There has been a lot of discussion recently around the possibility of auto-enrolment style funding for group income protection. I believe that our industry needs to unite to support the belief that this is a good thing. But many insurers are yet to be convinced and, at the recent Corporate Adviser Group Risk Forum, 88 per cent of attendees said ‘no’ to the idea of the Government extending AE to GIP. Clearly I have work to do.
In the UK the current debate is around the protection gap and whether there is an affordable simplified product that would be suitable for employers and meet the needs of employees. Many minds are grappling with this issue but the experiences in the Netherlands have some lessons to offer.
The first lesson is that it has taken a long time for them to develop a solution, based on a collective approach that puts a lot of emphasis on the role of the employer. The first overhaul of their system was in 1987 but the scheme was not actually finalised until 2006. The approach agreed was based on a report accepted by all political parties and supported, at least in principle, by unions and employer groups. It had also gained the acceptance of the general public, being seen as relatively fair. The scheme is operated by a government agency, the UWV, which is also responsible for adjudicating the degree of disability.
So here is how it works. If an employee is ill, the employer is required to pay at least 70 per cent of the employee’s salary for the first two years, up to a salary cap of 51,414 euros. In practice many employers pay more than that for the first year.
There is also a legal requirement to provide support for rehabilitation with early intervention – the employer and absent employee should have an agreed plan after 8 weeks.
After this initial period of absence the state takes over. The absent employee is assessed against an ‘any occupation’ definition, using objective tests. If they are deemed to be over 80 per cent disabled they will qualify for the full state benefit, which can rise to 75 per cent of their salary – up to the salary cap – if disability is considered permanent.
If disability is rated as between 80 and 100 per cent but is not expected to be permanent then a benefit of 70 per cent of their salary, up to the cap, is payable, whilst rehabilitation continues.
If the level of disability is considered as being between 35 and 80 per cent, with the potential for re-integration into the workplace, the benefit is set at 70 per cent of the difference between the salary for any work undertaken and their previous earnings. If an employee in this situation becomes sick whilst undertaking some level of work, short term sick pay is available.
These payments are met by the state. But it is possible for an employer to agree to pay the benefits in the latter two scenarios, in return for lower national insurance contributions.
The employer makes payments to cover the state benefits via a payroll tax. The amount of the contributions is based upon the overall experience of the system, with further adjustments for different sectors of industry.
In 2014 the standard contribution rates have been set at a percentage of salary up to the cap – 4.95 per cent for the basic contribution, 0.69 per cent for cover for partial disability, and 0.34 per cent for sickness of partial disabled, the latter two of which can be self insured by the employer.
So what can we learn from the Dutch model? Compared to the UK, their system is generous to those with a long-term need. A focus on rehabilitation in the first two years is central to their approach. And it appears to be successful, with new claimants on state benefits falling from 100,000 in 2000 to 40,000 in 2010.
And the success is reflected in the contributions – the basic contribution rate of 4.95 per cent has fallen from 5.7 per cent in 2010.
But the system is not simple and requires support from all parties to make it work.
So bearing in mind that so far our own AE pensions scheme has been successful and we know that there is a working model of an AE GIP proposition in Holland, showing positive results, my first question is “are you still so sure that AE for GIP should not be considered here?” If you still do not accept that this is a way forward, I have to raise a second question “what is the alternative to allow GIP market growth – not just by premium amount and the number of employees covered but by new to market employers, wishing to purchase this important benefit?”. Without AE for GIP, I cannot see how our market will grow.