In October 2013 this magazine reported that the government had opened the door for the group income protection (GIP) industry to devise a coherent strategy for some form of income protection auto-enrolment. Naturally this set a number of hares running. But whilst any debate about the shift in provision from the public to the private sector and the role that income protection can play in this is welcome, we need to be incredibly cautious, indeed pessimistic, about any real expectation that this could one day be a reality.
After all, auto-enrolment of pensions has been a relatively long and tortuous process and even now should be viewed as a successful start, but only that. If we contrast compelling employers and employees to contribute to a pension fund where the expectation is that everyone will retire, to doing the same for the ‘protection gap’, the fundamental issue becomes clear. No one expects to become long-term sick and the statistical reality is that you are far more likely to reach retirement age without it happening, than the reverse.
I don’t think anyone doubts the merit of individuals taking steps to protect their health and where appropriate, insure against those unforeseen eventualities. In addition we all wish our employers took a paternalistic approach to their workforce. But I am not sure it is enough to suggest that employers should be made to provide this insurance. Given the rising cost of pension auto-enrolment, any compulsion is unlikely to be welcomed by employers, or their employees.
Informal conversations that I’ve had with politicians over the years have suggested that the government would not interfere in the process of promoting or otherwise, this product. Has anything changed? Well I suppose if anything, means testing of Employment and Support Allowance (ESA), could be seen to have discouraged rather than encouraged income protection.
In any event, if the government wants to shift the burden from the public sector to the private sector and to employers in particular, considering GIP is not the only way forward. For instance, employers now have to provide Statutory Sick Pay (SSP) for 28 weeks. When I first came into the industry it was for eight weeks only and was pretty much fully funded through NIC savings. Over the years, liability has remained with the employer, government funding has all but disappeared and successive governments have successfully shifted the liability for short-term absence to the employer as well. In a number of other European countries, the equivalent period of SSP is much longer, typically a year.
Shifting the obligation to the employer direct – rather than through an insurance contract – would at least mean that the employer meets the actual cost of an employee’s absence. If they choose to insure themselves against that risk too, then all well and good.
Income protection is a fantastic product and employees and employers should understand the potential impact that a prolonged period out of the workforce would have on them financially, as well as the likelihood of this happening. However, it is not the only way employers can deal with long-term disability. A significant number of employers have uninsured prolonged occupational sick pay offerings, and even more – particularly in the public sector – are able to access pretty good ill-health early retirement pensions in the most severe cases.
But at the end of the day these solutions are about dealing with cases where it has not been possible for the individual to recover, or get back into the workplace. Whilst insurance to protect against these eventualities is useful, the real argument is about making sure employers and employees take whatever action is necessary to ensure that the need for such products is minimised in the first place. There has been lots of good work done around wellness and getting people back to work in the event of ill-health and the GIP industry has certainly played its part.
GIP should be looked upon as the insurance you need when all other avenues have been unsuccessful. It clearly has a place, and debate about where this product fits and if compulsion is the answer is very welcome. But even if it is the designated way forward, given the time pension auto-enrolment has taken, the industry has a long wait before this becomes a reality.