Group income protection insurance can provide a privately funded solution to alleviate this problem. It provides an income to replace lost earnings; it can provide funds to save for a retirement pension; and, the insurer is incentivised to rehabilitate absentees and get them back to work. Further, as in most cases group income protection policies will provide cover without the need for evidence of good health, cover is easier to obtain than had employees sought coverage on an individual basis.
Yet sadly, far from encouraging employers to provide such benefits to their employees, the government actually penalises them by charging the employer NI on the benefit.
Age discrimination legislation has already had some negative impact on employer provided protection and unless government grants an exemption for this benefit then this is likely to turn employers away from providing this benefit in a long-term format.
Therefore, whichever party forms the next government should recognise the benefits to society of income protection insurance and consider adopting measures to encourage employers to provide this benefit.
Income protection also fills the void left by the steady decline of defined benefit pension provision in favour of defined contribution, which has resulted in the gradual erosion of the availability of meaningful ill health early retirement benefits.
Government needs to recognise that it’s not just the individual that stands to gain from group income protection. These policies reduce the need for government-funded support for the individual and their family during their working life and possibly after retirement age and as such reduce future drains on dwindling national resources. It also needs to recognise that longer-term benefit structures are likely to be more suited to this than short-term arrangements.
This year the government is reviewing employers’ ability to effectively enforce retirement at age 65. If in future employers are no longer permitted to terminate employment at age 65, but Government does not grant an exemption for employer income protection arrangements, then this could leave employers facing an open-ended benefit promise. For various reasons, there has already been a move away from traditional long-term benefit designs that provide income to age 65 with short-term benefits of just two or five years becoming increasingly popular. Whilst these structures can make sense for an employer and are better than nothing, they are more likely to leave employees relying on the State once the benefit ends. Without an exemption for income protection this trend is likely to accelerate greatly.
Of course, the employer isn’t entirely without motivation for offering income protection. An insurance company providing the cover will want to engage with employees to assist with their rehabilitation and encourage them back to work. Secondly, as part of a benefits package the benefit can work as a recruitment and retention tool where employees recognise the protection’s intrinsic value.
Whichever party forms the next government should recognise the benefits to society of income protection insurance and consider adopting measures to encourage employers to provide this benefit
However these elements alone may no longer be incentive enough to keep income protection in a format that provides longer-term security. According to Swiss Re’s 2009 report on group risk benefits, 70 per cent of all income protection coverage is provided via an employer, highlighting how serious any erosion of this benefit could be.
Opportunities exist to encourage companies to offer income protection and to offer this in a manner that provides good long-term protection for employees. In an environment where tax increases are likely, an obvious solution is to exempt participating firms from future NI increases if they provide a certain minimum standard of long-term disability benefit, such as a minimum level of salary replacement, potential duration of benefit, which is required to cover a minimum proportion of employees. Government could take the opportunity to put a positive spin on a future tax increase.
Incentives would allow employers to make their own business decision while encouraging behaviour that is better for society.
Creating a future tax system that encourages socially responsible behaviour seems a reasonable way forward, and income protection benefits need to form part of this.