Income Protection Forum: Myths and Misconceptions

Group income protection is being held back because employers do not fully understand the product. Edmund Tirbutt identifies barriers and opportunities

Confusion over employment contracts, difficult HR consultants and misunderstandings as to what is covered are all holding back distribution of group income protection. That was the view of delegates at last month’s Corporate Adviser/Unum industry forum -Income Protection: Shaking Up A Stagnant Market.

Despite this, Unum’s chiefnum’s chief executive officer Jack McGarry and chief marketing officer Marco Forato had no shortage of figures to illustrate a wealth of opportunity in the market. Only one in 10 workers currently has income protection and companies that do offer the product only cover one in seven employees on average.

The duo also pointed to two distinct areas of opportunity: securing increased penetration at the smaller end of the market and increasing scheme membership at the larger end. 80 per cent of private sector companies with over 1,000 employees have group income protection but they only cover one in 10 employees with it. Companies with under 200 employees, however, cover seven out of 10 but only 1 per cent of those with 10 to 50 employees and 15 per cent of those with 50 to 200 employees actually have a scheme.

Nevertheless, McGarry and Forato also highlighted some very significant barriers to capitalising on this potential. The three main reasons commonly given by employers for not buying group income protection were cost, lack of awareness and not wanting to be bound to their employees.

Encouragingly, attendees agreed that these barriers were largely solvable and that, in particular, addressing the issue of employers not wanting to be bound to employees was primarily a question of myth busting. Policies can now be set up on a pay direct basis so that claimants can be removed from the payroll and the responsibility of dealing with them becomes entirely the insurer’s.

McGarry said: “It’s easy to wrap income protection into your employment agreement in a way that allows you to terminate employment when an employee has gone off because of a long-term disability. It’s a myth HR people believe that the product will bind them to something that’s going to be horrible, because there is now a way of doing it that places no burden on the employer beyond the burden they have for someone that is currently uninsured.”

“One of the biggest barriers we have come across is legal advice. Either HR have managed a claim in the past that has gone pear-shaped from a legal perspective or they’ve attended a conference where a lawyer has advised not to go anywhere near group income protection as it’s a nightmare”

But John Deacon, head of employee benefits at Helm Godfrey, stressed that HR personnel often hold this misconception as a result of deriving it from their legal advisers.

He said: “One of the biggest barriers we have come across is legal advice. Either HR have managed a claim in the past that has gone pear-shaped from a legal perspective or they’ve attended a conference where a lawyer has advised not to go anywhere near group income protection as it’s a nightmare. So we need to focus on public relations with the legal fraternity.

“HR is desperately trying to avoid anything involving any element of discrimination. So we need to take them on a journey and help them understand what this contract is all about so that they might say to legal advisers that, although there have been problems in the past, it is now important to try to overcome them.”

Steve Herbert, head of benefits strategy at Jelf Employee Benefits, observed that lawyers are embedded in what they’ve been trained in and in what they’ve known to be the case in the past, and Dave Middleton, managing director of Portus Consulting, caused amusement by pointing to the irony of the fact that the legal profession were ardent buyers of income protection. All of his organisation’s 60 law firm clients have such a scheme in place.

Laurence Power, consultant at Kerr Henderson, also highlighted a need to educate HR consultants because companies with limited HR capabilities often use their services.

Although HR consultants are not solicitors they are in theory specialists in employment law, so if they advise against having income protection it is likely to result in sales falling through.

But Power’s suggestion that employers who use pay direct should commit to paying claimants’ pension contributions met with opposition from Forato.

Forato said: “Would you rather have 60 per cent of salary and no pension contribution or nothing? I would rather have 60 per cent of salary, and many employers can’t afford to cover pension contributions. The message we are trying to put out there is that, although ideally you would get inflation adjustment and pension contributions if the employer can afford it, it’s better to get 60 per cent cover to retirement than 80 per cent-plus pension for two years and after that nothing. The price will be about the same, and we know that 35 to 40 per cent of our claims go to retirement.”

