The first year of auto-enrolment has enjoyed low opt-out rates and relatively high levels of compliance. But what does this mean for group risk schemes? Hannah Uttley investigates the impact of AE on the group risk market.
Planning ahead has been the catchphrase for auto-enrolment (AE), but for some companies which have never reviewed their risk benefits, AE has provided the perfect opportunity to prepare and introduce changes.
In the group risk market, the most popular trend to emerge so far from the inaugural year of auto-enrolment has been the de-linking of benefits from pension schemes.
Historically, death-in-service lump sum benefits, or alternatively widows’ and dependants’ pension schemes, were only available to employees enrolled under the company’s pension scheme.
As auto-enrolment has taken off, with more employees becoming enrolled in a workplace pension, the natural decision has been for employers to grant life insurance coverage to all staff.
For a relatively small additional amount, the whole workforce can benefit from a life insurance policy which only a privileged number of employees would previously have received, in cases where the product was only available to staff enrolled under the pension scheme.
And as Punter Southall Health & Protection Consulting director John Dean explains, employees at both ends of the pay scale will gain coverage by de-linking these benefits.
“People always assume with AE that the people who won’t join are the people at the lower end of the salary range – the ones who can’t even afford to give up 1% of their salary,” he says.
“But of course what people have forgotten is a lot of people at the very top end of companies now have had the earnings cap applied to them, or are protected under lifetime allowance limits so they’re coming out of pension schemes because they’ve reached the allowance or cap. What that’s caused is often that very low-paid people are not joining the pension scheme, but also the chief executive or the finance director can’t be in it either.”
Some employers have taken this de-linking trend a step further and provided increased incentives for employers to be part of the workplace pension scheme by increasing the budget for death-in-service benefits for current pension scheme members.
For example, non-pension scheme members may in some cases only be eligible to one time salary death benefit, while those enrolled in the pension scheme will be granted four times the amount.
In Swiss Re’s Group Watch 2013 report, which looked at the market to the end of 2012, it was reported that the number of lives covered under widows’ and dependants’ pension fell by 3.1%, with 2.5% fewer schemes existing in workplaces.
However, this was not all bad news as a low-interest environment has meant that the provision of lump sum cover has become a more viable option for employers.
Swiss Re technical manager Ron Wheatcroft explains that the greater impact of auto-enrolment on group risk was unlikely to be felt until 2014, when employers with 500 or fewer staff have enrolled their workplaces.
“To some extent, the way the auto-enrolment programme has been brought in – with the larger employers going first – means that it will be a gradual process before it all unfolds fully. What I think is important in the longer term is that AE does bring millions of people into financial services,” he says.
“It shows how important the role of the employer is to encourage people to do things, and we’ve witnessed a trend towards people paying for some of the benefits themselves. Maybe that will become the role of the employer in the longer term, so that will change a bit from being a provider to a facilitator. It just needs people to be sufficiently engaged with their pension that they see buying things through their employer as a good thing to do.”
Overall, experts resolutely agree that auto-enrolment will provide the biggest opportunity for smaller employers to review their benefits packages. These employers, many of whom are introducing a pension scheme as their first ever core benefit, will be looking to differentiate themselves from other businesses in order to attract and retain key talent.
Unum head of proposition development Andrew Potterton believes that keeping a control of sickness absence levels and cost, in addition to its effect on engagement with employees, will all be notable concerns for the smaller companies next in line to auto-enrol staff.
“I think employers will take an interest in their sickness absence spend, We’re certainly talking more and more to employers about the indirect and direct cost of their sickness absence rate. Further to this is the impact of that on your business and employee engagement when staff aren’t present,” Potterton explains.
“An employer that may not even be thinking about an insurance solution will certainly be thinking about the pressures that come from having to keep recruiting when they lose people and so on. Employers recruit and train their staff, so why would they be comfortable for them to go missing through sickness absence when tools could be in place to help them get back to work?”
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