Shaping up for the shake up
The group risk market is getting in shape in time for auto-enrolment says Carlos Correia senior consultant, risk benefit consulting, at LCP
As auto-enrolment rapidly approaches, employers have started the detailed planning that is necessary to comply with the new requirements.
The introduction of new pension arrangements is also an opportunity for employers to review their wider benefits package including risk benefits and any link to pensions.
Some employers don’t provide risk benefits to large sections of their workforce. Increasing engagement on pensions may be a good opportunity to consider extending benefits, perhaps in a lower cost format, to a wider section of the workforce.
Whilst employers are reviewing their pension benefits to ensure they meet minimum quality thresholds, they should review their group risk arrangements to check they remain appropriate.
For some employers these benefits may have been set up when the primary objectives were significantly different from today’s issues. For example, arrangements that were created following the closure of a final salary pension arrangement may have focussed on replicating the structure and levels of protection provided by the previous pension arrangement, which may not be relevant for new joiners.
Recent market evolutions give employers more choice than was previously available.
There are an increasing number of options for the provision of group risk benefits via voluntary or flexible benefit arrangements. Employers can provide voluntary disability benefits without the need to commit to funding a minimum level of benefit provision. Similarly, flex arrangements allow employers to provide incapacity benefits that offer financial protection for their employees, without attracting the significant employer costs and responsibilities typically associated with traditional income protection formats.
Even outside of voluntary or flexible benefit structures there are more opportunities for benefits to be designed to better accommodate the termination of employment after a period of absence.
The recent exemption granted by the government appears to allow employers to cease the provision of insured risk benefits for its employees from State Pension Age an improvement over the previous position for employers with older workers.
In recent years, the increase in evidence of health limits has meant that it is possible to deliver increasingly generous benefits to senior staff without the automatic need for medical underwriting. Where medical underwriting is still required, the widespread availability of one-off underwriting and telephonic or electronic routes for performing the underwriting reduce concerns about the administration and inconvenience of this process.
Employers who have not reviewed their arrangements for some time may find that using alternative structures lowers the cost of group risk benefits more than might be expected
Due to continued competition, it is commonly reported that group risk insurers are operating on very thin margins and rates have been driven down, close to minimum. This should translate into better deals on pricing with employers’ spend on group risk benefits representing good value against benefit payments received in the long term. Employers who have not reviewed their arrangements for some time may find that using alternative structures lowers the cost of group risk benefits more than might be expected.
There are, however, some risks that auto-enrolment brings to group risk benefits. Many employers still link risk benefits with pension provision and a threat to group risk provision is that, rather than be faced with an increase in premiums for auto-enrolees, employers may simply break this link and cease the provision of these benefits in the future.
Given ongoing financial uncertainty, many employers will be keen to avoid any extra costs on benefits and will be focused on the value of benefit spend. If faced with significant extra pension costs as a result of auto-enrolment, employers will resist introducing a new benefit unless this is a replacement for an existing offering.
The proposed means testing of State incapacity benefits and political and media debate on this ought to be a further platform for the industry to point out the value that can be added by employer group arrangements.
In summary, the insurance industry needs to work hard to publicise the value of risk benefits and to continue to develop solutions that better suit employers’ and employees’ requirements. In addition to pension arrangements, employers should consider updating their risk benefits arrangements taking into account the options available now.