The government’s Welfare Reform Act 2007, which received Royal Assent in May is the latest piece of legislation to affect group risk benefits, says Sam Barrett
Changes to legislation and government strategy around issues such as age discrimination and welfare reform are resulting in evolution in the group risk benefits arena, with additional requirements driving new product design and perks provision.
One such change is the government’s Welfare Reform Act 2007, which received Royal Assent on 3 May and is intended to reduce the number of people claiming incapacity benefit by encouraging them back into the workplace. The government hopes that this help raise the employment level to 80%.
This will be achieved by introducing a revised payment system for those claiming incapacity benefits. Once the legislation comes into effect, the date of which has yet to be finalised, claimants will have to undergo a personal assessment to determine if they have a genuine problem and then a second test to identify what type of work they are able to carry out, if they are fit to do so. Those that are deemed eligible for support following the first assessment are expected to receive a payment of equivalent value to the existing jobseekers allowance, although the government has yet to confirm the finer detail of the second allowance for those who are considered unfit to work. Steve Smythe, health and risk consultant at Jardine Lloyd Thompson, says: “It’s a cultural change. It will take time for the new way of thinking to be adopted but it will make the idea of rehabilitation more accepted.”
If claimants are judged fit enough to carry out some kind of work, then when they return to the workplace, their employer could receive assistance to help support them, such as funding to help cover the cost of providing items such as voice-activated technology, suitable furniture or to help transport employees between their home and place of work.
It is anticipated that these reforms could have consequences for the group risk market. Wojciech Dochan, head of commercial marketing at Unum, explains: “Currently, group income protection limits take incapacity benefits into account so they may need to be altered for the new system.”
The government, alongside its welfare reform programme, is also placing a greater focus on rehabilitation, which could have an impact on both employers and the benefits market. On 18 June this year, Lord McKenzie announced the creation of a new vocational task group made up of representatives from government, business, customers and insurers, to help those who are ill, or injured, return to, or remain in, work. Employers are likely to be encouraged to do more to support their staff.
The task group will firstly identify the services currently available and any wider provision and also determine why organisations do not provide more support for staff and what needs to be done to increase their understanding. It will then publish an initial report on these points later this year and a further report with proposals for mechanisms, tools and incentives to encourage employers’ wider take up of occupational health and vocational rehabilitation services for their employees, next year.
It is not yet fully clear what effect both the Welfare Reform Act 2007 and McKenzie’s reports will have on the group risk market, although both employers and providers may well have to review their provision in this area. Most group income protection schemes, for example, are currently structured so that they top up the amount staff receive through incapacity benefits. As this amount is likely to vary more widely between individuals under the terms of the new reforms, however, employers may have to review how their plan is structured, particularly in terms of its administration.
There will also be greater scope for employers that offer group income protection to spell out why it is worth taking either as a core benefit or as an option through a flexible benefits scheme, as staff will no longer feel that they will be able to rely on the state for assistance if they become unable to work.
The focus on rehabilitation, however, is also thought likely to drive new product design. Smythe says that insurers are already adapting plans to incorporate more support for employees and he believes there is an opportunity for providers to offer this type of rehabilitation and case management service on a standalone basis.
But these are not the only changes to affect the group risk benefits market in the past year. The Employment Equality (Age) Regulations 2006, which came into effect last October, require employers to treat all employees the same regardless of their age.
From a group risk perspective, this meant that employers had to alter their contracts to provide cover beyond any retirement age that was previously in place, typically shifting cover from age 60 to age 65 years and, in some cases, beyond.
Clearly this has cost implications. “The increase has had little effect on group life and critical illness premiums but it has meant more significant increases for group income protection contracts. Depending on the profile of the workforce and whether there are members [aged] under or over 60 years, premiums have increased by anything from around 15%-20% to as much as 100% to reflect the increased liability,” explains Dochan.
