Catalyst for a review
The jury is out as to whether employers will trim risk benefits to make way for pension auto-enrolment. But either way, the employer’s staging date is a perfect opportunity for a comprehensive scheme review, Edmund Tirbutt reports
With less than 12 months to go until auto-enrolment gets under way, the knock-on effects of the policy initiative on other benefits was at the forefront of the mind of delegates at the autumn Group Risk Adviser Forum in London last month. Will auto-enrolment increase overall premium business? Will it create opportunities to cross-sell group risk products or will demand suffer as employers cut back to fund pension expenditure?
Delegates were certainly not anticipating a massive flood of new group risk business as a result of the changes, but all expected at least some increase in the proportion of their clients currently without group life starting to offer it. 29 per cent were even expecting a 50 to 100 per cent increase. With income protection, on the other hand, no-one was anticipating an increase of greater than 25 per cent, and 71 per cent of attendees expected an increase of between 0 and 10 per cent.
Tim Johnson, managing director of Gallagher Risk & Reward, pointed to a polarisation among his clients on the subject of auto-enrolment generally. Some were like “rabbits in the headlights” who had said they’d heard about auto-enrolment but hadn’t done anything about it yet. Others have very well-funded and well-publicised pension schemes, which are normally non-contributory and enjoying over 95 per cent take-up rates. They therefore say that auto-enrolment will make “absolutely no difference”.
But many present were concerned about clients whose group risk products were still linked to pension schemes. Martin Hibbert, health and risk practice consultant at JLT Benefit Solutions, recently saw a client which offered a non-contributory pension scheme with an employer contribution of 8 per cent. But because the scheme was badly publicised it only had a take-up rate of around 40 per cent.
Hibbert said: “Because the group risk benefits are tied into pension fund membership, they will clearly have to dilute their spending, so it’s an opportunity for them to redesign their benefits package. The same will apply to many other employers. If it’s got to be redesigned then why not do it now?”
Others lost no time in weighing in with similar examples which they felt made compelling cases for employers finally biting the bullet and considering alternative benefit structures. Jamie Winter, head of healthcare and risk consulting at Towers Watson, referred to a client with a 60 per cent take-up rate for a well-established defined contribution pension scheme - whose group risk benefits are based on membership of that scheme.
“If auto-enrolment kicks in and it goes to near 100 per cent take-up then they’ve just added two-thirds to the cost of their risk benefits on top of everything else,” Winter explained. “So they are very interested in thinking about what design should look like in the future and in trying to control that cost. Auto-enrolment is another nail in the coffin for traditional designs and maybe it’s time to start again because the traditional products don’t work.”
Clare Dare, group risk & flexible benefits director at Broadstone, pointed to a couple of large retailing clients with very transient populations who are having to rethink ways of doing things because group risk currently covers only a very small percentage of employees. But it could suddenly rise to many thousands.
Dare said: “It’s quite a challenge for clients to have to think differently because some have never questioned the traditional benefit structures of four times salary for life cover and 75 per cent of salary for group income protection. Some will almost be forced into thinking differently so we must start talking to them now, although smaller clients are saying that it’s still a long way off. Some payroll providers also aren’t yet making changes, which has huge implications for clients as well.”
Leighton Churchill, group risk & healthcare consultant at Johnson Fleming, raised the hope that group risk costs might not increase by as much as feared because better selection resulting from a lot of younger employees joining the pension scheme may result in more favourable rates. More importantly still, there was general agreement that auto-enrolment wouldn’t actually result in employers deciding to go without group risk products because it was too easy for them to decouple them from pensions if they really wanted to. 71 per cent of attendees felt that a significant proportion of employers facing major pension increases would sever the link between pensions and group risk as their schemes were redesigned.
Discussion about the forms that such redesigning would take ranged from reducing cover limits and changing state benefit offsets to switching to income protection operating on a limited-term or pay direct basis.
Chris Ford, director of group risk at Jelf Employee Benefits, said: “Does everyone really need four times salary cover? From a product point of view a 20-year old with no overheads, no expenditure and no concept of ever dying is completely different to a 63-year old who suddenly realises that their legs don’t work as well as they used to. Four times salary for life and 75 per cent of salary for income protection is not realistic nowadays.
“We need to make products more flexible and in tune with lifestyle, so maybe we should be considering two times salary for life and 40 per cent of salary for income protection? If you restructure slightly it doesn’t mean that auto-enrolment has to have a huge impact and involve going without group risk altogether.”
Steve Ellis, head of group risk at Premier Choice Group, felt that it was important to completely divorce income protection from state benefits if we are going to find a way of making it attractive to both employers and employees.
