My client is an SME employer who can no longer insure employees until default retirement age after its removal. He is continuing to provide group income protection benefits to all of his employees for as long as they work in the company. What considerations and alternatives should I talk through with my client?
Paul Avis, sales and marketing director, Canada Life
Failure to insure to a minimum of age 65 or State Pension Age (SPA) - the latter of which will inevitably go up over time - will remove the exemption to the Equality Act allowing a cease age for insured group risk benefits and the employer would have to pay in perpetuity or until death.
My advice would be to insure to a minimum of the greater of either age 65 or SPA and absorb the small cost.
Employers may consider providing cover beyond SPA and most insurers will cover group income protection to age 70 and group life or critical illness to age 75; it is possible but there would be cost implications. The employer should also consider the current contractual promise and how it is worded, perhaps consulting with employees on its amendment if a change is being considered.
As SPA changes in the future, insurers may accept further increases in the cover cease age.
However, for group income protection claims that are in payment when the individual's SPA increases, most insurers will only pay the benefit to the SPA that applied when the claim started. This could leave an employer with an uninsured liability.
To alleviate concerns, limiting the maximum payment term could minimise the issue.
We are still only just starting to see the impact of the removal of the default retirement age as people reach SPA and decide that they will continue working.
Employers need to take action now, to anticipate the likely increase in working age that is going to happen.
Paul White, client director, Enrich Employee Benefits
The removal of the default retirement age means employers are no longer able to force employees to retire.
If employees continue in service they continue to be entitled to the benefits of employment, such as life assurance and income protection. However our industry successfully lobbied for an exemption to allow employers to cease insured benefits at state pension age.
While employers are generally continuing to provide life assurance to employees throughout employment we would caution them against providing IP beyond SPA. Firstly, it will be expensive to provide and importantly the costs will rise significantly in the future.
Secondly, at some point the insurer will actually be unwilling to provide cover - be that 70 or 75 - so the employer could get left with an uninsured liability beyond this. Typically therefore, clients are taking advantage of the exemption and limiting group IP cover accordingly and we would advise this client to do likewise.
As with all things there are a couple of caveats; firstly, the removal of default retirement age means the average age of the workforce will increase as employees stay in service longer and push up the cost of benefits; secondly, the SPA will increase over time; and finally, at some point in the future, the exemption could be removed. Employers need to factor in what might happen to their workforce and legislation in the future into decisions they make now.
Nick Cosh, group risk manager, PMI Health Group
Although the Default Retirement Age (DRA) has been phased out, the client in question need not be exposed to open-ended liabilities.
GRiD fought for the exemption to the principle of equal treatment where group risk insured benefits are provided by an employer - and the Department of Business Innovation and Skills formally agreed.
The client in question should be advised that group income protection benefits should be in line with the SPA, initially applying to employees age 65 and above and rising thereafter. The SPA is currently set to rise to 66 for both men and women by October 2020, and to 68 between 2044 and 2046.
Beyond the SPA, individual employees can still work for the company, but if they are absent on long-term sick leave and are unable to return to work, the employer may be able to put them on notice for retirement - providing they meet legislative and contractual requirements.
By linking the client's income protection scheme to the SPA, however, its scheme will typically see a premium increase of around 3% or 4%. This is because of the additional liability the insurer will potentially have to carry for those employees retiring beyond the age of 65.
If the client is faced by budgetary constraints, there are a range of products in today's marketplace to reduce the overall cost of an income protection benefit. Clients should seek specialist advice to ensure they have the right benefits in place.
