An increase in the state retirement age could cause a significant rise in group income protection premiums and may result in changes to scheme design and the level of protection employers can justify, according to several industry experts.
The comments come after an employee benefits survey by Origen revealed income protection (IP) as a benefit has been consistently decreasing for both large corporate companies and small medium enterprises (SMEs) since 2001.
Glenn Laming, sales and marketing director in the group risk division at Legal & General, says the government’s proposals to increase the state retirement age from 2024 could lead to employers considering whether to simply extend group IP schemes to age 68 or whether to review their whole employee benefits package.
He suggests employers may be reluctant to guarantee an extra three years protection, particularly as modern workforces do not tend to stick with one employer, because it could result in a major rise in costs.
For example, if employers guarantee to provide a 40-year-old employee with an extra three years of protection the company would effectively be guaranteeing to provide 28 years of payment, rather than the current 25 years, which would have a knock-on effect on premiums.
Moreover, if an employee is absent from work at age 65 Laming suggests their absence would probably continue until they are 68, with the extra three years adding significant costs.
As a result, he states: “More employers will question whether it is right to guarantee IP where the culture is not to provide this type of benefit as a matter of course.”
Laming believes companies will need to consider self-insuring certain elements of the scheme and look at their definitions of disability.
At present most schemes offer an own occupation definition, which is very generous, and Laming suggests they might look at alternatives like “suited occupation”.
He believes they could combine the two definitions so employees start with the own occupation definition and then switch to the suited occupation definition after two years with the firm.
Additionally, employers may consider changing their wider benefits package, including giving employees flexible benefits where they can opt for more life cover and less critical illness (CI) cover, for example.
Laming adds: “We have just got through A-Day where the industry was focused on ensuring high earners have protection in an appropriate way. This is the next big issue and we need insurers to give us guidance. It is important that everything is balanced and the industry looks at what the impact on the consumer will be.”
Jim O’Driscoll, scheme underwriting director at Canada Life, believes if the state retirement age increases to 68 employers will seek to move the expiry age of their IP schemes to 68 so the two marry up.
But a challenge for insurers and employers is there is no existing claims experience to work from, so they will have to look at existing population statistics which cover employed and unemployed people.
O’Driscoll adds: “The statistics on whether someone is more likely to be ill at 68 are missing. It will be a challenge for the industry to deal with this in an effective manner.”
More positively, he believes a significant increase in costs will only be seen in smaller schemes where employers may have a higher proportion of older people.
Larger schemes will still be impacted as a result of having older people, but O’Driscoll says the premiums will be balanced year to year by young people coming into the workforce.
Furthermore, he believes the trend of employers ensuring employees can return to work quickly through absence management programmes could help to control costs.
Likewise, Bob Cheesewright, group risk marketing manager at Friends Provident, points out as the costs of final salary pension schemes decline, as a result of employees drawing on the scheme when they are 68 rather than 65, this will balance any rise in the cost of IP premiums.
He believes employers who are serious about providing IP will continue to do so because the need is still as great, with one in 10 people going on sickness at some point in their lifetime.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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