Age old problem

1 December 2009 Corporate Adviser

Not so long ago the group risk market was awaiting the outcome of a High Court judgment that some felt could threaten its very existence. But developments on a number of fronts have ensured that such a doomsday scenario seems far from likely.

The Heyday case - brought by Age UK (formerly Age Concern) - argued that the ability to compulsorily retire employees at the age of 65 is contrary to European discrimination law. The implications of a Heyday victory were therefore that employers could have to extend insurance provision to workers of any age in order to avoid age discrimination and, because the costs of insuring older lives could prove prohibitive, many employers might decide to stop offering group risk schemes altogether.

By the time the judge had ruled against Heyday in September, however, the case had become something of a red herring because two months earlier the UK government had announced that it was bringing forward its own 2011 review of the mandatory retirement age to next year. Opinion is divided on whether this review will result in the mandatory retirement age being scrapped altogether or whether it will merely be raised to, say, 68 or 70. The only thing experts seem able to agree on is that it won’t remain at 65.

Increasing income protection cover from age 60 to 65 resulted in price increases of between 10 and 40 per cent

Audrey Williams, head of discrimination law at Eversheds, says: “I have no idea what’s going to happen but there are a lot of consultations planned next year around age discrimination in goods and services, and these will include specific consultations with financial services providers. The fact that they’ve brought forward the mandatory retirement age review means that it would be a good idea to consider the two things alongside each other because they are closely linked.

“There will be plenty of opportunities for industry bodies, insurers, intermediaries and other interested parties to make their views known, so they should ensure that the Government has a clear understanding of the implications and issues.”

Indeed, those wishing to input their views can already start doing so because Government ministers have recently started requesting submissions of evidence on the default retirement age to feed into next year’s review (see box).

If the default retirement age is raised it will lead to similar pricing issues to those experienced with the introduction of the Employment Equality (Age) Regulations 2006 - when many employers that were only offering group risk cover until the age of 60 had to extend it until the age of 65. Once again group income protection will be more severely affected than group life and group critical illness cover because a higher maximum age will mean not just scheme members being covered until they are older but also claims potentially having to be paid for longer.

Chris Ford, director of group risk at Jelf Group, says: “With life cover, many schemes could move from a maximum age of 65 to 70 with relatively little impact on rates but for income protection it would be very different. Increasing income protection cover from age 60 to 65 resulted in price increases of between 10 and 40 per cent.”

If, on the other hand, the Government decides to do away with the mandatory retirement age altogether - and many feel that the announcement last October by the civil service that it will abolish its retirement age in April 2010 provides a clear hint that this could happen - the pricing issues could be broadly similar, provided that the insurance industry is able to obtain a suitably worded exemption that allows it to apply a maximum termination age of, say, 68 or 70.

Bob Cheesewright, proposition director for group risk at Zurich Assurance, says: “You still get some people who want equality of output but the probability of claims occurring starts becoming a certainty once employees reach a certain age, which would mean writing a blank cheque. So I think most employers would prefer going for quality of input, spending the same amount of money on everyone but putting it into pensions as opposed to income protection for those who get past a particular age.

“The idea is that income protection ceases to be relevant past a certain age because people become sick more often and cover becomes disproportionately more expensive. The state Employment and Support Allowance ceases to be available once you get to retirement age, so we should be consistent.”

Industry body Group Risk Development (GRiD) is confident that its recent input into the Equality Bill consultation will already have helped secure some sort of exemption around age, and the Government’s response to this consultation is due out this month. This should indicate which way the wind will be blowing when it comes to reviewing the mandatory retirement age next year.

GRiD spokesperson Katharine Moxham says: “We have asked for Option 2, which is a tailored specific exemption allowing age to be used provided it is proportionate to risk and cost.

“Ultimately we don’t want the costs of group risk to be prohibitive and we want to work with the State to fill the protection gap. The Government did indicate that there would hopefully be a workable solution for financial services when introducing the Equality Bill legislation and consultation.”

The idea is that income protection ceases to be relevant past a certain age because people become sick more often and cover becomes disproportionately more expensive

A widely expressed confidence from group risk experts that the Government is actually listening to their views and understanding the issues involved means we are now quantum leaps away from the type of pandemonium being expressed when the Heyday case was in its infancy. It seems unlikely that the field will not be granted a suitable exemption if the default retirement age is abolished and, even if it isn’t granted one initially, some argue that the Government’s extensive track record of performing U-turns makes it probable that a satisfactory (for the industry) outcome will be reached eventually.

The popular view is therefore that an increase in the maximum age for group risk products - whether caused by a rise in the mandatory retirement age or by its abolition in accompaniment with an exemption involving a cut-off age of above 65 - is likely to see employers focusing on ways of offsetting the increased costs involved. There is, in particular, likely to be a marked trend towards income protection schemes that pay out claims benefit for between only two and five years. In some cases these may also include a capital option - a lump sum pay-out at the end of the benefit term.

To date such limited term income protection has been reasonably common with the little new business that has been written, but when it comes to existing business there has clearly been very little switching towards it, and this could well change.

James Walker, technical manager at Legal & General, says: “So far we haven’t had more than a handful of existing group income protection schemes switching to limited term because there are a lot of employment law issues to take into account when doing so. If we have a rise in the retirement age, however, you may see much more activity in this respect.”

According to Swiss Re’s Group Watch 2009, providers and intermediaries expected the proportion of group income protection schemes written on a limited term basis to increase from 6.7 per cent at present to 22.25 per cent by 2013 - without a change in legislation. The shift could therefore clearly now be far greater and, with jobs for life having become a thing of the past, this seems long overdue. Indeed, standard income protection that pays out until retirement age is seen by many about as outdated as the idea that people should retire at 65.

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