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Packaging protection

For months, it has been well nigh impossible to have a conversation

with anyone about group income protection without the subject of

pensions and ill health early retirement rearing its head.

The basic storyline is convincing enough. In the good old days of the

20th Century, when stockmarkets used to rise, most defined-benefit

pensionschemes enjoyed the luxury of boasting investment surpluses.

Employers could, with the permission of their scheme trustees, often

use surplus assets to fund ill health early retirement for employees

suff- ering from long-term sickness or disability.

Now over half the country&#39s final-salary schemes have closed to new

entrants or future accruals. Many of the remainder no longer have

surplus assets and the trustees of those that do tend to be more

tight-fisted than previously.

Furthermore, the defined-contribution schemes to which many employers

have switched never had any surplus assets in the first place because

scheme members each build up their own individual pot of money.

In theory, this should all lead to employers reappraising their

disability arrangements and paying greater attention to the merits of

income protection, which pays a regular income in the event of

long-term incapacity – essentially similar to what someone receiving

ill health early retirement enjoys.

In practice, however, the pension turmoil has resulted in far less

new business to date for income protection insurers than they or

anyone else would have expected. They confidently predict what is

lying around the corner but, when pressed on the subject, always

acknowledge that they have as yet exp-erienced no tangible increase

in sales.

I have heard it suggested that the whole ill health early retirement

issue is largely a red herring on the grounds that it was often used

as an inexpensive method of shedding dead wood. Local management of

big public sector employers could get rid of older staff and the cost

would be borne by the pension scheme as opposed to their local budget.

We will never know how much truth there is in this because the

managements concerned are hardly likely to want to advertise the

extent to which they were happy to abuse the system. But, while I

have no doubt that such instances occurred, I would be surprised if

they accounted for the majority of ill health early retirement cases.

In my view, the lack of demand is more likely to be explained by the

fact that this potentially valuable new source of income-protection

business has been viewing our product from the wrong angle.

Income protection undoub-tedly can provide a worthwhile substitute

for ill health early retirement in many cases, not least because it

does not rely on the length of service chalked up by the employee to

determine the amount of benefit that is paid. Nevertheless, anyone

assessing it as a direct replacement is essentially judging its

cost-effectiveness purely as an insurance mechanism and stands no

chance of appreciating its full value.

The leading income-protection providers nowadays are not simply in

the business of offering insurance. They pride themselves on offering

extensive rehabilitation facilities in order to engage with employees

to ensure an early return to work if at all possible.

Companies will offer the services of physiotherapists and

occupational therapists and will pay for retraining for those needing

to learn new skills and will sometimes even fund private operations

to enable employees to jump NHS queues.

The employer is benefiting from a potent rehabilitation and absence

management tool.

A further advantage of dealing with a major income protection insurer

is that it can prove a valuable source of expertise when it comes to

helping with the interpretation of legislation such as the Disability

Discrimination Act 1995. This aid to better understanding could avert

the employer finding itself in a court of law.

Not surprisingly, the blinkered approach which focuses only on the

insurance role of a group scheme often decides that the cost, which

is typically in the region of 1.5 per cent of payroll, is too high.

IFAs should focus less on trying to push income protection as a

direct alternative to ill health early retirement and more on making

sure that employers appreciate the complete package of benefits that

a scheme provides.

The transition in the pension market should be viewed as a sales

opportunity but primarily because it raises the whole subject of

sickness absence in the workplace. IFAs should be aware that the mass

switch to defined-contribution schemes has created opportunities to

sell to employers which have already implemented an income-protection


Since October, the Fixed-term Employees (Prevention of Less

Favourable Treatment) Regulations 2002 has prevented “non permanent”

employees being treated less favourably than full-time ones doing the

same jobs unless the employer can objectively justify different


Discrimination was never an issue when full-time workers were in

defined-benefit schemes because funding ill health early retirement

from surplus assets was a far less transparent exercise than offering

income-protection cover.

Furthermore, fixed-term workers were not members of defined-benefit

schemes but some now belong to group stakeholder or personal pension

schemes. They are more likely to draw comparisons between the way

that they and members of other defined-contribution pension scheme

arrangements are treated.º

One way for employers to safeguard against discrimination claims is

to offer fixed-term workers income protection as well but this only

has to be for the duration of their fixed-term contract.


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