He said: “I think that rather than having a benefit structure of 75 per cent of salary minus state benefits we should look to have a straight 50 per cent of salary with no offset. You can have some people on very low salaries, so there’s got to be a longer-term encouragement to return to work and a meaningful benefit. I inherited a scheme set up on 75 per cent of salary minus single person’s state benefit, and some staff were earning £10,000, so they questioned the value in having the cover.”
Winter pointed to the risks involved with traditional designs with fixed offsets for state benefits in view of the fact that the state was now turning down so many benefit claims. He had already had a couple of claimants enquiring why they were having around £5,000 deducted from their income protection benefit when they weren’t actually getting anything from the State. Winter therefore felt that we’ll either go to the no-offset type design or that there could be a case for lower-paid workforces opting for a basis that deducts the actual amount of State benefit being received.
The fact that Swiss Re’s Group Watch 2011 survey showed that limited-term accounted for 10.1 per cent of in-force income protection schemes in 2010 (compared to 7.1 per cent in 2009) created a major talking point. 57 per cent of attendees felt last year’s increase will actually be replicated this year and 43 per cent thought that the trend would still continue but be less significant than last year.
Dare and Ford were amongst those to report plenty of realisation from clients of the need to save on premium by moving to limited-term because it seems illogical to still have to pay claims up to retirement now that employees are likely to change jobs after only a few years.
Perhaps somewhat surprisingly, an increasing interest in group critical illness cover was also becoming evident. Gallagher Risk & Reward’s Tim Johnson reported a rise in take-up rates on his own voluntary schemes from 7 to 15 per cent. He put this down to employees seeing it as “something for me”.
Premier Choice Group’s Steve Ellis even suggested that providers could start bolting rehabilitation services onto group critical illness cover. But Towers Watson’s Jamie Winter was keen to express a few reservations about the core product.
He said: “The issue is that critical illness cover is easy to sell but it’s very poorly targeted. Someone could be back to work within two weeks after receiving a payout but the product doesn’t cover stress and bad backs like income protection. If people really sat down and realised that cancer has to be invasive to qualify for a critical illness claim and that pre-existing conditions are excluded they would probably realise that it is of very limited value. So, although the headlines are easy to deliver, there is clearly an educational problem.”
Winter also highlighted another “small elephant in the room” with regard to auto-enrolment, pointing out that the requirement for re-enrolment to take place after three years could raise some significant underwriting and administrative issues. Anyone re-enrolling after three years would technically be a late entrant and would therefore need full medical underwriting as they would not be able to access the free-cover limit. At the moment group risk scheme members are not normally considered late entrants if they join within three months from outset and, although this can sometimes be extended to one year, was it going to be feasible for underwriters to extend it to three years?
Interest in virgin group risk business was surprisingly muted, considering there are 80,000 businesses with between 50 and 3,000 employees who currently don’t have a pension scheme. Gallagher Risk & Reward’s Tim Johnson observed that such companies seemed to find it hard to accept benefits in any form, and Churchill felt that only the “odd few” would also be implementing group risk schemes.
Nevertheless, there was widespread confidence that the bulk of the storm had already been weathered with regard to existing business, despite growing fears of a double-dip recession and no resolution to the Eurozone crisis.
Ellis said: “A lot of those wanting to save costs have done so already and they’ve got their budgets down to where they are. There are a vast number of companies that are genuinely optimistic that things will improve and, although they realise the short-term might be difficult, they are confident of success in the long term.
However, Winter seemed more downbeat than most. This was hardly surprising given that the previous week he had been to see a client which had felt compelled to cancel plans for a £190,000 new group income protection scheme because it was about to make 25 people redundant.
“It couldn’t say it was making all these people redundant and then proudly announce the launch of a costly new scheme, so it asked us for a voluntary income protection scheme instead,” Winter explained. “There are a lot of doom mongers saying we are in for a lost decade like Japan, and I can’t actually rule out that happening given what’s going on in the Eurozone. If Greece won’t pay its debts then how are we going to get out of it?”
But delegates thought that employer concerns about the costs of private medical insurance were far more critical than they were for group risk. “In the past employers have always gritted their teeth and haven’t stopped medical cover because it’s a very emotive subject. But I think it’s reached a tipping point and we can’t cope with double digit medical inflation year-on-year,” said Winter.
There was, however, general agreement that rises in group income protection premiums could be lying around the corner. Anecdotal evidence abounded of insurers having levelled off their rates or even having started to harden them. As rates had been clearly unsustainable for too long this could result in some substantial hikes at renewal.