Faced with this increased cost, employers have taken different approaches to dealing with this additional requirement. Matthew Lawrence, practice head for risk at Aon Consulting, explains: “Some employers decided to extend the group income protection policy and paid the additional premium while others, especially the larger ones, have opted for self-funding to pick up this additional liability. Where they do go for self-funding, their insurer will often agree to be a claims adjudicator for employees not covered by the contract. Depending on the scheme, this can either be negotiated into the premium or charged as an additional fee when they deal with a claim.”
Insurers were initially cautious about taking on additional risk, but many have now relaxed their position on the age up to which they will write cover. “There was an element of caution from the insurers initially but we’re seeing a lot more of them adapting to the new requirements. While quotes initially went up to 65 years or, in some cases, 70 years, we’re now seeing more of them quoting up to age 75 years,” says Smythe.
For instance, Unum will now automatically accept schemes up to age 70 years and will often consider extending cover beyond this if the circumstances enable it.
But while insurers may now be happier to offer cover to these older lives, there are still issues to resolve.
Heyday, an organisation which represents people who are in or nearing retirement, is taking a case to the European Court of Justice to challenge the UK government’s interpretation of the age discrimination legislation. It believes that, by implementing the rule to request continued employment from age 65 years rather than have an automatic right to continue to work, the UK is not fully implementing the European Directive on age discrimination. As a consequence, it would like to see the government forced to amend the legislation so that workers over aged 65 years have the same protection as their younger counterparts.
While it might, in theory, be possible for employers to honour such an interpretation, Bob Cheesewright, group risk marketing manager at Friends Provident, says that it in practice it would throw up major difficulties for them in funding group income protection benefits. “If this was the case, anyone who was claiming could continue to receive benefit indefinitely. If this is allowed to happen, it makes premiums astronomically expensive,” he explains.
Cheesewright believes there is room for a more measured approach when it comes to group income protection. “The legislation states that different treatment is permitted where there is a good reason for it and this could be argued for group income protection. The insurance exists to protect the younger person with a family, rather than the older person who could draw their pension. I’m sure, especially where budgets are limited, older colleagues would accept a different benefit that is more relevant to their circumstances rather than see the scheme withdrawn altogether. This would also protect employers from effectively writing a blank cheque for cover,” he explains.
Whether or not group income protection is afforded this interpretation, premiums will have to remain significantly higher than before the legislation was introduced. One possible solution to this may be to include income protection within flexible benefits schemes, where employees can select their own perks. This would enable employers to offer the same value of benefit rather than the same level of cover so there wouldn’t be any discrimination.
Alternatively, new types of group income protection contracts might come into play. In particular, limited-term contracts, which pay for a set period of up to five years, cap liability and make premiums as much as 40% cheaper than on traditional cover. Lawrence says: “There has been interest in these types of contract, but this hasn’t turned into sales yet.”
Changes to employment contracts, and the perceived meanness associated with reducing a benefit could be behind this. Employers may also be loath to provide a benefit that stops paying, just when it is needed most.
Investors in People standard
Organisations’ commitment to employees’ health and wellbeing is coming under scrutiny from Investors in People as it is considering extending its standard to include health provision in the workplace.
Investors in People believes a proactive approach to employee health can result in a number of benefits including improved loyalty, productivity and customer satisfaction as well as helping to reduce staff turnover and absence, and litigation costs.
To see whether employers could benefit from this, it is currently conducting the third phase of its Health and Wellbeing at Work pilot, which will see 150 employers including health and wellbeing as part of their assessment for the standard. The pilot’s findings will then be used to determine whether health and wellbeing should become a permanent part of the standard.
But already insurers are mindful of whether the employer has achieved the standard. Bob Cheesewright, group risk marketing manager at Friends Provident, explains: “It’s true that levels of absence are lower in well-run organisations such as those with the Investors in People standard. If an employer with the standard approaches us for cover we will give it an introductory discount to reflect the improved claims experience that it is likely to have.”