If there was any doubt that an entire operating environment can change within a year, then what has happened to pensions in 2014 has surely quashed it.
Incumbent organisations, trade bodies and individuals in an industry can often be the slowest to react. That is just human nature. If you are in the middle of a ruck you don’t have the same view of it as the cool, dispassionate observer from the back of the upper tier. The roundtable reported in the October edition of Corporate Adviser was an excellent discussion on starting the shifts of mind-set on auto-enrolment to workplace long-term sick cover. Back in the summer I argued in these pages that the state has both irresistible drivers and, through auto-enrolment to workplace pensions, an established template for making it happen.
The industry needs to start planning now. By planning, I mean actively designing the product structures, delivery processes and claims management processes, and modelling the likely operating margins and profits. Let’s think back to how incumbent pension organisations – and by that I mean the major life companies – prepared for auto-enrolment to pensions. They didn’t prepare.
Their tactics were led by an analysis which said it will never happen, there will never be a political consensus and even if there were people will opt out in droves and it will fail. That was just cover for the thought that “there isn’t enough money in this for us, we don’t want to invest in the fundamental changes needed to our operating infrastructure”. The extent of the radical change to existing private pension structures were as anticipated by some strategists almost ten years ago but were never expected by the incumbents.
Providers of insurance capacity need to start influencing the Treasury and the Regulator without delay so that a sensible operating environment can result.
Undoubtedly, there are difficult interfaces with State benefits. Those were swept away in the provision of old age benefits with the policy decision that we move to a universal state pension. It is unlikely that our welfare structures will tolerate extreme child poverty so the amount of disability, sick pay cover that should be purchased through the workplace will always need to take account of the individual worker’s family structure. Rules-based “how much to buy” software has already been developed for the current Universal Credit environment. Rules for auto-enrolment to workplace pensions are not simple and employers’ communication obligations are complex but software to comply has emerged.
What does the product look like? Again, like workplace pensions it is probable that employers will be obliged to provide a component of the cover and the split between employer and employee will be by duration. I envisage employers being obliged to provide the first two years from first absence, with obligations to facilitate and encourage return to work. The long-term sick pay provision will be the employees’ obligation. Insurers will only participate provided they can manage the individual within the first four to eight weeks of their absence. We don’t need to go through the horror stories from other markets to prove that any insurers who do not observe this critical hygiene factor will be former players in the market within a couple of years. What results then is a co-pay model with rules driven guidance on the amount of cover with the insurer leading in an early intervention, case management process. The other critical essential for participation from insurance capital will be an appropriate level of regulatory supervision and no political meddling in the definition of disability. Further insurers and reinsurers who participate in this market need to be sure that the State will not overtly interfere in the claims admission process. If those assurances are not clear, then insurance capital can, and will, take flight.
Employers are very useful devices for the State. Now they have seen how quickly auto-enrolment to workplace pension has become the new normal, they are unlikely to hesitate on this next stage of deficit-busting change.