GIP – Building a compelling case

The government has ‘sorted’ retirement income through pensions auto-enrolment, so should sickness absence be the next target? Edmund Tirbutt finds belief in the idea beginning to grow

There are sound fiscal reasons why the government should back a policy of nudging employers to do more to protect their staff from long-term absence. Less paid out in state benefits, a reduced burden on the health service and improved productivity should all appeal to policy makers. But, if and when the case for doing more has been accepted by politicians, what levers should government pull? Are tax changes the solution, or information and awareness campaigns? Or is some form of auto-enrolment the answer? And if this nuclear option is to be adopted, what ground work needs to be done to enable such a policy to become a reality?

These were the issues debated by delegates at a Corporate Adviser/Canada Life Group Insurance round table AE for GIP- What are we frightened of?, where a consensus emerged that the industry should at the very least make the case for a state-sponsored solution to the protection gap, not least to demonstrate self-belief in the product.
With both major political parties having indicated that they would be receptive to ideas about how auto-enrolment could be applied to group income protection, there was a consensus that the industry needed to seize the moment.

Canada Life Group Insurance sales and marketing director Paul Avis said: “The state is in crisis and we can remedy that crisis very quickly. Bearing in mind the success of auto-enrolment of pensions, we now have an opportunity to explain to the government that it has all these problems but that we can provide a benefit for it.”

Avis highlighted that the government spends more than £20bn a year on disability related benefits. And with hundreds of thousands of people coming onto sickness benefits every year, and the private sector only supporting 14,000 or so of them, the scope for the industry to shoulder more of the burden was apparent.

Towers Watson senior consultant, healthcare and risk consulting Jamie Winter said: “What I really think is strong about the idea is that by attaching the phrase auto-enrolment to group income protection you immediately amplify the debate with government. That’s the powerful thing and it’s a step forward even if we think auto-enrolment is a bridge too far or that there are insurmountable issues with delivering on that basis.”

But delegates agreed there was still be a long way to go before the case for auto-enrolment of group income protection was as compelling as that for auto-enrolment of pensions. With pensions there was a clear state financial need to outsource provision but with income protection this case hasn’t yet been made in anywhere near the detail set out in Lord Turner’s two reports into retirement saving shortfalls. The other key differentiator for pensions auto-enrolment is the desire on the part of the public to have a product because everyone knows they need a pension, whereas most people don’t realise they need income protection, and many would never claim from it.  

Jelf Employee Benefits head of benefits strategy Steve Herbert said: “At the moment we haven’t actually addressed either end of this argument and the market isn’t going to grow unless we do both of these things. We need to make a fiscal case for the auto-enrolment of group income protection, saying what the risk is to the government and what the potential return is.”

Delegates at the event agreed that the starting point should be to establish exactly what message the field is trying to put across to government and to resolve any differences of opinion before proceeding.

Swiss Re technical manager Ron Wheatcroft said: “We can look to government to be positive and supportive, provided that we don’t betray that trust, but we must ask exactly what we are trying to address with auto-enrolment. If we are saying we need government help because all our marketing efforts have failed it doesn’t sound like a strong message.

“However, if it’s a big issue the government faces then that should be the starting point. Conceptually, I think we know where state provision is going but I don’t think we are in a position yet where we’ve got the detail to say that income protection is the solution, although it might be.

“Research we did for Group Watch showed a real split in opinion about auto-enrolment,” continued Wheatcroft. “I would say providers were marginally more positive towards it than intermediaries but not by much. But it’s really important that the industry presents as united a front to government as possible, and the time to have arguments amongst ourselves is before we get there.”

Mercer principal David Manning and Willis Employee Benefits client relationship director Peter Murphy both emphasised the need to have a platform to stimulate debate within the industry, and there was  agreement that Group Risk Development (Grid) was probably the most suitable body to accommodate this.

Grid spokesperson Katharine Moxham explained that she didn’t have a mandate to lobby for group members, who currently demonstrated a diverse range of views. But Munich Re head of business development Lee Lovett pointed out that all this could change once there had been a fully informed debate amongst the membership.

