Pensions auto-enrolment will trigger an upheaval in the group risk sector says Carlos Correia, principal, risk benefit consulting, LCP.
The group risk market will experience an extensive administration burden caused by auto-enrolment if the insurance market does not sufficiently modify its standard processes and positions. Risk benefit provision by employers and insurers is likely to see evolution as employers begin to put their plans into practice.
While auto-enrolment is now a reality for the largest employers, those with at least 120,000 employees, medium to large employers still have a few months to go. But all employers, regardless of size, should by now have started planning not just for their pension arrangements but also their strategy for risk benefits.
Where risk benefits are not connected to pension provision it could be a good time for employers to review their overall benefits objectives and how group risk benefits work within this package. It is an opportunity to consider who should be in the arrangements, what the benefits should look like, the appropriate budget, and whether the benefits should be included in a wider flexible or voluntarily benefits arrangement.
For those employers who currently link risk benefit provision with pension membership, for example, only providing life cover or extra life cover on joining the pension scheme – auto-enrolment will become a pressing issue. If not already in hand, plans will need to be made and actions taken.
Several major insurers have already announced significant improvements in their policy terms, such as waiver of some normal restrictions in the light of auto-enrolment. If insurers do not already appreciate it, they will find that their terms in respect of auto-enrolment could be a significant differentiator in a competitive market where providers are constantly battling to win and retain business.
It will be vital that workable concessions are agreed with insurers to reduce or avoid the issue of newly enrolled staff being treated as “late entrants” and the consequence that employees are required to provide some form of evidence of health before they are entitled to benefits. There are multiple issues for employers associated with this including: problems of identifying relevant staff; the administration involved with getting these employees to provide evidence of their health – either on paper, over the phone or electronically; the issues of administering any special terms applicable to the member; and the extra complexity for future communications with members.
Many insurers have typically been concerned that employees who join a pension arrangement after their first opportunity are primarily doing this to access associated risk benefits because they now have a health issue. In the new auto-enrolment environment where pension take-up is likely to be high this concern may fade and insurers may relax their terms on a permanent basis at least for lower earners.
Where pension scheme take up is high then employers are likely to increasingly consider breaking a direct link with pension membership and look to provide group risk benefits for all employees or all employees within a specific category. In future it could be common for an indirect link, for example alignment of eligibility to a minimum earnings threshold.
In the period where auto-enrolment staging dates first bite there could be considerable market upheaval if insurers seek to regularly enforce rules that allow them the right to re-price arrangements if the membership increases by 25 per cent or more. If insurers have the option to re-set their rates then previously hard negotiated guarantees may be lost.
There are multiple routes to get to the end position of a sustainable and administratively efficient group risk arrangement. The route taken will vary and depend on each employer’s budget, preferences, data systems and general stance on auto-enrolment.
In an ideal world the whole process will be automated within a single arrangement centred around the employer’s real time payroll system. The system would communicate with pensions and other relevant product providers to deliver timely and relevant data.
The greatest efficiency may be achieved by agreeing a process that removes the potential administrative bottlenecks and medical underwriting. This doesn’t necessitate a fully automated process.
For many employers who continue to link pension membership with group risk benefits there could be some complication arising from auto-enrolment. Employers will need to start planning and consider potential issues with late entrants, pricing and administration. The industry will need to plan and evolve to make this as pain free as possible. But in the long term the burden of operating a risk benefit arrangements should not be very significant if it is set up with some foresight of the employer’s requirements.