In the July 2015 budget, the Chancellor announced that from 6th April 2017 any applicants for Employment and Support Allowance (ESA) who are assessed as unfit for work (but capable of work related activity) will receive a lower level of state benefit equivalent to Job Seekers Allowance. This is the benefit that follows Statutory Sick Pay when an employee is absence for 28 weeks of. This change means that the annualised value of this state benefit will fall from £5,312 p.a. to £3,801. (1)
For anyone who has never considered what would happen to them, and their colleagues, when they are sick this is another wake up call. Around 250,000 (2) people leave employment each year due to ill health. With a welfare bill estimated at £36bn (2), it has been estimated this simple reduction in the ESA benefit amount payable will save £100m in year one for the Government, rising to £640m in 2020-21. (3) It will not be the end of the debate over how we both support and fund long-term absentees and people with disabilities noting that there is currently a Governmental discussion over ‘Fortune Accounts’ (5) and a consultation about what employers can do to support employees who have addictions in the workplace.
For the 17,119 organisations (covering 2.08m employees) which have had the foresight to have Group Income Protection (GIP) schemes in place, there are impacts too. (4) A 30% cut in this state benefit means that, if an organisation has a GIP scheme with a ‘state deductible’, they will have to pay more as the benefit that insurers pay, during a claim, has increased.
We estimate that around 50% of our GIP schemes have a state deductible scheme design and, if this is representative of the whole market, this could affect 9,000 organisations and around 1m employees. (4)
GIP scheme designs of 75%, 66% or 50% salary, less state benefits (‘the deductible’), have become the norm. Organisations, especially with high earners, may choose to retain the state benefit deductible and pay an additional premium, but further state reductions will result in increased premiums and there is a risk this will be a continuing theme.
So it may be worth considering de-linking state benefits from GIP. Organisations can change their benefit to say 65% of salary, fixed, with no deductible. However, it is likely they will need to undertake a consultation and communication exercise with their employees to make such a change, but as a one off exercise this is worthwhile.
In addition, if undertaking this exercise, further simplicity and de-linking can be achieved. Schemes with “All pension scheme members” eligibility should consider why they still have this legacy criterion. This not only affects GIP but also Group Life schemes. With Automatic Enrolment, everyone now has access to a pension. There are additional expenses for pension member only schemes (covering selection risk and medical underwriting costs for late entrants) and by including all employees you get lower premium rates where any minimum premium is exceeded. Non-pension members tend to be younger and so their inclusion reduces the average scheme age/rate of premium payable.
So let’s compare the following two scenarios where there are both pension and non-pension scheme employees.
1) To pension scheme members you would say: “ As you are a pension scheme member, you will receive 75% of your salary less the relevant (ESA and WRAC) state benefits after 26 weeks’ absence” and to employees who are not in the pension scheme, “As you are NOT a pension scheme member you will only receive 28 weeks SSP”, or
2) “All employees will receive 65% of salary payable after 26 weeks absence”.
You can see the difference!
So in the existing scheme market the time to act is now! As the industry tends to offer 2 year rate guarantees, this already has an impact on any claimants after April 2017. In effect some insurers are already under-charging as they will have to make up the shortfall between the current state benefit and the new amounts.
And for those that do not have GIP it is another hole in the argument that the ‘State will provide’. It never really did and in future it will provide even less. So perhaps GIP is the next thing HR Directors should be considering both for themselves as much as for their employees.
And therein lies the issue: failure to consider the way that people who are long-term absent are treated is no longer an option. Can anyone really live on £3,801 per annum and does this provide a moral conundrum when a request for state benefits is declined? If you have group income protection which includes a ‘deductible state benefit’, the benefit design should be reviewed otherwise retention could lead to further consultation exercises and prices increases as the State system is refined further. All anyone will want is clarity: how much will I get, who from, how long for and what will the assessment process be? If you answer this in policies, procedures, staff handbooks, and contracts then, should the worse happen, all will be clear.
- Budget by George Osborne: section 3.4 of the summer budget document https://www.gov.uk/government/publications/summer-budget-2015/summer-budget-2015
(Pages 4 and 14)
- https://www.rethinkingincapacity.org/why-the-budgets-cut-to-esa-may-backfire/ and budget URL is: https://www.gov.uk/government/publications/summer-budget-2015/summer-budget-2015
- Swiss Re Group Watch 2015