Time for new designs

Now the default retirement age reprieve has been granted, the group risk industry can start to look at product development, says Edmund Tirbutt

Awaiting the outcome of a government ruling that some felt even threatened their field’s very existence has not been easy for the group risk community. So we should not begrudge a moment of celebration of January’s announcement that insurance products will enjoy a suitable exemption from the scrapping of the default retirement age (DRA).

When the DRA disappears this October employers will not have to offer group risk products beyond the state pension age. As this is the age at which state disability benefits cease, the exemption is logical enough, although previous governmental rulings on financial services issues have tended to show a distinct lack of logic.

Industry body Group Risk Development (Grid) have been working tirelessly on the issue, with Catherine Baxter of Bupa Group Risk, Bob Cheesewright at Zurich Corporate Risk and Ron Wheatcroft at Swiss Re Life & Health all understood to have been driving the lobbying process, with the Investment and Life Insurance Group (Ilag) also making a noteworthy contribution.

Ron Wheatcroft, technical manager at Swiss Re Life & Health, says: “It’s generally recognised that group risk has been very much in the background as far as government thinking is concerned but the work done by Grid, Ilag and others reflects the fact that the group risk market has come of age in terms of getting messages across. It shows that it has developed the ability to talk to key officials, getting them to understand the case.

“Grid worked closely with a number of leading employment lawyers, and it has all been a really good exercise in terms of bringing all the key people together and making sure all the key messages were understood. Work has been going on steadily since 2006 and the whole DRA thing has clearly dominated so much of peoples’ time and thinking.”

Everyone has breathed a big sigh of relief. If they hadn’t exempted group risk it would have constituted crass incompetence and could have had a massive negative impact, but you really never know until the final decision

Although a number of issues have still to be resolved (see box overleaf), obtaining the exemption could bode well for the group risk industry in a number of ways, and even those who aren’t getting overly excited readily acknowledge that the announcement has at least removed a very serious potential negative. After all, if no exemption had been granted, the costs involved with having to insure older workers could have resulted in many employers cancelling schemes altogether.

Wojciech Dochan, head of commercial marketing at Unum, says: “Everyone has breathed a big sigh of relief. If they hadn’t exempted group risk it would have constituted crass incompetence and could have had a massive negative impact, but you really never know until the final decision.”

Some who tried to see the glass as half full used to emphasise that failure to obtain an exemption would give rise to valuable consultancy opportunities for intermediaries and a much needed challenge for insurers to come up with innovative new products. But consultancy opportunities should also be plentiful as a result of actually obtaining the exemption.

Dochan continues: “There is certainly now a consultancy opportunity for many of the brokers out there. There are already over 1.5 million over 65s in the workforce and therefore there is a challenge to apply some kind of benefit structure for those employees who want to carry on working. It is too early to say what percentage of employers will want to offer anything to the over 65s but many were already offering life cover to 70 and some were already offering income protection to 70.”

Even when employers don’t want to offer benefits past the State pension age the fact that this pension age is due to increase should in itself throw up consultancy opportunities.

James Walker, technical manager at Legal & General, says: “It looks almost certain that employers will still have to review benefit offerings because at the moment the state pension age is due to rise to 66 but the government is also possibly planning to increase it to 68, and there is talk of it accelerating this. The Pensions Bill, which should come out later this year, is likely to confirm an increase in the state pension age to 66 to be phased in from 2018 and all eyes will then be on a further rise, which could come in sooner than expected.”

The success achieved by Grid and others in proving it is possible to negotiate with government through sensible dialogue should also bode well for the prospect of forming public/private partnerships. Both the Grid Regs Group and the Income Protection Task Force (IPTF) are understood to be planning to move things forward in this respect. With the government so palpably short of money and the group risk sector so badly in need of tapping new areas of demand for its products there should be opportunities to join forces in a way that is mutually beneficial.

There will also clearly be implications for product development and, whilst there may not be an immediate avalanche of new launches, it is reasonable to expect more activity than when insurers still had the unresolved DRA issue hanging over them.

Chris Ford, director of group risk at Jelf Employee Benefits, says: “Employers can now quantify costs, so we should start to see a little bit of flexibility in products. Insurers are already starting to contact us to ask us into meetings to provide feedback on proposed new products. I can’t see them changing by huge amounts and it won’t jump-start things but I can see a fair amount of tweaking.”

Some insurers had in fact already used the DRA issue as an opportunity to develop more flexible products before they knew which way the wind was going to blow. Canada Life, for example, began overhauling and reviewing its product range last autumn with the ambition of providing much simpler products that can be customised to suit employers’ needs. Last December Legal & General also launched its Workplace Recovery Advantage, which is unusual in offering limited-term income protection to any age you require.

Even commentators who are not going overboard about the potential implications of obtaining the exemption are tending to emphasise that it could finally result in a move towards limited-term income protection. But, although this may increase consultancy work for intermediaries, it will reduce premium income for providers.

John Russell Smith, client director Lorica Consulting, says “I would temper everyone’s excitement about the DRA exemption. Obviously it’s a good thing but it won’t resolve some of the long-term issues. As long as the income protection retirement age is going to track the state pension age there will be an increased liability to the client.

As long as the income protection retirement age is going to track the state pension age there will be an increased liability to the client

“We still need to overhaul income protection provision as it stands so, rather than just talk about limited term, I think clients will actually make that jump. I expect the more paternalistic ones will opt for five or 10 year benefit terms. Our clients are looking at seven to 10 year terms with great interest at the moment, both with and without capital options.”

Furthermore, even though obtaining the exemption has given the group risk field a much needed confidence boost, any real momentum in obtaining genuine new business is probably still a good couple of years away. Firstly there needs to be an economic upswing and secondly employers need to fully come to grips with Nest, because the fact that pensions involve compulsion means that group risk will always play second fiddle. So although the storm clouds have lifted there is unlikely to be a barbecue summer.

The finer details

At the time of writing there are still a number of unresolved issues relating to the DRA exemption, although it is understood that the Department for Business, Innovation and Skills will issue clarification about some or all of these any day.

For example, although it has been made clear that insured group risk schemes will receive an exemption, there has been no indication as to whether self-insured schemes will qualify. It is also unclear what will happen with regard to those workers who are already receiving cover after the age of 65 or to those claims currently being paid.

Mention of group critical illness cover has also been distinctly absent from the original exemption announcement, which referred only to group income protection, life cover and private medical insurance (PMI). Even for these latter products, it is not clear whether voluntary schemes are exempted and how the changes as a whole fit in with age discrimination provision in the Equality Act.

Grid spokesperson Katharine Moxham (left) says: “Although we are still waiting for clarification on a number of points, this was an exceptional outcome and we hope that government will follow the direction on these other issues that we have been lobbying for. We have, for example, pointed out that the DRA was also a key issue for self-insured schemes, and we are hoping these will get an exemption as well.”