The big news in January this year was that the UK Government recognised the negative impact age discrimination regulations could have on risk benefits such as income protection and life cover.
This was hugely important to the whole risk benefits industry, although at the time of writing we still await the actual wording of the proposed exemption. There may remain complexities to resolve for some employers if they find that their scheme falls outside the exemption and all schemes could require some adjustments.
With hopefully the main issues of age-discrimination legislation resolved, the industry can get back to developing long-term solutions that best meet employers’ and employees’ needs. Employers can consider what their disability benefits arrangements should look like without the fear of leaving themselves exposed to potential open ended benefit promises.
The recent changes to the pensions tax regime have created new issues. Enhanced ill health early retirement benefits could create the potential for a significant annual allowance tax charge to be paid by a member if their benefits are enhanced on retirement but they are not considered by HMRC to be terminally ill or unable to perform any work to meet the definition of “severe ill health”.
Many employers will want to review whether a form of income protection benefit is a more appropriate method of delivering medium to long-term disability benefits rather than restricting the availability of benefit to the stricter Revenue rules or potentially causing large tax charges for members.
Alternative solutions could entirely substitute ill health early retirement or possibly be a hybrid income protection and ill health early retirement arrangement.
A key step in the evolution of disability benefits in the UK could be the launch of one insurer’s new voluntary benefits package. This allows staff to select a level of income protection benefits (as well as life and critical illness benefits) and for this benefit to be either partially or fully funded by the employee’s own contributions.
The concept of allowing employers to contribute to the cost of the benefit but requiring the employee to also contribute to receive any benefit is new in the group risk market but already has its precedents outside of group risk. This structure not only shifts cost away from the employer but could also significantly increase the employee’s engagement with this benefit.
It is still common for income protection schemes to include offsets for state incapacity benefits irrespective of whether these are actually received by the employee
It will also be very interesting to see how other insurers react to this new proposition and what, if any, alternative they propose.
The design of existing and new disability benefits will also be impacted by the Government’s announcement that, in future, the state Employment and Support Allowance which is currently payable on account of ill health will be limited to one year in payment except for those in the most severe ill health. The value of employer-provided disability benefits could be eroded by future means testing.
It is still common for income protection schemes to include offsets for state incapacity benefits irrespective of whether these are actually received by the employee. If in future these state incapacity benefits are only available in a minority of claim cases then it would seem reasonable for employers to review whether such benefit structures should remain.
Any day now the European Court is expected to decide on the legitimacy of insurers using gender related premium rates. In the group risk area this could directly impact any employer not using unisex rates in their flexible benefit or voluntary benefits arrangements.
A key aspect will be the extent to which insurers can in future use gender details in pricing their products. If insurers are not permitted to take account of the gender of members when setting their overall rate for an arrangement then this could translate into increases in rates for some schemes at their next pricing review. Differences in assumptions made by insurers on scheme gender profile would create a new differentiator in the insurer selection process.
With multiple market developments and increasing volumes of legislation in the pipeline, the next 12 months are a crucial a time for employers to consider their current arrangements.