There has been a lot of discussion recently over the possibility of auto-enrolment style funding for Group Income Protection, either with a compulsory employer contribution or an opt-in variation, possibly as part of a future increase in the level of pension contribution. I believe that the Group Risk insurance industry needs to unite to support the belief that this is a good thing. However, many insurers are yet to be convinced and, at a recent Group Industry Forum, 88% of attendees said ‘no’ to the idea of the Government extending AE to GIP. Clearly I have work to do!
In the UK the current discussion is around the protection “gap” and whether there is an affordable simplified product that would be suitable for employers and meet the needs of employees. Many minds are grappling with this issue, but have the experiences in the Netherlands any lessons to offer?
I think the first lesson is that it has taken a long time for them to develop a solution, based on a collective approach that puts a lot of emphasis on the role of the employer. The first overhaul of their system was in 1987 but the scheme was not actually finalised until 2006. The approach agreed was based on a report accepted by all political parties and supported (at least in principle) by unions and employer groups. It had also gained the acceptance of the general public, being seen as “relatively fair”. The scheme is operated by a government agency, the UWV, which is also responsible for adjudicating the degree of disability.
How the scheme works – Short term absence
So what happens if an employee is ill? For the first two years the employer is required to pay at least 70% of the employee’s salary, up to a salary cap of 51,414 euros. In practice many employers pay more than that for the first year, up to 100% of the uncapped salary. Alongside this there is a legal requirement to provide support for rehabilitation with early intervention – the employer and absent employee should have an agreed plan after 8 weeks.
This standard period of 2 years (104 weeks) can vary in some circumstances. For instance, if the employee is considered permanently disabled, the period could reduce to as little as 12 weeks. Conversely if the UWV think the employer has not fully cooperated with rehabilitation support, it could be extended.
How the scheme works – Longer term absence
After this initial period of absence the state takes over. The absent employee (claimant) is assessed against an ‘any occupation’ definition, using objective tests. If they are deemed to be over 80% disabled they will qualify for the full state benefit, which can rise to 75% of their salary (up to the salary cap) if disability is considered permanent.
If disability is “rated” as between 80% and 100% but is not expected to be permanent then a benefit of 70% of their salary (up to the cap) is payable, whilst rehabilitation continues.
However, if the level of disability is considered as being between 35% and 80%, with the potential for re-integration into the workplace, the benefit is set at 70% of the difference between the salary for any work undertaken and their previous earnings. If an employee in this situation becomes sick whilst undertaking some level of work, short term sick pay is available.
These payments are met by the state. However it is possible for an employer to agree to pay the benefits in the latter two scenarios, in return for lower national insurance contributions.
How the scheme works – Contributions
The employer makes payments to cover the state benefits via a payroll tax. The amount of the contributions is based upon the overall experience of the system, with further adjustments for different sectors of industry.
In 2014 the standard contribution rates have been set at:
Basic contribution 4.95% of salary up to the cap
Cover for partial disability 0.69% of salary up to the cap (employer can self-insure)
Sickness of partial disabled 0.34% of salary up to the cap (employer can self-insure)
So what can we learn from the Dutch model?
- Compared to the UK, their system is generous to those with a long-term need
- A focus on rehabilitation in the first two years is central to their approach
- It appears to be successful, with new claimants on state benefits falling from 100,000 in c2000 to 40,000 in 2010
- The success is reflected in the contributions – the basic contribution rate of 4.95% has fallen from 5.7% in 2010
- It is not simple and requires support from all parties to make it work
So bearing in mind that so far our own AE pension’s scheme has been successful and we know that there is a working model of an AE GIP proposition in Holland, showing positive results, my question is, could AE for GIP be considered here?
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