The psychological contract between employers and employees and the way this translates into benefit provision is evolving. HR personnel and finance directors must balance managing or cutting costs in a tough environment with maintaining a good benefits strategy for competitive reasons. And for some firms, a culture of paternalism shows itself when it comes to responsibilities felt towards staff incapacitated over the long term.
Understanding how the employer/employee relationship will develop in future is crucial if the group risk industry is to be able to adapt its products and services to meet the needs of its clients, said delegates at the Corporate Adviser/Ellipse industry forum ’The Psychology of Managers’ Attitudes to Long Term Disability Risk’ in London last month.
Forum delegates felt that employers’ understanding of disability risk was key to whether they would continue to maintain group income protection. All delegates agreed there has been a long-term shift in attitudes about what sort of support is appropriate, with the picture further complicated by new regulations and responsibilities that have set new minimum requirements.
Delegates felt that the current difficult economic conditions has made many employers comfortable with the idea of cutting benefits, although few had, with those directors tasked with reducing benefits having few qualms about implementing changes.
Enrich Benefits client director Paul White said: “Given the pressures on employers, if it comes down to ’how can I save money’ versus ’should I cut a benefit that has relatively low utilisation and that I don’t have to provide’, I think we are quite relaxed about it.”
Delegates agreed that individuals within organisations actually making the cuts that could potentially have a serious material effect on the living standards of a colleague who became seriously disabled usually had no personal problem in doing so. This is in part because nobody expects a job for life, and also, in the case of limited term, they themselves will have moved on by the time the individual’s benefits cease.
For executives whose sole legal obligation is to maximise shareholder value, unvalued paternalism as an end in itself is hard to justify. LCP senior consultant Carlos Correia suggested that group income protection is easier to cut because the employees may not value it enough.
“Acting rationally, as an employer, are you happy to cut it back? You probably are unless you have someone at the company who really values it,” he said.
Helm Godfrey group risk consultant Laura Brown agreed and said that employers wanted to push more of the onus on to employees to provide for themselves.
She said: “From our experience, the employees don’t value it as a benefit. Therefore employers ask why are we providing them with this? Are there other ways? Employers are looking to push the onus on to the employees. The employees are not going to take up the benefit or don’t have the excess income, or don’t value it. If the employee put more into a pot, or explained what they would actually get if they are off on sick that might help. But employers are saying if they don’t value it, why are we giving it to them?”
For Fidelius director Iain Fox, part of the problem with getting employees to pay for it themselves is the lack of immediate gratification from the purchase. He said: “It boils down to the psychology of buying something for the long term, when everyone wants to see a benefit now. Resistance to buying something for the long term is difficult to overcome.”
White said that the decision-makers in a business are already inured to telling people bad news. Because they are used to getting rid of people when the sick pay runs out, getting rid of benefits from those who are not sick is not such a big step.
But on the question of how individuals feel about cutting benefits for colleagues, Correia suggested that there will be some degree of psychological attachment in some employers given that they put the benefit in place in the first place. He also thinks some finance and HR people may be reluctant to get rid of the benefit because they value it themselves.
White suggested that where human resources and finance directors will be calculating whether to cut income protection or other benefits it is probably going to be first on the list.
“Acting rationally, as an employer, are you happy to cut back group income protection? You probably are unless you have someone at the company who really values it”
Carlos Correia
“If you were an HRD or FD with an IP scheme for a few hundred people, you are going to have to claim once in a blue moon, but you are going to be paying this benefit for a long time. It is not adding anything to your business. So you look at pensions or private medical insurance, you may get 30 per cent utilisation, lots of people making relatively low value claims compared with something that seems to affect a very small number of people into the future. So you could direct that benefit elsewhere. Is it a tough decision? If something has to go the axe looks like it is going to fall on income protection.”
Delegates agreed that what leads some firms to retain benefits is what their peers are doing, particularly in sectors such as law or finance.
“What are my peers doing? That is an inhibiter to cut it completely,” said White.
Correia suggested that some HR directors may also be put off by IP because it can cause them a lot of hassle. He said: “A key thing which upsets HR people is where you get a tricky IP claim. You get someone who is working the system, where they keep appealing. The idea on paper sounds great, but in practice you get these tricky people that generate a lot of work for you. Those are the scenarios that upset employers the most and that can be much more than the budget. They understand they have to make some savings. If they have had a bad experience with a claim that puts IP higher up the list, they think ’this is something that caused me a lot of trouble. That is all connected to keeping that person in your employment’.”
