The group risk sector faces two big challenges – on pensions tax relief and on welfare reform. We need to get our house in order now, to help guide policymakers to the best outcomes, says Swiss Re technical director Ron Wheatcroft
Swiss Re’s Group Watch 2016 results have been out for three months and it is timely to consider the current market priorities.
The group risk market is important: worth more than £2bn in premium terms, with 64 per cent in respect of death benefits and 32 per cent covering income protection. In my view, the market needs to prioritise its activities in these two key areas.
Where the Government’s intentions for pension taxation are concerned, the consensus is that likely reforms have been deferred rather than abandoned. Add the Lifetime Isa into the mix and the shape of long-term savings for later life may look very different.
Responses from the group risk market to HM Treasury’s consultation – Strengthening the incentive to save – talked about the practical issues for group life schemes if the Government were to move to a TEE model or to a flat rate of tax relief. These issues remain as the lump-sum model currently works on an EEE basis. At the end of 2015, 42,848 in-force registered group life lump-sum arrangements covered almost 8 million people.
The rules allowing excepted group life schemes suggest there is no government imperative to raise more taxes from lump-sum death benefit premiums. This is a positive starting point. The priority has to be to use market expertise to bring practical support and solutions to the Government.
The Treasury’s consultation asked no questions about the potential impact of tax reform on lump-sum death benefit schemes. This suggests knowledge of these arrangements in the corridors of power is low. As a result, the Government could look to the industry for help.
The opportunity should, therefore, be to work with the Government to determine the ideal lump-sum death benefit regime to sit comfortably alongside either a tax-advantaged pension or a workplace Isa.
The solution is likely to be based on the rules for excepted group life schemes, provided we can resolve outstanding concerns about discretionary trust entry periodic and exit charges. Given differing opinions as to what does and does not work, greater certainty is needed here regardless.
Protecting incomes better should also be a priority. The promise of a welfare reform green paper from the DWP later this year means the market needs to be ready to respond on how greater private participation can be achieved.
This is a crucial area. The UK has the dubious distinction of holding the largest disability protection gap in Europe, with only around 10 per cent of the workforce insured at all against losing their income following incapacity. Although workplace sales of critical illness cover continue to increase, we have made little impact with GIP, the number of schemes in force declining in each of the past 10 years. New individual policy sales have fared little better with just over 100,000 new sales reported in 2015.
The first priority has to be reaching consensus on what could help to widen provision.To do this, the industry must get to the bottom of what stops employers and consumers arranging cover.
For employers, is this primarily a cost issue or a reluctance to take on long-term liabilities? Even more fundamental, is it a simple lack of awareness or an assumption of lack of employee demand? If it is an awareness issue, budgetary constraints should mean the Government would have a very strong vested interest in ways in which it could support increased take up.
Adapting existing, or seeking greater, tax incentives for employers that provide benefits may be a way forward. Given the pressures on Government budgets, robust evidence will be vital to support this. Any incentives on offer are likely to be conditional, such as with regard to the minimum benefit duration or measures to support an early return to work.
These are two big opportunities to work with the Government, and in doing so to enhance the offering for employers. Both are core to the group risk proposition.
Crucial to success will be close collaboration, such as between trade bodies, the potential prize being a compelling set of proposals that the Government would find hard to ignore.