Approaching its second birthday, the Employment Equality (Age) Regulations 2006, which prevent employees from having their benefits restricted just because of their age, are giving rise to an income protection saga that is likely to continue unfolding for several years.
Experts say there will doubtless be sporadic court cases testing grey areas. For example, it remains unclear whether existing claimants from schemes which previously had a retirement age of 60 are entitled to benefit until age 65. But there seem to have been few issues with the core requirement of implementing the new default retirement age of 65. Most employers with IP schemes that previously ran to age 60 extended them to age 65, although a minority chose to self-insure the extra years instead.
Colin Micklewright, head of group income protection business development at Canada Life, says: “To my knowledge all our 4,000 income protection schemes complied with the implementation deadline and, although there would have been a trickle of post-deadline activity that has now all been pretty much sorted.
“We have, for example, come across a couple of schemes in the last 12 months which only wanted to cover people who have been in employment for 10 years. This contravened the Age Regulations, which say that a period of longer than five years is normally discriminatory, so we pointed it out to the intermediary concerned. “
Nevertheless, it is widely anticipated that there will be a belated reaction to the cost involved with taking out this extra cover when IP schemes start their bi-annual rate reviews from this October onwards. This could result in employers electing to switch to lower-cost schemes restricting benefit payments to a period of between two and five years.
Doing so may have to involve consulting with the workforce but such consultations could be combined with those concerning unresolved pension issues, and the cost case for switching could seem compelling. If an IP scheme moves from covering all members from age 60 to age 65 it could, broadly speaking, offset the entire extra cost of doing so by switching to a three year benefit period.
Sue Sneddon, employee benefits technical manager at Aegon Scottish Equitable, says: “In the short term employers recognised the need to do something and so they extended cover to age 65 but they are now beginning to question whether they can afford the extra cost involved. With the credit crunch biting, thoughts are turning to the bottom line and quotes for short-term benefit periods have definitely increased. Some schemes have actually made the switch and we expect to see further switches at renewals.”
There can also be a significant cost issue when employees wish to work beyond 65. Should employers grant them permission to do so they cannot discriminate against them on grounds of age.
The most common approach towards such older risks is to self-insure them, although some employers have raised their IP scheme retirement age to 70 and others have chosen to insure just the relevant individuals to age 70.
National employee benefit consultants Buck Consultants, which is now getting two or three queries a month about income protection cover for employees aged over 65, arranges insurance for under 10 per cent of them.
Jon Green, senior consultant at Buck Consultants, says: “The preference for self-insurance is partly a cost issue and partly a reflection of the fact that you don’t actually know at what age someone will finish working post 65, and the retirement date is all-important with income protection. Quite often employees are working on rolling annual contracts and, if there is a six month deferred period, employers who self-insure are only potentially liable for six months’ pay.”
But any headaches employers may be experiencing in complying with the age regulations could be magnified many times over if the default retirement age is abolished. Worryingly, this could happen as a result of a case taken by Heyday to the European Court of Justice.
In the case, heard on July 2, 2008, Heyday has argued that there should be no mandatory retirement age and that the UK Government has improperly implemented the EU directive. We are unlikely to get a decision much before the end of this year and, even then, if the outcome proves unsatisfactory for the UK Government it could appeal against it in the House of Lords.
Once this exhaustive process has been completed, there is a real possibility that employers providing IP cover will have to bear the costs of covering all employees to whatever age they choose to work to. If employers find the costs of doing this to be too high they could decide to stop offering income protection altogether.
Paul White, head of risk benefits consulting at national employee benefit consultants Aon Consulting, says: “It would be a huge issue for the insurance industry if Heyday wins, and the feedback I’ve had suggests that on the balance of probabilities the European Court of Justice is likely to take a stance in favour of Heyday or to go half way. Employer liability could therefore be significant.
“In practice most employees are likely to be looking for a fixed retirement age at around 65 because they want to retire but, because we have an ageing population and increasingly inadequate pension provision, we are likely to see increased demand for people to work longer. The cost is likely to be manageable for lump sum life assurance for the larger schemes but for income protection it will be more contentious and difficult.”
Regardless of the outcome of the Heyday case, the age 65 default retirement age could also disappear in 2011 when the UK government is due to review the Age Regulations legislation. If it is intending to move to a situation in which there is no mandatory retirement age it seems reasonable to assume that it won’t appeal against the outcome of the Heyday case.
But the UK Government should be only too aware that its attempt to shift the burden of benefit provision from the state to the private sector could backfire horribly if employers start turning their backs on offering income protection. Hopefully, therefore, it would ensure that any scrapping of the default retirement age will be accompanied by some form of exemption for insurance.
Sneddon, who is chairman of the regulatory working group at Grid, says: “The government could remove the default retirement age in 2011 as the purpose of the legislation is to stop people being written off because of age. The default retirement age encourages the start of a shift in culture but the end objective would be to have no maximum age at all.
“The government is in fact already starting work on reviewing the default retirement age by 2011, but it is fully aware of the problems that this would create for employee benefits. So it is not impossible that there could be some compromise on benefits, but I don’t think that anything is going to happen until after the Heyday outcome is known.”
At the end of the day common sense will hopefully prevail. If we are to have no mandatory retirement age the government will have to find an answer to insurance issues. When the European Courts have thrown interesting challenges to employee benefits in the past a solution always seems to have been found. n
Companies will be forced to adapt to an ageing pool of employeesColin Micklewight: “There are schemes which only want to cover people who have been employed for ten years”
expert viewJohn Heatley, senior risk adviser, Gissings Advisory ServicesJohn Heatley, senior risk adviser at national employee benefit consultants Gissings Advisory Services, acknowledges that, although the extra costs of paying for IP to age 65 have resulted in plenty of quotation requests for shorter benefit periods, few schemes have yet switched. He says “Getting to the final decision to make the change has been the stumbling block. There is a lot of legal advice needed because if you pay claims for only two, three or five years you have the ability to dismiss the claimant on grounds of capability but it’s such a sensitive area that some compromise involving a lump sum pay-off may be necessary. “Our advice is to take legal advice, draw a line in the sand and don’t feel the need to offer sweeteners. There is a culture in the UK that if you shout loudest you get what you want but if you give in once you are almost duty bound to do so again in the future.” Heatley emphasises that, although consulting with the workforce before switching to a reduced benefit scheme can help manage expectations, employers will always get protests at the point of claim. He continues “People don’t pay much attention at the consultation stage as they don’t think incapacity will happen to them. Although there will be scenarios at the claims stage when you have to make compromise payments, claims should be considered on a case by case basis and don’t have to prove as expensive as many people imagine.”
Drawing a line in the sand