In the last in his series offering protection non-specialists an introduction to group risk, Paul Avis highlights three important considerations for advisers looking to ensure schemes are fit for the modern workforce
* Eligibility: Some employers limit their schemes to either executives or pension scheme members but, wherever possible, an eligibility of ‘all employees' works best for a number of reasons. Schemes with a limited number of employees will have a lower ‘free cover level' (FCL), which is the maximum amount of benefit an employee can have without needing any medical underwriting in normal circumstances.
Benefits over the FCL will be medically underwritten and individuals may be limited to the FCL, have additional costs or be postponed. Also, as these tend to be high-earners, they do not necessarily like going through the process and so, the more people in the scheme, sometimes on lower benefit levels, the higher the FCL.
With late or discretionary entrants, it is possible people may join schemes in the knowledge they are more likely to become claimants. As an example, a person who declined to be a pension scheme member now wants to join to gain a group life assurance benefit as they have a serious health condition, so medical underwriting needs to be done in these instances. This not only increases scheme administration costs but could be remedied by an ‘all employee' scheme, where everyone joins on the day they start with the organisation or complete their probation period.
‘Single Premium' costing happens normally up to 10 to 20 employees. This means each individual member has a separate cost attributed to them and leavers and joiners need to be specifically noted. Once the threshold is exceeded, however, a ‘unit rate' applies, where a percentage of salary or per mille (thousandth) of benefit is applied uniformly to everyone covered.
This rate is normally guaranteed for two to three years, as long as the membership does not vary by a significant amount within a single year. A simplified review is done at the end of each year to adjust the costs up or down, depending on how the membership has fluctuated. With this approach, organisations have greater budget certainty and less administration to undertake.
Where eligibility is for limited ‘populations', such as executives or pension scheme members, these tend to be older groups. By including all employees, the unit rate may be reduced as younger, healthier lives offset the risks. More benefits can be provided at better rates, and it is possible premiums may actually reduce - especially on schemes that have been closed to new entrants for an extended period of time.
* Termination ages: In 2010, the industry body Group Risk Development (GRiD) negotiated an exemption from the abolition of the default retirement age for schemes with a cover cease age of at least ‘the greater of 65 or state pension age', which limits employers' exposure to continuation of service.
Despite death benefits generally having no cost to make this change, as an example, 41% of our group life lump sum policies still have a fixed termination age of 65 or less. Change is becoming more urgent as the state pension age will be over 65 from 6 March 2019 - within a typical two-year rate guarantee from now.
Data suggests just over half (50.6%) of our group income protection policies still have a fixed termination age of 65 or less, despite there usually being only a 2% to 3% additional cost. If a younger employee claimed, there could be a period of non-insurance - from 65 to 68 years.
In such instances, would the exemption still be valid? The employer might be asked to self-fund the cover for the extra three years, or possibly even longer. Of course this has not happened yet, and therefore has not been tested by the courts, but the only way an organisation can guarantee they can cease an employee's benefit is by adopting a cover cease age of ‘the greater of 65 or state pension age'.
For anyone born after 6 April 1978, the current pension age is 68 and could rise to 70. There is already a three-year gap of non-insurance between 65 and 68 so, in effect, a five-year period of non-insurance would happen if an employer kept a cover end age which did not take advantage of the exemption for insured group risk policies.
A further issue with cover cease ages is that some policies still cease at 60! Some 2% of our policies cease at 60, which is a concern not only due to the default retirement age exemption but also from a gender equality view. All schemes should have equalised, so uncovering other male/female differences (implying a potential legal issue) in scheme design is imperative.
As an industry, we worked hard to gain an exemption and to future-proof and protect our customers. Is now the time to adopt a more modern cease age for your benefits? I would suggest so. The gap between many organisations' benefit termination ages and the state pension age is only going to grow and, with the jury out on any periods of non- or self-insurance, certainty can only be gained by doing this.
* Staff attraction and retention: In the war for talent, group risk benefits serve their primary purpose well as retention and attraction tools - but only when communicated by employers to existing and prospective employees.
There are plenty of facts that can give employers a clear message of value. Only 2.2m people, for example, are covered by 17,168 group income protection schemes in the country while group critical illness is even more exclusive - only some 3,300 schemes cover around 586,000 people …
Sticking with the financial dimension, in a period of increasing inflation and low wage growth, how about extra benefits for each employee without increasing costs for the employer? This is where support services step in. We have attributed a monetary cost for every support service and, when communicated in addition to the financial products, they really do have the potential to increase employee engagement.
Paul Avis is marketing director at Canada Life Group
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