No exemption, no protection

The group risk industry could face dire consequences if no exemption is granted on the removal of the default retirement age says Ron Wheatcroft, technical manager at Swiss Re.

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Over the past months, the group risk market and other players have been considering their responses to the government’s consultation on removing the default retirement age (DRA) during 2011.

At a time when people are living longer, and may need to work longer to achieve an adequate income in retirement, we support enabling those who need or wish to work beyond age 65 to do so. But in the absence of an exemption which allows an expiry age for risk benefits the cost of insurance could increase to the point where employers cut back the cover for everyone or remove it completely. It is encouraging that the government consultation recognised that this could be a problem.

Although providing life and critical illness cover provides some challenges, especially with flex arrangements, it is a particular problem with group income protection (IP) where data used by Swiss Re to calculate the income protection gap shows that more than 70 per cent of all insured IP benefits in the UK are provided through employer schemes.

Permitting an expiry age within legislation should not mean that employees over that age receive nothing. Rather, the value of their overall package should be the same but with greater scope to agree with the employee how that value might be used more effectively. Linking the expiry age to the State Pension Age would be the most robust solution and one which should be readily understood and accepted by scheme members.

The removal of the DRA will force all employers to review their employee benefit packages to ensure that they comply with the new legislation. An exemption for risk benefits would give employers and advisers confidence about termination at a specific age. It would give far greater certainty than ancillary guidance to the legislation, faced with which employers may still need legal advice on whether their own arrangement left them vulnerable to a challenge.

With no exemption, group IP schemes would become an open-ended commitment for employers in the same way that final salary pensions schemes are. Theoretically, the risk could be priced and insured but, in practice, an open-ended commitment would be unaffordable. We have seen pension schemes move away from the open-ended commitment of defined benefit schemes. Similar steps to limit or remove IP exposure would leave employees to make their own arrangements or to fall back on to the welfare state.

Swiss Re research shows average earners with young families would be most vulnerable.

Too often, we have failed to convince consumers to protect the risk of being unable to work for more than three or six months

When the public purse is under immense pressure, it would be absurd if legislative uncertainty incentivised employers to cut or withdraw cover.

Employers’ cost pressures will lead them to consider all their discretionary spending, this at a time when some non-discretionary employment costs could grow, for example to meet employers’ auto-enrolment obligations into qualifying pension schemes or Nest. Unlike pension provision, group risk cover is entirely voluntary. The “reward” for employer paternalism could be a legal challenge, not an issue faced by employers who provide no benefits.

Would we see more buying of personal cover if employers were to withdraw or reduce benefits? Just now, it looks pretty unlikely. Sales of individual IP products are in decline with the possible reasons for and solutions to this debated in other articles and forums. Too often, we have failed to convince consumers to protect the risk of being unable to work for more than three or six months.

And let’s not forget that tax rises, including the forthcoming VAT increase, will reduce consumer spending power, especially those for whom the ability to purchase any risk product is marginal. While the withdrawal of the public sector will create opportunity for the private sector to replace or augment what remains, this will take time to work through.

Everybody would gain from an exemption – employers through greater budgetary certainty and reduced legal risks, average earners and below, those most in need of cover and less able to provide for themselves elsewhere, older employees through the ability to obtain an equivalent benefit to suit their circumstances and the State through increased tax and NI contributions and reduced benefits expenditure.

Ending on a positive note, I am pleased that the FSA has recognised in Feedback Statement PS 10/13 that commercial business is excluded from the requirement for disclosure for pure protection services associated with investment advice, thus removing any uncertainty in the market.