Group risk insurers will struggle with the massive administration and underwriting headaches of auto-enrolment says Richard Davey, head of commercial development, Enrich
The impact auto enrolment will have on pension scheme arrangements is generally well understood by advisers, employers and trustees, but it can also affect the other generous employee benefits generally afforded to pension members.
As the first auto enrolment staging date rapidly approaches for the largest employers, it is important that employers of all sizes review their existing benefits arrangements to ensure they are structured appropriately in light of the changing legislation. The same applies to trustees.
Auto enrolment becomes relevant when reviewing any employee benefit that an employee automatically qualifies for when joining a company pension scheme. Typically this comes as a form of life cover but can also extend to other benefits such as income protection and private medical insurance. Auto-enrolment should result in far higher pension scheme take up rates and this very fact means employers could be faced with higher premium spends on pension linked benefits.
But it is not simply cost that becomes an issue. Let’s consider a larger employer of say 25,000 staff where this issue is more pressing as the staging date is nearly upon them. Take-up of the pension scheme is currently 50 per cent and to keep things simple life cover is four times salary upon entry to the pension. As of 1 February 2013 – the staging date for companies of this size – yes the employer should expect a nice bill for the additional life assurance premiums, but how are insurers going to handle the additional work strains that this dilemma provides. Four vital factors need to be considered here : accounting, pricing, actively at work conditions and moving forward, late entrants.
We are all aware of the demands within an insurer’s administration team to supply accurate accounts in a “normal” scheme year. Let’s face it, some accounts may be more than a year out of date.
Using the example above, the life assurance scheme renews on 1 January. Auto enrolment begins in February where all staff join the pension scheme and become eligible for life cover. The opt out process is complete in March and members declining to join the pension lose entitlement to life cover. Potentially insurers could be faced with three groups of membership and therefore three sets of accounts and three differing unit rates within the first quarter of 2013.The altering membership could lead to a 20 per cent shift in the membership within each month which could trigger an underwriter to review their terms each time.
But is this purely a spike in workloads during the initial stages of auto enrolment? It would be if there was simply one staging date however auto enrolment is staggered beyond 2015 at which point who knows what new legislation would have been introduced by the reigning Government – as is typically the case every 2 to 3 years – to add to workloads?
Actively at work requirements and late entrants are likely to also increase administration. Staying with the example above, will it be that easy to obtain a full and accurate list of members at work at the staging date? Experience would suggest not, and whilst it is likely that most insurers will take the decision to waive the actively at work conditions, the potential exposure to risk for insurers cannot be underestimated and alarm bells should be ringing. Auto enrolment could effectively allow employees in poor health, the opportunity to join a pension scheme with the pure intention of securing a level of life cover they would have otherwise been declined for. In theory this is going to lead to a far greater exposure to risk for insurers with the potential long term impact of a higher claims frequency and future increases in book rates as a result, to the detriment of employers.
The terms of auto enrolment also allow employees to join the pension scheme at any time during employment which will again make them eligible for linked benefits. Whilst insurers may protect themselves with a requirement for medical underwriting for such “discretionary entrants”, increases in workloads should be expected. This could impact service delivery unless investment in more staff has been factored into future budgets to allow for the additional work.
Considering the facts above, the overall burden auto enrolment brings should be a concern for employers, intermediaries and insurers. Accounting and rate retests need to become far leaner in terms of requirements. The transfer of data between parties also needs to be seriously considered given the level of activity expected through joiners and leavers, Medical underwriting, whilst evermore simplified, will need further streamlining or a greater investment in staff is needed to cope with the work.
Whilst the simple answer for employers may be to remove any benefit promises linked to pension entirely, this may fly in the face of most employers’ intentions in supplying benefits in the first place.
As advisers we continue to work with our customers to consider ways of devising future-proofed alternative benefits packages and communications to avoid hefty premium hikes or uninsured liabilities which is great news for employers, yet when auto enrolment does begin, will higher administration demands bring the industry to a sudden halt?