- Changes to long-term state benefit for ill or disabled employees potentially impact employer sponsored Group Income Protection Schemes
- Employers need to understand the changes and the financial consequences of inaction
- Changing insurer stances complicate the matter
Employers insuring Group Income Protection benefits need to be ready for upcoming changes to state provision. As part of the Government's continuing programme of Welfare Reform, the Budget in July 2015 announced a significant reduction to the state benefit paid to a certain group of ill or disabled claimants, effective from April 2017. Unless specific action is taken, many employers will potentially be exposed to significant cost increases for their insured Group Income Protection policies.
Historically, individuals who were ill or disabled for an extended period received a generous state benefit. Many employers took this into account when designing their insured Group Income Protection Scheme to ensure there was an incentive to return to work. In recent years, the Government has significantly tightened state provision. State Incapacity Benefit was replaced with Employment and Support Allowance (ESA) in 2008, with further restrictions made in 2012. State benefits are now lower, harder to qualify for and are commonly only paid for a limited period of one year, with re-qualification needed for future payments.
The July 2015 Budget continued this trend by significantly reducing the ESA benefit paid to those in the 'Work Related Activity Group', which will impact all new ESA claims from April 2017. Claimants will lose the Work Related Activity Component of the benefit and so will only receive the basic ESA rate. Based on current figures this represents a drop of nearly 30% for those aged 25 and over. In addition, rates of ESA for those in Work Related Activity Group have been frozen for four years from April 2016. Ultimately ESA will roll into Universal Credit, which will result in even more complexity and potential restrictions for State benefits.
Matthew Lawrence, Chief Broking Officer, Health & Benefits UK and EMEA explains:
"This issue is not new but many employers have still not taken positive action to review their insured Group Income Protection policy. They continue to have a benefit design which means that without action the level of insured benefit could increase, with significant proportionate increases for lower paid members. Consequently, employers could be subject to significant premium increases at their next rate re-test."
A small number of insurers are planning on implementing a default benefit basis; for example having a fixed value deductible that is not linked to state benefits, and which should avoid an immediate increase in benefits and costs.
While this is a positive step from a price perspective, it could be more confusing to members if the benefit design has an arbitrary monetary deductible. In addition, while insurers have differing default stances, we have recently seen a number of insurers change their stance, with some insurers not applying it consistently i.e. differentiating between existing and new business. As this is an evolving situation it makes it vital that employers review their benefit design to make an informed decision rather than just rolling into their insurer’s default stance.
The issues do not stop here. We would recommend that wherever possible any reference to state deductibles in the benefit design is removed. This can be done on a cost neutral basis. It could also potentially eliminate any implications of a ruling by the Financial Ombudsman Service, if Group Income Protection claimants who lose entitlement to state benefits, look to their employer (or the insurer paying their Group Income Protection claim) to top up the claim payments to make up for the lost state benefit."
Lawrence advised employers to work with their employee benefits consultant to ensure they understand the full implications of the legislation - both what this means in practice and the implications of failing to act.
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