The DWP wants the group risk sector to make its case for fiscal incentives for protection through the workplace. Edmund Tirbutt considers the options on the table
All significant change has to start somewhere, and many commentators within the group risk community feel that we have recently witnessed the catalyst that could result in major inroads being made into the reduction of our well-documented protection gap.
Comments made by a very senior Department for Work and Pensions (DWP) figure to a journalist at the Conservative Party Conference this September suggested that if the group risk industry was able to make the case for government backing for group income protection then it would listen.
But the same source also made it clear that, although open to debate on the subject, the Government had yet to be convinced about the need to link income protection to pensions auto- enrolment. The fact that only 7 per cent of the workforce are currently covered by the product suggests a lack of any real demand, the source said.
Group Risk Development spokesperson Katharine Moxham points out that while the Sergeant Review of Simple Financial Products has made it clear that the Treasury placed some value on income protection, this was the first time anyone in government has actually said anything positive on the subject.
She describes it as “an opportunity we will seize with both hands” and highlights that Grid already has four years’ worth of research that can be used to track consistent positive relevant employer attitudes. New data due to be released shortly will increase the scope of that research to five years.
Moxham says: “The time is right and I would be disappointed if we haven’t made progress within three or four years, but we have to view it as a long-term project. Pensions need to be put to bed first and after that people might begin to question whether pensions would be enough. Auto-enrolment needs to be considered as a journey as opposed to a ‘once and done’, and I would therefore expect the whole process to evolve over time. Perhaps one step in the evolution could be to look at auto-enrolment in the protection space. ”
At the moment neither the DWP nor the Association of British Insurers (ABI) holds any official position on the subject, and the idea that group income protection could be linked to auto-enrolment really represents no more than a kernel of an idea that could be developed into a policy position.
No one doubts that a lot more work and modelling would be needed going forward, but with industry lobbyists having already secured an exemption for group risk from the abolition of the Default Retirement Age in October 2011, confidence in their abilities is at an all-time high.
Aviva head of group risk Steve Bridger says: “Grid and the ABI Protection Strategy Committee ought to be strong enough with the right data to make a compelling case to influence the change. This time, because of auto-enrolment and the understanding building around the protection gap, we should be able to demonstrate the positive benefits. I expect something to happen, even if it’s only a step towards the end result we all want, which is substantially more people having access to protection.”
The biggest potential game changer would be if, as with pensions, it could be made compulsory for employers to provide access to income protection, but with employees still having the right to opt out. This could potentially be arranged either so that a proportion of pension contributions -– which could possibly be less than 0.5 per cent of earnings – was put towards protection or that employers were required to pay an additional amount over and above pension contributions for the cover. But not everyone is in favour of either soft or hard compulsion, which would be a highly sensitive issue.
Moxham says: “I’m not sure anyone wants to be advocating that employers spend more money at the moment, but there could perhaps be a rethink on whether all of the current auto-enrolment contribution has to go towards a pension. Could a small amount be diverted to protection if the individual chooses, so the employer incurs no extra cost but can still facilitate access to protection cover? I think we will see fund providers partnering with group risk providers for this.”
Canada Life Group Insurance marketing director Paul Avis on the other hand is adamant that compulsion represents the way forward. He points out that group voluntary income protection hasn’t worked and fears that simple financial products won’t work either.
He says: “Over the next four years employers will have to be paying into pensions but during this time it would be sensible for the ABI and Grid to lobby hard for a proportion of pension contributions to be put towards disability on a compulsory basis. Compulsion would enable us as insurers to substantially increase our residential rehabilitation teams whereas at the moment we can’t justify the increases because the business isn’t there.
“In my view the business would have to be intermediated as there are so many differences between insurers, and all insurers would compete in the normal way via whole-of-market reviews.
“It would be a really competitive, vibrant market but the downside for insurers is that we would have to look at every single risk, including the more risky occupations we are not so keen on.”
A number of commentators feel that discussions between the industry and government should also focus on how income protection benefits interact with State benefits, especially in the wake of the transition to Universal Credit from October 2013. But there is widespread agreement that the industry should not muddy the waters by asking for any tax or National Insurance (NI) concessions.
Patrick Nolan, chief economist at independent think tank Reform, says: “I wouldn’t like the industry to argue for tax relief as it would really weaken their case in the current fiscal environment. Departmental budgets are suffering such deep cuts and the Chancellor has made it clear he’s not going to budge an inch on the subject. It’s always easier to win an argument about removing a distortion like the way that income protection interacts with means testing than about having extra tax relief.
“What we really need to know is how group income protection should be treated in the means testing process so that it doesn’t act as a disincentive. But it’s all subject to cost, and I would like to see some public discussion on how we move forward on this. There will be a cost to the change but Treasury officials tend to see neutrality as the goal, so removing a distortion is always going to be a more powerful argument than asking for further tax relief.”
The fact that employers offering income protection already enjoy corporation tax relief on the premiums and that the Treasury is currently consulting on the idea that tax relief of up to £500 per employee may be available if employers make small adjustments recommended by the Independent Assessment Service (IAS) is considered likely to be as good as it gets for the moment.
The IAS is also very much on group risk providers’ radars with regard to how it will interact with those individuals who are members of group income protection schemes. The government has been inviting tenders from private sector companies wishing to provide early intervention case management for the IAS, and there are fears that these could interfere with the way insurers handle their claims.
Ellipse chief executive John Ritchie says: “If employers are obliged to refer into this process after three weeks it will not be good news for insurers because they will want to do it their own way.
“We know from precedents on the Continent, in Australia and in lots of developing countries that if insurers don’t have control over the definition of disability and the claims admission and claims management process then they are goners.”
A logical solution to this issue would seem to be to allow employees in group income protection schemes to bypass the IAS at the point of making a claim, and Grid is in on-going discussions with the DWP on the subject. Sources involved in the development of the IAS say it is anticipated that employees of organisations with occupational health services will not be required to go through the IAS, but finer details will need to be ironed out.
As to the wider question of incentivising savings, stakeholders agree that the industry is at the beginning of what will be a lengthy dialogue on the matter. n