Helping the state bear the welfare burden

The group risk industry has constructive ideas that can help the Government to achieve many of its welfare and health objectives – if only the politicians would listen. Edmund Tirbutt reports

If the group risk industry is to achieve genuine cut-through in lobbying for a number of important changes, it needs to up its game. That was the view of delegates at last month’s Corporate Adviser Forum in Birmingham – ‘20:20 Vision – A Blueprint for a New Group Risk Market’ – held in association with Canada Life Group Insurance.

A fresh approach to group risk could benefit not just providers and intermediaries but also the Government in cutting its massive benefits and healthcare bill, and enable thousands of Britons to lead more fulfilling lives.

Group risk professionals at the event were confident that there were numerous steps the Government could take to reduce the welfare bill. But they were pessimistic about the likelihood of genuine change because they felt politicians and government technocrats did not understand the issues or the way the private sector could help to lift the burden. They believed this was partly because the group risk sector was not getting its message across.

Johnson Fleming group protection, health & wellbeing senior consultant Angela Jones said:
“We can keep having the same conversations but nothing will change massively. We just react to what happens and we don’t have much input into what the Government does.”

Delegates questioned whether the industry was investing enough in its associations. Group Risk Development (Grid) and the ABI were the main representative bodies, with Investment & Life Assurance Group (ILAG) featuring behind the scenes. But Grid was essentially a voluntary body, with spokesperson Katharine Moxham the only full-time employee.

i2 Healthcare director Simon Derby said: “Very rarely do you see much about Grid in the trade press and, if you Google the name, our body comes on something like page 10 or 11. So I feel it needs to change its name to something more eyecatching to raise its profile.”

Wishlist

If prime minister David Cameron were ever to consider a Ros Altmann-style ‘poacher turned gamekeeper’ appointment as minister for protection, Canada Life Group Insurance marketing
director Paul Avis has certainly staked a claim.

The wishlist he announced for the three main group risk products dramatically focused attention on how the fortunes of the field had become heavily affected by government legislation. His three wishes would comprise: a complete break in the link between group life and the pensions regime; a total delinking of group income protection payments from state benefits; and the removal of the P11D burden from group critical illness cover.

Such radical actions, Avis argued, could help address the one key metric that the group
risk industry was still failing on, namely the number of people who bought its products. With the opportunities being presented by both pension auto-enrolment – to cross-sell to businesses that want to offer more than a pension – and technological advances – in boosting both sales and communications – there could not be a better time for such actions, he argued.

Avis said: “The industry is worth nearly £2bn, which puts us on the radar of many people, but if you then begin to look below the surface you get a different picture. Less than 4 per cent of employers have group life, less than 1.4 per cent have group income protection and only 0.2 per cent have group critical illness cover.

“But post-RDR and the DWP charge cap, many pensions advisers are looking for alternative revenue schemes and I think group risk, and group life specifically, provides a real opportunity on the back of that. Advisers need to appreciate the commission levels available of 30 per cent a year, every year, so even within SMEs there’s money to be made.”

He continued: “With 1.8 million businesses about to enter auto-enrolment, there’s a clear opportunity for advisers to address the 96 per cent without life schemes. But the threat we have is the continuing alignment that the group life market has with pensions and trusts, and the big fear I’ve got here is the massive increase in excepted policies, because they are not the right thing to do.

 “With income protection, deselecting state benefits from product design should be the way forward. Currently, around 50 per cent of schemes still have a state deductible so premiums will have to go up at some point as state benefits come down.”

Support for the idea of separating group risk benefits from pensions legislation could not have been greater at the event, with 100 per cent of attendees backing it. Reservations were expressed both about benefits from registered group life schemes being taxable if the lifetime allowance was exceeded, and the fact that, although excepted group life schemes could get around this problem, they could still throw up issues with charges in the event of death or terminal illness before the tenth anniversary.

Mercer principal David Manning said: “We are seeing a growing number of clients separating life assurance benefits from pension trusts. But I think the Government sees life assurance written under trust as part of occupational pensions and
I don’t think it clearly understands that the two are very separate.