If they do decide to cut benefits, the obvious first stage strategy has been to move to limited term group risk.
Thomsons Online Benefits health and wellbeing consultant David Bourne said: “A number of our clients have moved to limited term, because they see it as the biggest saving reduction, especially when you have a contract that runs to normal retirement age and you cut it back to five years and you see the premiums halve. They say ’brilliant, my finance director told me to cut benefits spend’ and that is exactly what I have done’.”
Ellipse chief executive John Ritchie also noted that many of those making the decisions may move around a lot and so may not be there when benefits cease. Delegates also pointed out that they as consultants might well help a senior manager understand the benefits of IP, but that when that manager moved on the replacement might not have such an appreciation.
“If you are not altering what is making people claim, ultimately you may have a benefit that is so cheap it is worthless”
Paul White
Delegates also said that when it was devised, most insurers believed limited term would grow the market and never dreamt it would actually lead to employers reducing their cover, which is what has ultimately happened. But this has fitted in with job market developments. Where previously income protection would have provided cover, potentially instead of early retirement, such patterns of employment and jobs for life are much less common now.
But the full effect of moving to limited term is yet to be felt as very few schemes established on such a basis have come to the end of that limited term yet. Delegates predicted some unforeseen consequences and suggested that employers must be careful to align the insurance with employment contracts.
White, who said he had been the first to go to insurers with a practical model for limited term, taking on an original idea thought up by Mike Tyler of Buck Consultants, said: “Going limited term of itself doesn’t save any money at all. Changing your contract from a full term to a limited term means you have saved the insurance premium, but unless you have changed the contract of employment you haven’t saved a penny because you are picking up that liability when the claim strikes. It is the contractual part that is the bones of the question, not the insurance piece.”
Delegates suggested that some employers have yet to consider some of the full consequences.
Bourne said: “A lot of employers are looking at this and saying “we’ll cut it today, and we won’t think about it for the next five years’ time, but in five years’ time, they are going to see those claims coming round. I am still employed by you but I now receive no benefit. What happens here?”
White suggested that some of the issues could be decided by case law. He notes that you can let staff go for capability reasons, even with the disability discrimination act, but an employee might say by letting me go you are depriving me of this benefit. “Going limited term and changing the contract of employment to limited term, you know there’s a finite stop,” he said.
Bourne would like to see insurers perhaps take a different approach in terms of the definition of what incapacity is.
He said: “What insurers need to do is to look at much more of the definition of an incapacity. Maybe in the early years, if you can’t do your role, we’ll pay out the claim, but try and rehabilitate you into some kind of work, and if you can’t do any kind of work, then you’ll continue to get money. That is very much looking at the long-term aspects of it. Employers still do think about employee’s needs in the long term but at the moment it is about money in pocket.”
Some delegates also warned against the process of paring back benefits which could render the cover worthless. White suggested that you could have a limited term and then adopt a more restricted definition of incapacity. You might double the deferred period, remove escalation, then stop the pension benefits. He suggests it may be better to find ways to reduce claims.
“If you are not altering what is making people claim, ultimately you may have a benefit that is so cheap it is worthless,” he said.
Forum delegates also suggest that a raft of legislation may have altered the terms of paternalism. Paternalism may once have involved companies looking after the employees’ interests, but now in many ways it means what is required by legislation.
White suggests that for some employees a lot of legislation was a step up, but for those who always provided more, they may now have the attitude that as long as they don’t fall below that minimum then they are ok.
Delegates also grappled with the issue of cost noting the big annual inflation in PMI premiums compared with the relative stability of group risk premiums and suggested that the product must be getting better and better value.
However delegates suggested that sometimes it is difficult to get employers to calculate the value of the benefits they are buying.
Correia said: “One of the misconceptions I find is they look at the PMI and see that much in claims for this much in premium. They look at IP and say ’oh they only paid out this much this year’. And they don’t understand they have to capitalise that up. Maybe insurers ought to emphasise that capital sum. I might explain it to one director, but in a few months’ time when someone else looks at it, they might not understand.”
Bourne added: “That is linked to the benefit build as well. If you have got a client with full term income protection with escalation of five per cent and full pension contribution, it soon adds up over a number of years.”
Getting employers to understand the full benefit they are receiving from their benefit is crucial, but that benefit has to match what they perceive as their psychological contract with their staff.