Finance directors were considered a lesser problem but research commissioned by Unum into more than 800 of them provided some valuable insights into their attitudes towards group risk. 46.2 per cent said they were ’moderately involved’ and 25.7 per cent ’very involved’ with defining their employees’ benefit packages. But, at the same time, they spend relatively little time working on such matters in a typical year – less than one day for 19.6 per cent and between one and three days for 29.8 per cent. Worryingly, a staggering 234 finance directors thought income protection paid out if you are made redundant, compared to 239 who thought it didn’t.

Herbert felt this shock finding reflected their lack of engagement with the product. He also stressed that it would assist intermediaries if providers could help them get in front of finance directors, which were more difficult to access than HR.

Lee Christian, senior consultant, health and risk practice at JLT Benefit Solutions, observed that when finance directors did fail to sign off schemes it was normally due to cost but emphasised that such situations presented “An opportunity to inform them that you may have something else that could fit in with their budgetary needs and with what they are trying to achieve as a company.”

“His firm conducted a survey before putting in a pure voluntary Unum scheme, and 75 per cent of employees had said they had wanted the cover.But once the scheme was implemented take-up was only 1.5 per cent!”

Unum’s research showed that 26.7 per cent of finance directors would be ’likely’ and 11.9 per cent ’very likely’ to introduce income protection for employees if there were tax breaks to incentivise them. But 60 per cent of round table attendees thought it was ’unlikely but possible’ that the tax treatment of the product could be changed in the next five years, and 20 per cent thought it would never happen.

Some present wondered whether the industry had missed a trick when inputting into the government’s recent review of sickness absence by focusing too much on the ability of income protection to assist with rehabilitation as opposed to giving financial support to the long-term disabled. After all, group income protection could potentially have a much more immediate benefit to the State if it was given tax breaks than auto-enrolment is expected to have in reducing the State pension burden.

Herbert said: “We need to spin the conversation around because income protection was almost an afterthought in the sickness absence review. The main focus was on returning to work but around 40 per cent of long-term sick and injured don’t actually return. If you accept that those 40 per cent would be better served by having an insurance policy then suddenly that’s a huge saving for the State. This is the way we need to tackle it politically.”

The clear lack of interest in pure voluntary income protection – that Unum now offers as an option on its Select product – made the need for tax breaks for company-paid cover seem even more crucial.

McGarry said: “Everyone likes the idea of Unum Select until you try and get employees to put money in, then it doesn’t happen because employees don’t understand it enough. Even in the US, which has a very big voluntary market, income protection plays a relatively small part and the interest is in more easily understandable products.”

Helm Godfrey’s John Deacon provided the proof of the pudding. His firm conducted a survey before putting in a pure voluntary Unum scheme, and 75 per cent of employees had said they had wanted the cover. But once the scheme was implemented take-up was only 1.5 per cent! “Only two months earlier the workforce had understood that they would be spending more on trips to Starbucks and on mobile phone contracts than they were on protecting their income during their working lives. I don’t know why, but when push came to shove they didn’t do it. You can take a horse to water but trying to get it to drink is very difficult,” he said.

A reluctance on the part of employers to allow face-to-face meetings was considered a major barrier to securing decent take-up rates. Forato described how employers often initially say that they will allow you to conduct face-to-face meetings and hand out literature but eventually say they are too busy and ask you to email employees – which never works.

Middleton even cited the case of a law firm client dropping out of a scheme because it couldn’t justify the costs of its 600 lawyers spending time in face-to-face meetings.

Few attendees felt that auto-enrolment was likely to actually boost demand for group risk products because, although in theory it provided a great consulting opportunity to review employee benefits as a whole, the industry tends to think in silos rather than holistically. But nobody envisaged the additional costs of auto-enrolment resulting in a really dramatic downturn in demand for group risk products.

In fact Middleton suspected that benefits will remain the same and that workplace pension reform will be funded through other vehicles such as reduced salary increases and salary sacrifice arrangements. During the last recession he only saw benefits reduce in one client out of 150.