“Perhaps we should be presenting the argument that says if life cover isn’t provided under the registered pension scheme that’s linked to the annuity piece, it shouldn’t be counted against the lifetime allowance. I am also not sure if there is any clarity around group excepted contracts regarding how exit and periodic charges should apply and would be calculated. My concern for a while now has been that this needs to be tested.”

Government engagement

Other delegates at the event questioned whether the group risk industry had achieved sufficient penetration for the Government to view it as an intrinsic part of the overall sickness absence and wellness proposition.

Portus Consulting director of consulting David Dolding said: “If you tell the Government it needs to divert some resources to look at this issue of excepted group life schemes or the registration of group life schemes linked to pensions, it is going to say that it affects only a tiny minority and that it doesn’t have time to do it. So we get caught up in pension legislation and it’s the same situation with tax. For example, you could argue that increases in IPT lumped onto PMI is counter-productive to what the Government is trying to achieve.” 

Avis expressed the view that the huge welfare bill for disability, which the ABI estimated at £36bn, meant the Government would have to engage with the group risk industry on income protection at some point. But others were less sure.

Dolding said: “There’s an assumption it is going to engage but the real issue is that our industry is so low on its radar that it is probably thinking it is employers who will have to do something.”

Manning said: “If the Government wanted to engage with us around the welfare state and building in some kind of provision should someone become long-term ill, it could have done so with pension auto-enrolment. It had a fantastic opportunity to do that but it chose not to.”

Derby said the Government did not fully appreciate how lacking in savings most of the
public were, given that the majority of people, in the event of long-term illness and inability
to work, fell immediately into debt. But he noted that such muddled thinking was hardly new.

He said: “The whole thing is not well thought out. If we go back to what Gordon Brown did in 1997 when removing tax incentives from PMI for the over-60s, it resulted in older people ditching their individual policies and charging in to the NHS. He saved a lot of tax but caused a lot of cost.”

On the doorstep

Premier Choice head of employee benefits Steve Ellis was able to bring a view from the coalface having done “a lot of door knocking” in the run-up to the general election.

He said: “There was a feeling that people wanted to cut benefit bills but didn’t know how because there was no message. They just saw it as a lot of money coming out of their tax and that was because there was no one supplying a message anywhere.

“There’s a certain naivety in the Government in looking at our industry because it doesn’t really know what we do. It’s got this silly focus that the employer will look after everyone and everything, and it doesn’t realise that a lot of people go straight to SSP [statutory sick pay].

“It’s this naivety we need to break, and get the message to Government that there are solutions out there to keep people in work and get them back to work, and remove the burden from the state.”

Ellis also reasoned that the Government was inevitably swayed by how it thought certain actions might be perceived. For example, if it made an announcement removing P11D liabilities from group critical illness cover and healthcare, this might be construed by the public as looking after the rich rather than saving money for the NHS.

Dolding thought this was a shame because removing the P11D liability would undoubtedly boost demand for group critical illness cover.

He said “We see schemes when premiums rise and people opt out because of the P11D liability.”

It was generally agreed that something had to change if any progress was going to be made in influencing Government policy. However, some attendees warned that, even if the sector could succeed in liaising more effectively with the Government, people should be careful what they wished for.

Ellis said: “If, all of a sudden, the Government waves a magic wand and says you can have all this tax relief then could we as an industry cope with the demand?”

Dolding said: “I’m sure the pensions industry wanted a degree of compulsion in pensions
but, when it actually comes, you suddenly feel you are being squeezed on your charges and
other product features.

Straw poll: The view from the room

1. Should group risk benefits be completely separated from pension legislation?

Yes 100%

No 0%

2. What impact will auto-enrolment and pension freedom and choice have on group risk?

Give group risk a higher profile 80%

Give group risk a lower profile 0%

No impact 20%

3. How do you expect employers to engage with the new Fit for Work service over the long term?

Usage will be virtually minimal 60%

A significant minority of employers will use the service 40% 

With time, referral to FFW will become the norm 0%

4. How should the Government improve the nation’s income protection cover? 

Auto-enrolment into IP 40%

Simplified IP product 40%

Tax break on existing product 20%

Awareness campaign 0%

5. What opportunities do you foresee from auto-enrolment as small and micro firms reach their staging date?

Significant new business levels 40%

Some new business but not significant 40%

Not expecting any new business from AE 20%