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Changes to state benefits highlight the need for protection

Most people in financial services read trade publications such as Money Marketing to keep on top of what is happening in the industry.

However, there are wider issues that we all keep a watching eye on but rarely have the hours in the day to delve into too deeply unless questioned.

For many, state benefits fall into that category but recent legislation and changes on the horizon mean that group risk intermediaries need to understand the developments, as there are opportunities to be explored.

Back in 1995, when incapacity benefit was introduced. If you were still unable to work after 28 weeks when statutory sick pay finished, you were entitled to short-term incapacity benefit. If you were still incapacitated after 52 weeks, you then became entitled to the higher rate of long-term incapacity benefit.

There were additional benefits for dependants and only these were means tested.

Medical tests to qualify for the benefits were not very objective and reassessments were rare, so once a person qualified for these benefits, things did not change much.

With the increased cost of meeting incapacity benefits, a more objective medical test, the personal capability assessment, or PCA, was introduced. This made it more difficult to qualify for benefits, unless an individual was genuinely incapacitated.

In 2008, the employment and support allowance was introduced.

In this two-tier system, those who have limited capability for work receive the Work Related Activity Component, a lower benefit than those with severe limitations, who receive the support component.

The work capability assessment was introduced from late 2009 to replace the PCA to determine an individual’s status and, with ongoing reassessments, existing incapacity benefit claimants will not remain on benefits if their state of health improves.

The initial outcome of the WCAs for new ESA claims (March to May 2011) shows that 38 per cent of claimants had their claim closed before even having a face to face assessment.

Where the WCA was completed, 57 per cent of claimants were assessed as fit for work and therefore not eligible for the ESA. Of those that were eligible for the ESA, 21 per cent received just the WRAC and only 22 per cent also qualified for the support component.

The next significant change to hit state benefits is the introduction of Work and Pensions Sectretary of State Ian Duncan Smith’s single benefit payment, the Universal Credit, designed to replace the fragmented systems currently in place.

In April 2013, a trial of the Universal Credit will begin which will see one payment brought in to replace all the following:

  • Income related ESA

  • Income related jobseeker’s allowance (JSA)

  • Income support

  • Working tax credits

  • Child tax credits

  • Housing benefit

The DWP’s current timetable will see all new claims able to be processed under the new system, with new applications under the old system faded out.

All new claims are due to be under the new Universal Credit from April 2014 and existing claimants will be gradually transferred to the new system by 2017.

The contributory versions of both the ESA and Jobseeker’s Allowance will be retained.

Although not means tested, there are time limits on their payment. Once the time limit is met the benefit stops, so claimants will have to apply for other benefits and will not necessarily qualify for them.

If we look back to what group income protection benefits looked like in 1995, it was fairly common to provide some level of ‘integration’ with state benefits. This was to make sure that:

  1. Employees were not better off if they were receiving both a GIP benefit and state benefits, retaining an incentive for the employee to return to work.

  2. The cover was as affordable as possible, as there was no point in duplicating benefits provided by the State.

The level of integration ranged from a fixed offset (equivalent to the long term incapacity benefit) through to the rather complex ‘net pay’ arrangements, where the benefit was expressed as a percentage of net pre-incapacity earnings.

When incapacity benefits became taxable, the advantages of net pay benefits largely disappeared as they lost their cost advantage.

The introduction by insurers of claims management and rehabilitation services, helping incapacitated employees to make a successful return to work, has also been an important development.

GIP benefits are often based on an own occupation definition of disability so, now that it is far more difficult for individuals to qualify for the ESA, fewer and fewer employees receiving GIP benefits are likely to qualify for state benefits too.

In addition, the amount an individual will receive in state benefits is likely to change more often, not only because some payments are time limited, but also because their state of health will be checked more frequently.

With these factors in mind, finding a suitable method for determining an appropriate deductor for state benefits on GIP schemes, especially for integrated benefits, becomes quite difficult.

With benefits changing over time, finding a fair method of calculating fully integrated GIP benefits looks rather messy. Surely this demonstrates that the link between GIP benefits and state benefits has broken once and for all, so that the only sensible solution is to provide GIP benefits that are a straight proportion of salary?

There is a clear opportunity here for advisers, not just to review the benefits clients are providing under GIP arrangements but also to encourage clients to set up new GIP arrangements.

If any employer is genuinely concerned for the welfare of its staff, the provision of a GIP scheme is hugely important as the support available from the state when a person is incapacitated is being significantly eroded.

Paul Avis is sales and marketing director at Canada Life Group Insurance

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