Every idea has its critics and introducing some form of auto-enrolment system for income protection is no exception. For everyone who believes this is the way to increase take up and reduce the amount spent on state incapacity benefits, there is a “doubting Thomas” with a reason why it is not the answer.
Low opt-out rates for pensions auto-enrolment in the UK and a look at the systems that operate in Australia and the Netherlands provides some food for thought.
For example, according to the Association of British Insurers’ recent report, Welfare Reform for the 21st Century, Dutch employers must pay their employees sick pay at a minimum of 70 per cent of prior earnings for at least two years. There are also strict rehabilitation requirements, which has created a market for insurers to protect businesses against those risks and led to an increase in preventative measures and rehabilitation of employees.
In Australia, income protection is known as group salary continuance and is available as an option within workplace pension schemes. But the ABI report says claims have been higher than the industry expected and priced for, which is a challenge.
Nevertheless, the Association of British Insurers sees the workplace as having great potential for increasing access to, and take up of, income protection. Others in the industry have come to the same conclusion.
Since May, Canada Life has been calling for a combination of the Australian and Dutch models to be tailored for the UK market. Canada Life Group Insurance marketing director Paul Avis says the group income protection market has grown in terms of premiums but not in terms of new employer business.
“My peer group is not aligned in terms of how to grow this market and is fragmented in its approach. At every stage of the value chain, whether insurer, employer or adviser, this benefit is proving to be a challenge,” he says.
For Avis, the solution to this problem and that of having a costly state system that does not work properly is a model whereby a two-year salary is paid and there is a compulsory rehabilitation programme.
“However, this should not be imposed on employers until the next increase in pension contribution,” he says.
“For example, when the employer moves from 3 per cent to 5 per cent pension contribution, they can give employees the choice of a 5 per cent pension contribution or 0.5 per cent to extended sick pay and a 4.5 per cent pension contribution,” he says.
Avis says waiver of premium could be provided to cover the employee’s pension contributions and the employer’s national insurance contribution if the employee was unable to work due to illness. There would also be options to top up or extend cover on a corporate or personal basis, which would generate opportunities for financial advisers.
“It’s not about insurance; it’s about creating a debate about how we provide a world class sickness and absence management system where employers and employees are clear about how much they get, who from, how long for and the support that’s there to get them back into work or retain staff. This, to me, is the only model to significantly grow the group income protection market,” says Avis.
Macbeth Financial Services managing director Simon Claxton says: “Everyone should know that there is a way to protect their income because it protects their ability to fund everything else. From a selfish viewpoint, that is important for advisers because once someone’s income stops or reduces, everything you are advising them on is affected.”
He points out that some insurers will have a vested interest in backing an auto-enrolment style system that would generate more business for them, while some employers would see it as another form of tax. He still thinks it would be a great thing to do, although he questions whether it could work in practice.
“Things like state benefits and occupational sick pay need to be addressed before such a scheme can be considered and I don’t know how insurers would go about costing it,” he says.
Legal & General thinks it is feasible that 0.5 per cent of a salary of around £35,000 to £40,000 could provide benefits of around 40 per cent of salary for 12 months.
But LV= head of intermediary marketing Justin Harper believes auto-enrolment for income protection is fraught with complexity because it interacts with state benefits, sick pay and depends on individual circumstances. He believes it is up to the individual market to rise to the challenges over the long-term.