Reform overload

A year ago, welfare reform was meant to spark interest in group risk. Edmund Tirbutt finds the credit crunch changed all that

Whatever happened to government stealth? You would expect it to be peaking all over Whitehall so close to a general elelection, but in the area of welfare reform it has been conspicuously absent. Governmental reforms to state benefits appear to be scoring a spectacular own goal by boosting unemployment figures just months left until the electorate goes to the polls.

Incapacity Benefit changes introduced for new claimants in October 2008 place the emphasis on what people can do (as opposed to what they can’t do) in the workplace, with new claimants being required to undergo a Work Capability Assessment to determine which rate of Employment and Support Allowance (ESA) they qualify for – at least initially. All existing Incapacity Benefit claimants will then have their claims reassessed by 2010.

This July, however, a Financial Times report revealed that in some areas up to 90 per cent of new benefit applicants were being considered able to work and were therefore eventually being placed on unemployment rolls as opposed to remaining on ESA. The figures were based on data seen by several welfare industry figures, but they have not been officially confirmed by the Department for Work and Pensions (DWP).

The one potential consolation for the current Government is that, if elected, the Conservatives are likely to be even harder hit by this new problem. Over 2.6 million people in the UK which – according to the DWP – are currently claiming Incapacity Benefit are due to start having their claims reassessed with effect from next year. If a high proportion of these are considered able to work the mind boggles at the potential effect on unemployment figures.

As far as group risk is concerned, one of the few impacts of the new system has been a trend for employers to prefer a group income protection format with no offset for State benefits. The effect is marginal, however. Legal & General reports that employers are opting for the maximum benefit of 80 per cent of pre-disability salary with no offset in under 10 per cent of cases for existing schemes and in between 10 per cent and 20 per cent of cases for new schemes.

Laurence Power, consultant at Bluefin, says: “Some employers are taking up this option because they don’t want someone back at work who isn’t 100 per cent fit. I can see their point of view as they are under pressure to produce more with fewer workers.”

Intermediaries should also watch out for a technical hitch that can result in some group income protection claimants being incorrectly denied ESA.

Steve Browning, group protection product manager at Friends Provident, says: “In the early days the Jobcentre Plus people were incorrectly classifying group income protection benefit as a pension benefit, so it disqualified them from ESA when it shouldn’t have done. When we realised this was happening we clarified the position and notified clients to appeal against their decision. Individuals must also make sure they fill out their forms correctly as there is a danger of them not making it clear that the income protection benefit is coming from their employer.”

Otherwise, one year on from their implementation, the October 2008 State benefit changes have had little impact on the group risk market, which had originally heralded them as being likely to make employers more conscious of the need to provide private insurance against incapacity and to increase their interest in occupational health and other wellbeing solutions.

David Williams, lead consultant, health and risk benefit practice at Hewitt Associates,thinks the changes mean employers do face new challenges.

He says: “The news that failure to qualify for ESA is around two thirds overall and as high as 90 per cent in some areas suggests the current system has raised the bar in terms of making it more difficult to claim. Our job in group risk is not to say whether this is right or wrong but to recognise that there is more emphasis on employers doing something about the situation rather than relying on State benefits. A year down the line I think there is a lot more awareness amongst employers of changes in how the mechanics of the State benefit system works and, although there is not much being done about it yet, I suspect things will start to happen in the next year or so.”

Other experts are talking more in terms of timescales of several years before change kicks in and some feel this could require the introduction of governmental measures.

Katharine Moxham, spokesperson for industry body Group Risk Development (GRiD), says: “The changes point to greater responsibility for employers to provide greater rehabilitation and support, but it’s not getting through yet. The NICE guidelines on managing absence in the workplace again point the finger at employers but, once again, make no suggestion as to how they can go about it.

This places group risk in a very good position as vocational rehabilitation is a standard part of income protection, so employers with group income protection could reasonably expect some government support, but they haven’t got it yet.”

Virtually all the anecdotal feedback suggests that the average employer is currently far more preoccupied with trying to survive the current economic downturn than with worrying about Welfare Reform.

Caroline Shepherd, corporate account manager at Jelf Group says: “When we started planning for welfare reform 18 months to two years ago everyone got quite exited, and we were all going to go in guns blazing and use it as an opportunity to sell group income protection to companies that didn’t have it. But then we had the credit crunch, which has affected all employee benefits.

“Instead of doing exciting consultancy pieces around welfare reform, we’ve ended up doing rebroking exercises to try and save every penny possible for employers whose primary priority is to try and stay in business. It’s been very unfortunate. The State benefit changes were starting to get exciting to talk to clients about, but then the goal posts moved.”

John Gillman, an independent healthcare consultant who advises the Income Protection Task Force on group income protection, suggests that other industry changes have also been deflecting attention from welfare reform.

He says “A lot of advisers I’ve spoken to have been just as interested in the possible removal of the default retirement age and in predicted trends towards pay direct and limited benefit terms on group income protection as they have been in Welfare Reform, for which they don’t sense there is going to be any Big Bang. They just feel it is something that is likely to gradually register over the next few years.”

Research results released by Aon Consulting this July confirm that awareness amongst employers of the State benefit changes is not yet anything like as great as the government had originally intended. As many as 19 per cent of the 600 employers surveyed admitted to not knowing about the recent Welfare Reform announcements and 63 per cent had no plans to amend current sickness and absence benefits because of them. Furthermore, the consensus view is clearly that employer attitudes are unlikely to change for a considerable length of time.

Steve Herbert, head of benefits strategy at Origen, says: “The reality is that Joe Public doesn’t know much about Welfare Reform yet and Joe Employer hasn’t thought much about it either. In most employers’ minds it is plan Z in the context of the current economic climate but when we come out of recession it will move back up the agenda. It won’t crystalise in peoples’ minds until we see a few horror stories come out about people losing benefits, and we haven’t had these yet.”

Insurers could form partnership with government

Insurers could benefit in more ways than one from Government reforms to the State benefit system. In addition to the possibility of experiencing future increased demand for group risk they could help the government to underwrite its disability risks. The latter suggestion was made this July by the Insurance Industry Working Group (IIWG) when proposing a vision for the insurance industry in 2020.

The IIWG emphasised the need for the industry to act in partnership with the government to increase savings and protection provision, where appropriate, and to help consumers manage financial distress caused by accidents, ill health or old age.

Nick Kirwan, assistant director health and protection at the Association of British Insurers (ABI), says: “I would like to explore ways in which insurers might be able to play a bigger role in the provision of benefits to build a more resilient society, and there may well be
opportunities for the private sector to take a share of the welfare reform benefit burden. In the case of pensions, the State accounts for £70bn a year in benefit payments but private schemes account for £117bn. With disability cover, on the other hand, we are talking about £21bn from the State and £1bn from the insurance industry.

“Perhaps we should be nearer a 60/40 split like with pensions and, if so, it is certainly worth exploring what it would look like and how it would work. We need to find areas where the private sector can add value like in pensions, and this doesn’t necessarily mean the government granting tax breaks.”