Lovett said: “One of the strengths of Grid is that it represents reinsurers and insurers and the adviser community. I don’t know if it intends to go down this route but I would like to think it might be supportive of it in some shape or form. There is a problem to be solved but the question is whether auto-enrolment to group income protection is the best solution? Or are there other aspects around tax incentivisation or disincentivisation?”

Attendees certainly had no shortage of ideas that could be developed as potential solutions to be put to government, and one of the most considered of these was offered by Avis.

He proposed a simple auto-enrolled income protection product backed by a fully mandated reported rehabilitation plan. Claimants would get no state benefits, and cover of 30 to 40 per cent of salary for a limited term of two years, which would probably cost 0.5 to 1 per cent of salary.

Avis cited the Dutch model, which is more generous and more expensive, as evidence that you can get a 60 per cent reduction of people going onto state benefits after two years.

He said: “Fundamentally I don’t think anything can change until we simplify taxation and state benefits, and for the government to hit any employer with an additional 1 to 1.5 per cent charge would cause a lot of political concern. So at one of the junctions when pension auto-enrolment contributions leap, employers could be given the choice of paying, say, 5 per cent to pension or 4.5 per cent to a pension and 0.5 per cent towards group income protection.”

But Jelf Employee Benefits’ Steve Herbert was quick to point out that pension auto-enrolment contributions are currently “pin money in the great scheme of savings” and that, because they will have to go up anyway, he couldn’t envisage the government giving away even a small proportion of them.

Manning argued that if the industry succeeded in doing the financial calculations around what impact it thought group income protection might have in terms of reducing state health-related benefits then there could be a case for some type of incentive for the employer to fund the product. However, Lovett felt that a marginal disincentive, such as a slight rise in NI contributions for those who didn’t have group income protection in place, could prove more attractive to policymakers.

Wheatcroft enquired whether anyone present remembered waiver of premium for pensions, pointing out that covering pension contributions at a 2 to 3 per cent cost could be a good way of linking income protection to the pensions environment. After all, pension auto-enrolment had demonstrated the case for starting small and building up, he argued.

Murphy even wondered whether incentives could be linked with private medical insurance on the grounds that the NHS was facing massive financial pressures. It could be possible to alleviate the burden on the state through rehabilitation as well as medical provision, he argued.

He said: “It could perhaps be beneficial to give relief on Insurance Premium Tax (IPT) of, say 2 per cent, but only if the money is spent on group income protection. We still have a number of buyers who say they want group life and PMI but after that don’t want to spend any more. But you should be talking to employers about PMI and income protection together.”

Avis pointed to the very evident lack of willingness amongst politicians to give incentives via tax relief and referred to Association of British Insurers’ research that suggested that incentives tend to meet with little demand. He questioned whether a 2 per cent reduction in IPT would be enough to start the debate on what is already a limited market.

Even if auto-enrolment of group income protection doesn’t eventually prove the solution, there was agreement that engaging government on the subject was only likely to prove positive. Just putting the case forward would at least make those not in favour explain why – not least following the negative response to the idea expressed by some at last Spring’s Corporate Adviser Group Risk Forum, where some providers and advisers expressed caution at bringing auto-enrolment under the same sort of government control now experienced by pension providers.

Herbert said: “Ultimately group income protection needs to be at the higher end of the news radar but it just isn’t, and the only way we’ll get there is through some sort of political patronage. Whether auto-enrolment is the solution, which it probably won’t be, or not, we won’t get there unless we get the media and political parties at least talking about it and understanding it. The reality is that if we make the case and make it well then we will be listened to. But it won’t happen overnight, it’s a 15 to 20 year job.”

When asked which initiative has the best chance of succeeding in increasing the coverage of income protection across the UK, only 25 per cent of attendees thought auto-enrolment of the product was the answer – compared to 50 per cent for campaigns to increase awareness. However, Master Adviser senior partner Roy McLoughlin stressed that pensions auto-enrolment should play an important role in increasing this awareness.

He said: “Maybe auto-enrolment for income protection is a step too far but in the previous 25 years I’d never known the government recommending financial products. But it is now doing so with pensions, so surely it’s the same principle with illness. The positive here is that as a practicing IFA I’ve never heard so much positivity in my life. Before, when I mentioned pensions people used to walk out of the room but now even young people are asking questions about them.”