The Treasury’s consultation on Simple Financial Products represents a landmark for the protection industry. Acknowledging the role more straightforward products could play in fostering financial wellbeing, the consultation calls on the finance industry and consumer groups to work together to design appropriate basic products for mass market consumption. Developing a portfolio of protection products is seen as a prime objective of the process. Indeed, the consultation document actually quotes the “protection gap” as calculated by Swiss Re and acknowledges that protection has an important part to play in helping people to build up financial security – a significant achievement for the group risk industry!
This follows on from another breakthrough where the Treasury’s discussion document “Restricting pensions tax relief” recognised that Group Income Protection (GIP) schemes can provide a viable funding alternative for ill health early retirement pensions. The suggestion was that when the reduced tax-relieved annual pension savings allowance comes into force in April 2011, GIP would be a way to avoid the hefty tax bill that might otherwise result from taking an enhanced ill health pension.
The Finance Bill 2011 confirmed an exemption for those retiring on the grounds of severe ill health but this has been defined by HMRC as applying only to those who are not expected to survive beyond one year. The needs of those who might otherwise take ill-health early retirement (IHER) are likely to be far better served by a Group Income Protection (GIP) policy going forward. Group risk professionals have long argued the many benefits to employers of GIP over IHER (scope for rehabilitation, active claims management, lower and known costs and other benefits such as life assurance to name but a few) but the fact that the Treasury recognised the potential for GIP when looking at the pensions issue is of pivotal importance.
The fact that the Treasury recognised the potential for GIP when looking at the pensions issue is of pivotal importance
Meanwhile, the Government’s Welfare Reform programme is well underway and the changes are expected to lift more than 350,000 children and 500,000 adults out of poverty and will see most people on benefits set on a pathway back to work. Under the plans, the “static” welfare system will be transformed by removing the complexities of the current benefits system, introducing a new system of conditionality and Mandatory Work Activity for some jobseekers and ensuring that work always pays.
The “Universal Credit: welfare that works” white paper published on 11 November 2010 confirmed that the current complex system of means tested working age benefits and tax credits will gradually be replaced with the Universal Credit, an integrated payment that will ensure work always pays, with greater flexibility and less scope for fraud and error.
Reforms to the benefits system will be complemented by the new Work Programme, which will harness the expertise of private and third sector specialists to provide personalised support for those with the greatest barriers to employment (the long term unemployed and disabled people).
Providers will be paid on the basis of the additional benefit savings they secure, thereby incentivising higher performance levels and delivering net savings for the taxpayer. Additionally, the contributory Work Related Activity Group Employment & Support Allowance (ESA) will be time limited to one year as announced in the Comprehensive Spending Review 2010. This is expected to affect 1 million people.
From October 2010 through to 2014, all 2.136 million people on old style Incapacity Benefit will be reassessed and moved onto ESA or other benefits using the Work Capability Assessment. The expectation is that a significant number will be found fit for work or able to take up work, yielding big savings.
There is no doubt that simplified protection products would sit well within the Government’s Welfare Reform framework. Any development which encourages personal provision is bound to have a positive impact on the number of people claiming welfare benefits. Viewed in the round this all adds up to a system that encourages greater personal responsibility and more positive behaviours. And in turn, greater consumer understanding should drive greater demand for employers to provide these benefits either as core entitlement or through flexible benefit programmes. The Group Risk market has much to offer both employers and Government as it implements the Welfare Reform agenda. Now that the Treasury is joining up the dots, let’s focus on encouraging the DWP to do the same.