Life assurance has dominated employers’ group risk focus since pensions auto-enrolment was introduced in October 2012.
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- Life assurance is expected to continue to dominate employers’ group risk focus for the next few years as they auto-enrol their workforces.
- In a new trend, organisations are separating their pension provision and life assurance cover.
- An ageing workforce does not necessarily mean higher group risk benefit costs.
This is because organisations could face increased life assurance costs as their pension scheme membership grows.
Alan Thacker, a consultant at benefits advisory firm Buck Consultants, says: “Many employers link life assurance cover level to their pension scheme. Auto-enrolment is increasing pension scheme membership, which is indirectly increasing employers’ group risk costs.”
Some employers have taken a tough stance on potential hikes in life assurance premiums by reducing, or even removing, life cover for any employees they auto-enrol into a pension scheme set up specifically for the new legislation.
But John Russell Smith, client director at Lorica Consulting, is not surprised by employers’ action, and expects this trend to continue as more organisations treat their pension schemes and life assurance policies as standalone benefits.
“We have seen most employers divorce life assurance membership from pension scheme membership,” he says. “I don’t necessarily think the two things go hand in hand these days.”
Limited cover terms are, of course, nothing new in the group risk market as employers try to reduce, or at least control, their benefits spend. For example, some employers have capped the group income protection (GIP) cover they offer their employees to, typically, between two to five years, rather than offering a benefit that pays out until retirement.
This is not surprising given the hardening of GIP premiums, which Thacker believes has been fuelled by a rise in claims for illnesses such as stress , as employees have struggled to manage increased workloads during the recession.
Russell Smith expects this limited cover trend to continue. “I definitely recommend limited terms for employers without GIP,” he says.
Russell Smith says employers’ starting point should be to ascertain their employees’ average tenure with the business. Organisations should then be encouraged to outline how far they feel obligated to support staff on long-term sick leave.
This is a particularly pressing issue for employers given the difficulty that Thacker claims employees are experiencing in accessing the government’s Employment and Support Allowance (ESA) benefit, which is designed to support staff on long-term sick leave .
“It is now getting very difficult for employees to qualify for those benefits, and even when they get the benefit, they lose it after 12 months and have to reapply for it,” he says.
The ESA time limit was introduced under the Welfare Reform Act 2012 and took effect on 30 April 2012.
Employers also need to consider how, and whether, they plan to support older workers , and how group risk benefits can help them do this.
“This is the biggest thing that’s been impacting the market on the group risk side,” says Thacker. “The removal of the default retirement age, and the fact that pensions provision is, in a defined contribution [DC] environment, forcing many employees to continue working beyond 65 , will result in a lot of upward pressure on [benefits] costs.”
This is because older workers are more likely to encounter health issues and mortality as they remain in the workforce and, consequently, increase employers’ group risk benefit premiums, says Thacker.
But Russell Smith rejects the assumption that older workers are more prone to ill health than their younger peers. “Employees are simply living longer because they are healthier and mortality is improving,” he says. “Many insurers are happy to cover employees until they are 75.”
Insurers could work harder to show employers how they will play an active role in keeping their employees fit and healthy. “All group risk insurers should aspire to do more in the wellness space in terms of the workplace rehabilitation services they offer,” adds Russell Smith.
Insurers should also work harder to simplify their administration and enhance their technology-based processes , says John Ritchie, chief executive at insurer Ellipse. He expects to see group risk providers offer employers greater access to technology-based group risk benefits for a wider range of employees, but at a lower level of employer-funded cover, over time.
Ritchie believes employers’ auto-enrolment-based root-and-branch benefits reviews will fuel this evolution.
“The group risk environment is changing and auto-enrolment is speeding up the rate of change,” he says. “The question is, who’s ready? The really fast-growing models are those that combine the provision of software and advice.”
Ritchie adds that the Health and Work Service that the government plans to introduce in Autumn 2014 will have little impact upon the group risk market’s rate of change. The service aims to provide occupational health advice and support for employees, employers and doctors, to help staff that have been off sick for four or more weeks return to work.
”It will be absolutely useless. It’s a fig leaf; the appearance of doing something. My prediction is that 95% of employees won’t use the service.”