Putting a price on protection

Auto-enrolment may not be right for protection, but that does not mean group risk should not attract tax incentives. John Greenwood reports

A Nest model for protection is not the way forward but tax incentives for group risk would be a massive boost to tackling the widespread lack of cover amongst Britons, according to a Grid report published to record the findings of a multi-stakeholder working group.

The report, comprising the findings of a round table discussion hosted by Grid and attended by representatives of the DWP, ABI, Federation of Small Businesses, intermediaries and providers, concludes that it is unlikely that the auto-enrolment and Nest project could provide a similar catch-all solution for the UK’s protection needs because, rightly or wrongly, protection issues are currently lower down the political agenda than pensions.

This is in part because relatively few people benefit from payouts from protection products, whereas the benefits of pensions are more widespread, making them more visible, says the report.

The report concludes that a Nest protection solution is also unlikely because the target market for protection gap financial planning is different to that for pensions. Low earners are currently relatively well cushioned by state benefits should they fall sick or die, whereas middle to higher income families have far more to lose.

Delegates at the meeting, which took place in June but has only just been disclosed, did feel that tax incentives to employers to provide group risk benefits to encourage employers to help employees to take responsibility for their own and their family’s welfare could yield considerable savings for the welfare state and could potentially help alter the mind set which currently deters end users from making adequate provision for their future.

Group risk professionals will be encouraged by the wide-ranging participation in the meeting, with representatives including Stephen Meredith from the Department for Work and Pensions, Mike Cherry of the Federation of Small Businesses and Nick Kirwan from the ABI as well as Grid representatives.

The report points out that the 6.11 per cent of the UK workforce that have been taken out of the State system because their employer provided GIP are already saving the Treasury £3.48bn to £3.97bn a year and calls a reduction in National Insurance (NI) contributions as an incentive for offering a GIP scheme and taking those covered under it out of State disability provision completely. It says that given that vocational rehabilitation is a primary feature of most GIP policies, an employer making this provision is currently able to assess an employee’s level of incapacity and to commence a return to work programme long before any assessment for Employment and Support Allowance (ESA) is even due to commence.

If the Government really wants to encourage the Big Society then it means encouraging employers to look after their employees with benefits

Worksite marketing, where employees are given the opportunity to purchase financial products including income protection, life and critical illness cover direct from providers in their place of work was seen as another potential way to market protection to a wider audience. But the UK’s regulatory framework would make it more difficult to administer in the UK than in the US and it is unlikely to deliver the reach and segmentation potential to truly corner the market’s potential, the report concludes.

The report goes on to say that just because the Nest model is not a complete or immediate solution for delivering protection products, this does not theoretically rule out the auto-enrolment model altogether as auto-enrolment models have been successful in other countries such as Australia, where highly cost-effective and transferrable products are so popular that, despite a potential opt out opportunity, there is almost 100 per cent uptake – providing most Australian workers with a basic level of protection cover.

However, developing a model along these lines for the UK market would involve a huge sea change for a country still used to relying on the State as default benefits provider.

Katharine Moxham, Grid spokesperson says: “Considering that the industry feels it already delivers major social good in this space one might expect the outcome of discussion on incorporating protection into auto-enrolment to be a resounding, self-interested ’yes’. Not so. Ultimately the conclusions are far more complex and considered than that.”

Grid is however seeking modifications to the rules governing Excepted Group Life Policies with a view to arriving at a situation where employers can establish a group life scheme with a simple declaration of trust, get tax relief on their premiums as a business expense and pay all lump sum benefits completely tax free.

Carlos Correia, senior risk consultant at Lane Clarke &Peacock says: “If the Government really wants to encourage the Big Society then it means encouraging employers to look after their employees with benefits. We know that tax increases are coming, and if that means not taxing those employers who do offer benefits for their staff as much as those who do not, then that would be a start. “