Changing expectations

Attitudes to work have undergone a fundamental shift in recent decades. As employees have moved away from the notion of a job for life towards more transient careers, so employers have begun to question and review whether what they provide for, and how they support employees remain suitable. As a result, many have moved away from their previously paternalistic approach.

Katharine Moxham, spokesperson for industry body Group Risk Development (Grid), says: “We have seen the decline of paternalism over more recent years and we have moved away from the job-for-life-type position, where a company would have held huge obligation to support its employees. Our increasingly diverse and mobile workforce means one size no longer fits all and employers focus now on attracting and retaining the best employees rather than looking after them for paternalistic reasons.”

This shift has increasingly involved the transferral of risk and responsibility away from the employer onto employees. The move from defined benefit to defined contribution pension provision is perhaps the most significant and high profile demonstration of this, but the shift has now begun to filter down into other areas of benefits provision.

Inextricably linked to these changes is how employers deal with long term sickness issues. Kevin Newman, head of healthcare and risk consulting at Towers Watson, explains: “Historically, individuals have, as part of the DB deal, been entitled to ill-health early retirement provision. That then comes away and you come into a new funding environment in a DC world and the question is ’what do we do around ill-health benefits?’”

For many, group income protection schemes or critical illness insurance are typically used in replacement for ill-health early retirement provision. However, given that the majority of employees no longer regard jobs as being for life, it is perhaps not surprising that employers have begun to question whether they should continue to provide financial support and benefits until the end of an employee’s working life or whether to take a much shorter-term view.

According to Grid’s employer research, conducted in October 2011 among 500 businesses, more than a third (36.4 per cent) did not see any obligation to offer financial support to employees, while just 9.5 per cent felt it was their duty to offer high levels of financial support to disabled employees and/or employees’ dependants in the event of their death while employed.
Limited-term group income protection arrangements – which typically provide a replacement income for a two-, threeor five-year period, or a one-off critical illness insurance payment – enable employers to still provide a benefit for staff while limiting the organisation’s liabilities and costs.

Mike Tyler, managing director, health and productivity at Buck Consultants, says: “Where employers have introduced limited-term arrangements, you can perfectly understand why they would do that for a fit and healthy employee because their tenure is not particularly secure in modern-day employment. Companies reorganise, staff move on, so why would you offer significantly more security to a disabled person – being quite tough about it. Certainly that has not been communicated in that fashion, if at all.”

Typically, employers opt for limited-term group income protection rather than critical insurance cover. Lee Thurston, a director at JLT Benefits Solutions, says: “I am not seeing a move to critical illness insurance. Critical illness has a place, but it is not a replacement for group income protection. On a corporate basis, it has not been taken up that much. It is quite popular in a flex arrangement and in employee choices.”

“Companies reorganise, staff move on, so why would you offer significantly more security to a disabled person – being quite tough about it. Certainly that has not been communicated in that fashion, if at all”

When deciding whether to offer a full or limited term income protection arrangement, employers should consider a number of factors to ensure they provide a scheme that meets the needs of the organisation but that staff still value. Newman says: “If you start looking at the traditional income protection scheme, that does not really work for the majority of corporates because they are used to the finality of ill-health early retirement. If you have a blank sheet of paper and say ’what would a scheme look like?’, it would not look like a traditional income protection scheme because of the finality issue and keeping people on the payroll.

“It has been a natural extension of where benefits have been provided in the past, looking at corporate desires and objectives, and then factoring in other elements such as cost and uncertainty around default retirement age issues. You naturally get to a place where a limited-term disability arrangement suits the majority a lot better than traditional income protection.”

Where employers are introducing or moving to a limited-term arrangement, how they position and communicate will be key to maintaining a strong psychological contract with employees. But many experts agree communication around this issue has not been as good as it should.

Tyler says: “The communication of this has been poor in respect of the psychological contract because if we go back a step to the good old days of DB schemes with ill-health early retirement and an income protection scheme in place, staff were covered under two fronts. If they were seriously, permanently disabled, the individual could be early retired, but they could take the IP arrangement out in the first place and subsequently ill-health early retirement.

“I have never tested this but I think most employees who have been in traditional organisations where benefits have been quite rich would continue to be in a position where they think the organisation is going to look after them for quite a while.”

How an organisation is perceived to treat its employees when they become ill can have a significant impact on its employer brand, according to research by Ellipse and Cary Cooper, professor of organisational psychology and health at Lancaster University.

Its ’Sick Notes’ research found that nearly three-quarters (72 per cent) of workers say the way a company treats sick employees impacts on how they feel about the organisation. This is most prevalent among 18 to 24 year olds, with 84 per cent citing it as important, compared with 63 per cent of those aged over 55. Just 15 per cent feel this has no impact at all. In addition, 80 per cent of line managers agree that an organisation’s approach to absence management affects its ability to attract and retain employees.

