access to other products.

Advice to employers could also help them to assess how effectively they manage their business. There are already many excellent examples of good practice where businesses are supported by the financial services market and occupational health support to manage staff sickness proactively. Surprisingly though, despite government statistics showing that over 150 million working days are lost to sickness every year, 85 per cent of employers considered it was not an issue for their business. Of those for whom it was a concern, almost 70 per cent were unable to quantify the problem. Many who were not concerned may simply be unaware with the true cost of absence lost elsewhere in the business.

The sickness absence review recognises the problems faced by employers. It recommends, among other things, setting up a government-funded Independent Assessment Service to improve access to an in-depth assessment of an individual and advice on how people could be supported on their way back to work. This might be very helpful, provided it can then be supported by earlier treatment.

The review recognises the good work that group risk insurers do in getting people back to work, but also concludes that group income protection is designed mainly for high earners and that insurers are unlikely to find interventions for lower earners cost effective. In doing so, it rather glosses over the inclusive nature of schemes, with automatic cover meaning that most employees are included without any evidence of health and that, even for a low earner, the capital value of a claim can be substantial. More work by the industry will be needed to clarify understanding of how group income protection could play a role before the Government issues its response, probably in the second half of 2012.