In my opinion, Group Income Protection (GIP) is undervalued. Imagine, you suffer from a condition, which is so severe that you can’t work again. If the prescribed treatment doesn’t make a significant difference you could be left relying on state benefits for the rest of your life. If you’re lucky enough to be a member of a GIP scheme that provides cover to your planned retirement date, you can look forward to an income until that date. Many schemes will also make contributions to your pension scheme, increasing the chances of a comfortable retirement. But the benefits don’t stop there. Most insurers will give access to rehabilitation and back to work programmes that can help you get better or learn to adapt your working life around your condition. This also benefits employers who are more likely to see their long term absent employees return to work, and sooner than might have otherwise been the case.
This is why it’s clearly good news that the Government have recognised the importance of Group Protection benefits and particularly GIP. They’ve announced that they will be granting an exemption for employers who provide them. Without this, there was a real risk that employers would seriously reduce or withdraw benefits altogether. Group benefits represent 70% of income protection insurance in the UK so it’s important they protect these valuable benefits.
At the time of writing, the actual regulations are hot off the press and there are one or two things that need clarifying. However, it seems certain that employers won’t need to provide Group Protection benefits for those that work beyond 65 or the State Pension Age (SPA), whichever is greater. Even though the SPA is currently 65 for those claiming the old age pension now, the Government plan to increase this. The Pensions Bill is currently going through parliament. This includes legislation to increase the SPA to 66 by 2020. In addition to this, the government have already published plans to increase it to 67 by 2036 and 68 by 2046. And don’t bet on this not changing again. There’s a good chance that these changes will be brought forward and the SPA’s extended further.
Currently most employers that provide GIP benefits provide them until age 65. Employers may wish to consider making changes now to increase the Benefit Termination Age to the SPA that matches the individual employee. For example, an employer may wish to consider covering an employee born in April 1967 to their 66th birthday and one born in April 1979 to their 68th birthday. This seems a prudent course of action as employers could be left with an uninsured liability as current and younger claimants pass their 65th birthday. Increasing cover in this way may increase premiums by around 5%.
If an employer provides benefits above the SPA they must be fair in doing so. Clarification is still needed, but it seems likely that if an employer provides benefits above the SPA for a category of employees, they must do the same for all in that category. It’s not yet clear how this will affect those who already provide benefits above the SPA and this may well be one for the lawyers to argue over.
Finally, the regulations may have provided a boost to the insurance industry. The exemption appears to only apply to employers who insure their benefits. Whether this was intended or not, advisers could have an opportunity to convince self-insured schemes to fully insure. Of course, insuring the scheme already has advantages of giving a known cost, protecting the employer against large claims fluctuations and providing a process to validate and pay claims.
James Walker
Technical Manager, Group Protection
Legal & General