But in some cases employees may not even be aware they are entitled to any form of income protection cover. Thurston, says: “Rather unbelievably and embarrassingly, many organisations have not communicated the existence of a group income protection contract. In recent times, because of problems over claims, they have almost refrained from doing so intentionally because they were concerned about one person becoming a claim and the domino effect of that spreading through the workforce. We have found that because of some of these changes, not withstanding having to check the contract of employment position, sometimes organisations are making changes to group income protection and because they have not communicated the benefit in the first place, it has meant they have not had to communicate at all.

“It is all about communication, engagement and education, which means an organisation can explain to employees what it is providing, or what it can provide, and how it can give access to benefits to employees so they both take equal responsibility.”

This can be carried out as part of a wider communications exercise, for example during a pensions change programme, or take place on an ongoing basis using media such as total reward statements.

Failing to communicate changes to benefits can mean employees do not recognise the full value of what they receive, or understand what they are entitled to, which may unnecessarily damage their psychological contract with their employer. In some cases, this may mean staff are unaware that a move to limited-term group income protection cover may mean it is easier for them to qualify for benefits than under any previous ill-health early retirement provision. “The definition of disability for income protection tends to be more generous that it was for ill-health early retirement in a lot of cases,” explains Newman.

“Rather unbelievably and embarrassingly, many organisations have not communicated the existence of a group income protection contract. In recent times, because of problems over claims, they have almost refrained from doing so intentionally because they were concerned about one person becoming a claim and the domino effect of that spreading through the workforce”

“It might be that an employee would not have qualified in some schemes under the definition of the trustees’ rules for ill-health early retirement, but if you have an ’own occupation’ definition, which most income protection schemes have, that is probably a lower hurdle to qualify for. So what you have got is a hurdle that is slightly lower than under the ill-health early retirement, but it does not pay a benefit for as long, although then it may have a a lump sum as a sweetener at the end of that in any case.”

Carefully considering the design and positioning of a limited-term benefit, therefore, and ensuring it is well-communicated to staff can go a long way towards maintaining a strong psychological contract. Some employers, for example, have overturned the traditional perception of income protection to position it as a rehabilitation benefit aimed at helping staff to return to work where possible.

Louise Flowers, head of risk and wellbeing at Lorica Employee Benefits, says: “That is part of the psychological change that has occurred over the years. A lot of organisations’ purpose for providing income protection is, unless it is a very severe case, around managing the short-to-medium term and making sure financial support is in place. But it is very much around always working towards the return to work and that is where the industry has turned around over the last few years.

“All the providers are now thinking about the rehabilitation services they can offer, whether that is vocational rehabilitation or funding for treatment. It is not a question of an employee thinking ’I’m ill so I cannot work’, it is actually ’I cannot work at the moment but my organisation has something in place to support me while I get better and to a point where I can go back to work’.”

Another option is for employers to use varying definitions of disability at different points of a claim. For the first couple of years, for example, they could use a definition of ’inability to follow own occupation’. After a pre-defined period, this could move to a tougher definition of ’inability to follow any occupation’.

“If you have a blank sheet of paper and say ’what would a scheme look like?’, it would not look like a traditional income protection scheme because of the finality issue and keeping people on the payroll”

“The sort of logic that comes through from that is basically saying ’we want to look after the employee in the short term because some health issue has hit them’,” explains Tyler. “But then how long are they the employer’s problem? What you are trying to do is to sort through the difference between those who could go and do something else – and in fairness, that is consistent with what employers would do if the organisation was reorganised and some jobs were changed so individuals would have to retrain – and trying to make sure people who were just unlucky because of the claim that hit them are protected for a period beyond the short term, for example with a car accident or something like that which was not about work.”

Providing employees with the opportunity to top up and extend employer-funded cover can also help to engage them with the benefit and reinforce the idea of shared responsibility. This kind of flexibility, which can be offered on a voluntary basis or via a flexible benefits scheme, enables employees to either extend the length of time a scheme will provide income replacement for, or increase the multiple of salary they will receive.

So far, the move towards limited-term schemes has been a gradual one, with the trend still very much in its infancy. According to the Employee Benefits/Friends Life group risk research 2011, published in July 2011, just 3 per cent of respondents moved to a limited-term group income protection arrangement in the previous 12 months, while 8 per cent planned to do so in the coming year.

Looking to the future, experts agree this move is likely to continue. Moxham says: “I anticipate the role of the employer will shift from one of provider perhaps to one of facilitator, where the organisation will negotiate a reasonable deal for employees and will see that is made available but the contract is then individually taken out by employees.”

How quickly the trend will move, however, is a matter of debate. Flowers, for example, reports a great deal of interest in limited-term arrangements, although most employers then opt for a full-term arrangement. Meanwhile, around 75 per cent of the schemes Thurston is involved with implementing are limited term.

Just as employers’ attitudes towards providing for employees have changed, so too have employee expectations, particularly as DB pension schemes, with all the benefits that come with these, become an ever more distant memory. As Flowers concludes: “It is a very different mindset now. There are much fewer open DB schemes out there, so there are an awful lot of younger employees and employees who move around their industries who do not expect that facility. I suspect a lot of younger employees would not even know the old ill-health early retirement provision even existed. With the change in population and pension schemes as they are, I do not think employee expectation is there so much.”