Pension auto-enrolment will be a catalyst for change across the benefits spectrum. Edmund Tirbutt finds group risk advisers preparing for the new world
More employer clients will look to increase their group risk expenditure than will look to decrease it as part of an overall review of benefits triggered by pensions auto-enrolment, said delegates at last month’s Corporate Adviser round table. But auto-enrolment will also result in significant technical changes, such as creating a trend towards three-yearly renewable rates and a de-linking of group risk products from pension schemes, advisers warned.
Roy McLoughlin, senior partner at Master Adviser, was optimistic. He said: “It’s just an opportunity. There are scaremongers out there in our industry, as always, but I don’t think the risk of levelling down is as dramatic as some people are saying. The two big buzzwords are staff recruitment and retention, and it will all just bring employee benefits to the fore.”
Paul Avis, sales and marketing director at Canada Life Group Insurance, highlighted definite consulting opportunities and expressed the hope that group risk would grow off the back of income reduction in pensions and that some group life schemes would be extended in line with pension schemes. Indeed, Canada Life had made a list of no fewer than 27 different things it felt it needed to change or consider changing as a result of auto-enrolment.
But Avis summed up the big issue for group risk as auto-enrolment approaches. He said: “The challenge I’ve got is whether we as an industry are already having these conversations with employers or whether all auto-enrolment conversations are about pensions at the moment?”
Peter Murphy, client relationship director at Willis, announced that such fears were groundless from his own firm’s perspective. He said: “When we have conversations about auto-enrolment they can’t just be about pensions, they must be about the whole thing, including private medical insurance (PMI). Most of our pension clients have said that auto-enrolment doesn’t affect them yet but we tell them it does and that they need to start doing something about it. Anyone not having holistic conversations is missing a trick from a sales point of view and doing a disservice to clients.”
But Elliott Silk, director of employee benefits at English Mutual, distinguished between two types of clients: those who believe in benefits and have them in place at the moment and virgin clients. With the latter he feels conversations are being focused mainly on pensions and not on group risk but added: “when benefits are in place there is no doubt we have to speak about group risk as part of the conversation.”
As Lee Christian, senior consultant, health and risk practice, at JLT Benefit Solutions, pointed out, a lot of group income protection cover was currently only available to senior managers but this could often be extended to all workers for an additional cost of only a few thousand pounds because it tended to involve brining in a younger population – who would bring the rates down.
Avis was also relieved to find that most attendees didn’t share his fears that intermediaries were going to be asking insurers for premium reductions on group income protection schemes to help employers fund auto-enrolment costs. Silk said that in his experience big organisations with existing schemes have budgeted for auto-enrolment and factored in whatever pension contributions they are going to pay.
Allyson Gayle, senior consultant, risk & healthcare, at Premier Benefit Solutions, agreed. She said: “Cost is not so much an issue if you are setting your budget right for the charges you are going to meet on the pensions”. But she expanded “I think it’s the terms that are going to need flexibility, and that may or may not drive some of the cost issues. “
McLoughlin stressed that auto-enrolment would hit PMI more than group risk, saying: “Some of the conversations we are having with clients about PMI are just embarrassing. Their premiums are going up by 18 per cent but nothing else in their lives is going up by 18 per cent. People have just had enough.”
Gayle pointed out that those without PMI always had the NHS to fall back on. She added: “It is not too shabby in most respects, to be fair, if you’re in the right postcode,” while Avis advocated cutting out cancer cover from PMI to reduce costs and replacing it with a critical illness cover scheme.
Avis also championed limited-term income protection as a means of keeping cover affordable, referring to Swiss Re Group Watch data showing that this already accounts for 11 per cent of all schemes. He had just done a case study for a 270 person limited-term plan which cost £8,000 less corporation tax, working out at £28 per capita.
He said: “At these costs of 0.1 to 0.2 per cent of salary less tax, why isn’t every adviser just quoting
every client automatically for a two-year term? Some cover is better than nothing, and at least for two years you can settle down with your condition at between a half and three quarters of salary and have time to think and do your financial planning. Almost 50 per cent of income protection claims cease within three years, so a two-year limited-term for everyone should be almost a de rigueur benefit for employers in my view. I’m a huge fan.”
But Silk was not so keen on the limited-term concept or on the suggestion that it should be sold as a rival to cash plans as a low-cost benefit.
He said: “Cash plans tend to be done more on a voluntary basis and, although you can do voluntary group income protection, it’s difficult. The problem with limited-term income protection is that we’ve been discussing how poor the State system is, and putting in a 24 month benefit term is not really alleviating the State system for too long.”
But Silk did envisage a definite trend towards a lot more companies looking to switch to three- year rate review guarantees for group risk schemes. He said: “Auto-enrolment has to happen every three years, so a lot of companies may want to align group risk with that, and they may not have the budget and resources to afford to go to the market every two years?”
Further significant changes were predicted by Avis, who could see group life becoming considered part of pensions as opposed to being bunched together with other group risk products and PMI. He raised the possibility of providers chucking in one-times-salary life cover as their differentiator.
Murphy acknowledged that one-times-salary life cover could be offered free but was not concerned that this would have implications for demand for advice, which would still be needed for the higher multiples of salary. He pointed out that the death of the protection adviser had been predicted when online business started becoming popular but had never actually occurred, and that people still very much valued advice. McLoughlin strongly agreed, conjuring up the splendid phrase, “The meerkat is not a threat to group life.”
But there was greater agreement with Avis’ suggestion that auto-enrolment will probably be the end of pension-linked eligibility for group risk as employers grow wise to the advantages of avoiding administration and selection costs and temporary cover issues. A full 80 per cent of attendees said that more than 50 per cent of their employer clients will look to engineer such a de-link. In fact Christian couldn’t think of a single one of his top 10 clients where group risk is still linked to pensions. Murphy reported that, whilst a few of his firm’s clients still had such a link, they were already being advised of the need to change this.
From the provider perspective, Avis said that a considerable proportion of its book did still link the two. As elsewhere in the world of group risk, this looks like being an issue where auto-enrolment into pensions will prove to be a catalyst for change.