A double edged sword
Auto-enrolment presents opportunities and threats to the group risk sector. But which are the greater, asks Edmund Tirbutt
One reason that views are so polarised is that anyone taking a view on the issue can focus on very different sizes of client. Large companies who have to introduce auto-enrolment in late 2012 are likely to find it a much more pressing issue than smaller ones who don’t have to bite the bullet until 2016. Larger companies are also far more likely to already have quality pension provision in place and to have engaged in employee benefits generally.
Sean McSweeney, principal consultant at AWD Chase de Vere, says: “Larger employers should be hit less by auto-enrolment as, although it will probably involve some additional costs, these are likely to be manageable and to have only minimal impact on group risk. But those with less pension provision are also less likely to have engaged with group risk, as the two tend to go together. Nest can be positive for smaller employers who haven’t engaged with employee benefits at all, and we’ve found our advisers are starting to have discussions with them about group risk.
“Some companies in the middle with low-cost pensions are facing significant additional pensions costs and may look to cut back on group risk but this is more likely to be legacy stuff such as dependants’ pensions rather than core products. There is now little rationale for having dependants’ pensions and we have seen some employers with such legacies looking at either just scrapping them after consultation or at replacing them with additional lump sum life cover for dependants.”
When it comes to core products, cost differentials dictate that the increased costs of pension provision will have less impact on group life than on group income protection, although interest in voluntary group income protection could certainly receive a boost.
The results of employer research released this April by industry body Group Risk Development (Grid) found that 49 per cent of employers that do not already offer group risk protection benefits said they would consider implementing a group life scheme once pensions auto-enrolment becomes law.
Steve Bridger, head of group risk at Aviva UK Health, says: “Offering one times salary life cover can cost only 0.1 per cent of payroll, and life cover is not complex and doesn’t require a long-winded sales process. We are looking at a number of options to use existing strong relationships with clients to cross-sell on the life side, using the same research and overall intelligence in terms of relationship management as our pensions colleagues. The composite nature of our business can be an advantage as it enables us to construct a proposition that may have a minimal amount of life cover that can be attached to a pension. With income protection, on the other hand, there are fewer opportunities for such cross-selling.”
But not all group risk providers have pensions operations. Indeed Unum and Canada Life, the two major players, don’t have. But, according to Paul Avis, sales and marketing director at Canada Life, this is not going to place them at any disadvantage.
Avis says: “Auto-enrolment provides us with a significant opportunity to work with pension providers to sell our products. Ironically, it’s always been one of the big failings of the group risk industry that it hasn’t penetrated these pension books and formed suitable alignments. I haven’t begun any discussions yet but it would be nice to think that such a joint working strategy would be at the forefront of pension providers’ minds, and there would be benefits for them in going down this route. For example, we can provide a waiver of premium to protect pension contributions, and most pensions providers don’t currently offer this. Overall, auto-enrolment and Nest will boost provision of group risk.”
Steve Herbert, head of benefits strategy at Jelf Employee Benefits, is another to feel that the opportunities outweigh the risks. He stresses that auto-enrolment will “help bridge a huge hurdle” to widening the appeal of employee benefits to employers who have not previously embraced them, and that it is still surprisingly common for risk benefits to be linked to pension membership. “The savvy employer will also accept that spending money on benefits is now a requirement rather than a voluntary option, and look to spend its budget in the most imaginative way to create a valid recruitment and retention tool,” he says.
But Declan White, group risk marketing manager at Friends Life, doesn’t share quite the same optimism that auto-enrolment will prove a net gain for group risk. Whilst emphasising he is by no means “anti Nest”, he highlights that we are currently seeing limited new business coming to the market despite the fact that group risk benefits are currently more affordable than they have ever been.
He says: “Even if protection becomes part of Nest in future, it doesn’t necessarily mean the tap will start flowing straight away. There will still be a huge educational battle to ensure people understand the need for protection, especially if the cover is voluntary, because they will be funding for a pension and have other more immediate perceived needs such as childcare provision and higher utility bills. There is also currently no infrastructure in place within Nest for group risk, so issues such as premium collection and administration would all have to be considered.”
Swiss Re’s Group Watch 2011 says that the current focus on cost and value for money we are seeing is now unlikely to go away before auto- enrolment comes into force. Next year’s Group Watch survey however is likely to throw up a much more meaningful picture, with the report saying: “the impending arrival of auto-enrolment was widely seen as a factor which would begin to concentrate thinking from 2011 onwards.”
Even if protection becomes part of Nest in future, it doesn’t necessarily mean the tap will start flowing straight away
Ron Wheatcroft, technical manager at Swiss Re Life & Health, says: “If you look back over our previous surveys, generally the market performs better than people predicted. Broadly speaking, intermediaries tend to be more pessimistic than providers on these things, and I don’t know why. It may be that, because they are closer to their clients than providers, they see the employer cost implications more clearly.”
We are probably still many months away from reaching a point at which evidence of the attitudes and actions of employers regarding group risk and Nest can be quantified in any meaningful way. Until then, every time positive examples are volunteered (see box) there will be just as many others telling the other side of the story.
Lorica Employee Benefits, for example, deals with a large retail organisation with around 20,000 non-pension scheme members who currently qualify for life cover benefit. But the client company is thinking of not offering any life benefit to employees who opt out of auto-enrolment - a proportion that it expects to be as high as 60 per cent.
Another Lorica client, which is a distribution company with around 4,500 employees, currently only has around 1,500 employees in its stakeholder pension scheme, and all pension scheme members also have group critical illness cover - which was offered as a sweetener when the company closed its defined benefit scheme. But, because this employer would have to give everyone enrolled in its pension scheme critical illness cover under current eligibility requirements, it is thinking of cutting out critical illness cover for everyone when it introduces pensions auto-enrolment and replacing it with a low-cost personal accident cover.
NEST DRIVES NEW GROUP LIFE SCHEME
The Research House, a central London-based market research focus group facility, has introduced group life cover directly as a result of Nest. On reading about auto-enrolment in the press it contacted AWD Chase de Vere for advice in October 2009. By January 2010 it had implemented both a group personal pension plan with Scottish Widows, involving a 3.5 per cent employer contribution, and group life cover of three times salary with Canada Life.
The life cover is available to all 18 staff, whose salaries range from £16,000 and £80,000, and the entire scheme costs only £750 a year. Five employees have opted out of the pension but still get the life cover. The company also discussed group income protection and critical illness cover and these could be implemented in the future.
Sue Maldonado, global marketing director at The Research House, says: “I am so glad we’ve done it and I was amazed at how little the life cover cost. At that price it’s an absolute no-brainer and I didn’t even need to accept an invitation to think about it. It’s also so easy to manage as all I have to do is update the names once a year.”
“Recently I had a 28 year old employee who collapsed on site and, fortunately, survived after receiving first aid. It was a very close shave, and when things were critical I felt so good that I’d potentially taken care of his family.”