What auto-enrolment means for group risk

As auto-enrolment finally becomes a reality just how ready is the group risk industry? Edmund Tirbutt finds risk professionals in confident mood

Recent months have seen a notable shift in provider and intermediary opinion on the potential impact of pension auto-enrolment on group risk. Whereas the glass half-full and half-empty groups had previously seemed fairly evenly split, a clear majority of spokespeople now believe that the group risk industry will emerge from the ordeal with a net gain.
This picture is robustly supported by recent research. A survey conducted by ORC International Research in February 2012 found that 57 per cent of advisers agreed that auto-enrolment would be an opportunity to sell more group protection products alongside new pension arrangements, compared with only 40 per cent in its corresponding survey in February 2011. 23 per cent of advisers in the February 2012 survey found there could be cutbacks to existing cover to fund new arrangements, a slight drop from 25 per cent in February 2011.
Research conducted by Canada Life in April 2012 has no earlier equivalent to be compared with but tells a broadly similar story about current attitudes. It finds that 72 per cent of advisers think that, as employers seek financial advice to ensure they are compliant with regulatory requirements, advisers will be presented with more opportunities to speak to them about their employee benefits generally. It found 68 per cent think that businesses will review their benefit offerings alongside their workplace pension schemes.
Only 20 per cent of advisers in the Canada Life survey believe auto-enrolment will have a negative impact by making employers reduce benefits to make sure they can afford pension contributions, and 15 per cent feel it will have a negative impact by making employers reluctant to take on further administration whilst preparing for auto-enrolment.
No providers or intermediaries who deal with any of the very largest companies with staging dates this year (see box) report any requests from these organisations to alter their group risk benefit structures in order to cope with the costs of increased membership of schemes linked to pension schemes. This probably reflects the fact that these employers already have high pension scheme take-up rates and widespread group risk provision and that they are financially strong enough to pay for any extra cover that is in fact needed.
Most insurers also state that large companies with staging dates next year have not yet requested any changes either, although Zurich Corporate Risk is unusual in reporting that it has already seen some decide to give slightly lower benefits to new members. The key difference between these companies and those with October/November 2012 staging dates, however, is that they are still considering their strategy.
In some cases they are considering delinking group risk schemes from pension schemes to reduce administration costs or considering offering reduced benefits to new pension scheme members or, in a very small minority of cases, even to existing members.
David Manning, principal at Mercer, says: “They are looking at what additional costs are involved with being linked to pension, and some are asking for quotes so they can look at modelling costs for a range of percentage auto-enrolment take-up rates and gain an indication as to whether it could prove too costly and whether they should delink or change benefit structures. We expect a range of different outcomes but I think we will see a number of schemes with two levels of benefit, the more generous ones being for existing members.”
Steve Bridger, head of group risk at Aviva UK Health is not expecting a lot of delinking early next year and is expecting most new members of group risk schemes to receive the same benefits as existing members. But he anticipates a change in attitudes to become evident between mid-2013 and February 2014 as intermediaries start offering more genuine consultancy.
He says: “Some companies may start offering lower levels of group risk benefits, such as
one-times salary life cover or limited-term income protection. It will be more of an issue on the life side where there is more linkage to pension schemes but some will still provide four-times-salary cover. Based on current conversations with intermediaries, we are not expecting any scheme cancellations at all from auto-enrolment, even from those SMEs that have group risk.”
Not everyone is quite so optimistic about the potential impact of auto-enrolment on SMEs but no-one disagrees with the fact that it is too early to make any firm predictions. Indeed, a survey published by The Pensions Regulator in July 2012 found that only 64 per cent of small companies with between five and 49 employees were even aware of the requirement to make employee contributions, and that the proportion was as low as 36 per cent amongst micro businesses with fewer than five employees.
Insurers express confidence that they will be able to handle the increased administrative burden caused by an influx of new group risk scheme members resulting from auto-enrolment, commonly pointing out that the work is spread over a number of years and involves volumes similar to dealing with flex window spikes. Ellipse even stresses that the administrative challenge presents it with a great opportunity to make its mark with its unusual high-tech approach.
Dave Kay, commercial product manager at Unum, says: “There will potentially be quite a big impact but the fact that the majority of those who aren’t already pension scheme members are younger should reduce rates, which will be welcome. However, employee benefit consultants are currently checking that we are technologically equipped to reduce rates promptly.
“In the market generally if scheme numbers move by plus or minus 25 per cent then the insurer reserves the opportunity to change the rate, so there is nothing new although we would have to do more widespread rerating. We are satisfied that we have done as much as we can but our approach may evolve next year as start dealing with real practical issues.”
Will McNaughton, senior consultant at Lorica Employee Benefits, even sees the administrative challenge as being to the long-term benefit of group risk insurers.
He says: “Admin will be an issue and, where group risk is linked to pensions, records need to be up to date and available. But I think that auto-enrolment will improve administration processes generally and I don’t see it as the big issue it’s been made out to be for group risk. I just see it as an opportunity for companies to look at what they provide, and the cost issues with group risk are low in comparison to pensions.”
The one major technical problem that had been causing concern has now been resolved as all major insurers have decided that there will be no need to medically underwrite those who join schemes late specifically as a result of auto-enrolment, providing they are actively at work and fall within the free-cover limit. But there still remain issues to be resolved around the edges.
Sean McSweeney, principal consultant – employee benefits at AWD Chase de Vere, says “We expect most providers will still require ‘actively-at-work’ terms but if someone is off sick on the day of the staging date and has a linked death-in-service benefit it is likely the provider won’t pay out. We are having discussions with insurers about this now to find a way around it.”
Jonathan Plumtree, head of Zurich Corporate Risk, is still undecided as to whether those who opt out should be charged for group risk cover for their brief period of pension scheme membership and continues to talk to the market about his company’s potential approach.
Mercer’s David Manning reports that many insurers have in fact already decided that they won’t charge those who opt out. But he still flags other issues around opting out and ‘actively-at-work’ requirements.
He says: “Some employers may waive ‘actively-at-work’ for death-in-service for larger schemes but standard requirements are still likely to apply with income protection. There is a communications piece around employers understanding that an ‘actively-at-work’ requirement will exist at the staging date and that otherwise employees will need medical underwriting. So employers must be very careful with their benefit promises.
“There will also be an issue around the volume of data that will be sent through. I feel that it would make sense for the majority of insurers to request a single set of totals only based on membership three months after the staging date, so it avoids the issue of who opts in or opts out. Otherwise they will have continually fluctuating data.”