Absence minded

Many employers are faced with the harsh reality that their current approach towards employee long-term sickness absence will be unsustainable. Employers need to overhaul their entire philosophy towards employee absence ' both the procedures they follow and the benefits they provide.

Although it is sometimes argued that group income protection (IP) sales can be marred by barriers such as cost and problems associated with underwriting, in the current climate the benefits employers can gain by investing in a scheme outweigh any negative pre-conceptions clients may hold.

The dilemma employers face has resulted from changes in the pensions market and an inadequate system for rehabilitating absent employees.

Historically, employers who have operated a defined benefits pension scheme have utilised the surplus pension fund to provide ill-health retirement benefits for long-term incapacitated employees. Because many employer schemes enjoy a surplus of assets, the discretion the trustees of the scheme exercised in granting employees ill-health early retirement became fairly relaxed, with the criteria used to facilitate this process not being strictly interpreted.

Financial exposure

However, poorly performing equity markets have put paid to this practice, with many defined benefit pension schemes now facing a significant deficit. Consequently, many employers have closed their final salary schemes to new entrants and replaced them with a money purchase scheme, with defined contributions, transferring the investment risk from the employer to the employees. This has left many employees exposed financially should they become incapacitated for long periods during their working lives. Those forced to take their pension early because of ill health will have a significantly reduced income in retirement.

The other main area of concern for employers is the lack of effective absence management and rehabilitation of employees in the UK. The recent Association of British Insurers (ABI) and TUC joint discussion document Getting Back to Work highlights the problems facing British industry. The paper calls for an overhaul of rehabilitation services in the UK, with a more co-ordinated approach to rehabilitation provision, and greater involvement from employers and the Government. It highlights the fact that Britain now lags behind other industrialised countries in providing long-term treatment for people injured at, or made ill by work. The scale of the problem facing employers is clear:

• Some 27,000 people leave employment each year as a result of injury or ill health caused by work, and never return.

• An estimated 14.5 million working days are lost each year as a result of work-related illness.

• These absences are thought to cost Britain £14bn a year.

Getting Back to Work highlights the key issues behind the UK's inability to develop an effective system of rehabilitation as:

• A lack of early intervention.

• A fragmented system with no clear leadership in co-ordinating rehabilitation services or research.

• Uneven distribution of rehabilitation resources throughout the UK.

Focus on absence

The lack of effective recording and monitoring of employee absence by employers, combined with the shortfall in adequate provision of rehabilitation services make it increasingly difficult for employers to fulfil their obligations under the Disability Discrimination Act. Given the difficulties now facing British industry it isn't surprising that both employers and intermediaries are increasing their focus on the cause, cost and management of long-term absenteeism. Therefore, the role income protection can fulfil in helping employers address this growing concern is becoming apparent.

A group IP scheme pays the employer a monthly benefit of up to 75% of an employee's salary, in the event of them being unable to work as a result of illness or injury. Payment continues for as long as the employee is unable to work, or they reach the scheme termination age (usually the company retirement age) ' allowing the employer to provide continuing financial support for the absent employee. Importantly, group IP can also cover the employer's National Insurance liability and both the employer and employee pension contributions.

A scheme will typically pay benefit after incapacity has lasted 13, 26, 52 or 104 weeks (the deferred period), with the employer covering the cost of short-term absenteeism. However, an employer doesn't have to wait until the group IP is due to kick in before informing the insurer of the potential claim. It is well documented the longer the period of absence the more difficult it is to achieve a successful return to work. Early intervention and active case management, potentially long before the benefit payments are scheduled to start, is something the more proactive insurers are encouraging.

A group IP scheme provides several valuable benefits:

• Employers are not faced with the dilemma of either having to inform an absent employee that their income is being stopped and their employment ending or incur additional costs to pay for a replacement.

• It helps retain valuable staff, because employers are not forced to seek a permanent replacement.

• It helps employers to manage the cost of sickness absence and control fluctuating expenditure.

• It helps ensure disruption to the business is minimised, allowing profitability to be maintained.

• It ensures consistency in treatment of absent employees, avoiding potential resentment in the workplace.

• The insurer can provide expertise to assist employers in the management of an absent employee and potentially support an employee's rehabilitation, helping to meet the obligations under the Disability Discrimination Act. Some insurers have their own clinical staff and claims visitors, whose role is to give help and advice to aid all parties in supporting the employee make a successful return to work. Some insurers will also consider providing other support such as counselling services and rehabilitation services, specialist consultations, private medical treatment to speed recovery and job retraining and business start-up services.

Over recent years the group IP market has grown steadily, with a 17% increase in premium income during 2001. How-ever, a significant increase in the demand for this valuable protection seems imminent given the key role it can play in helping employers manage employee welfare and the financial burden of sickness absence.

Where the employer is only able to provide limited sick pay, a major opportunity exists for intermediaries to promote voluntary IP arrangements, where the employer sponsors the scheme but the employee funds all or part of the cover. The introduction of Stakeholder pensions has confirmed the Government's view the employer is the most effective gateway to achieving greater personal provision among Britain's working population.

Historically many intermediaries have shied away from promoting voluntary schemes due to a lack of success in this area. However, times have changed and intermediaries should seize the opportunity that now exists.

Securing sales

There are several key considerations when promoting a voluntary IP scheme. First, obtain the employer's support by explaining how they will benefit as well. Then arrange personal interviews with each employee, during work time.

Offering the employees something extra that they could not obtain if they sought cover themselves will significantly increase the take-up. An attractive benefit to employees would be a premium reduction. The intermediary could facilitate this by sacrificing an element of commission. For example, if the intermediary took the same rate of commission they would receive on a group IP scheme they could fund a 10% rate reduction ' a significant incentive for employees to purchase via their employer.

In addition, in recognition of the benefits they would receive, the employer may be prepared to make a contribution to the cost in order to encourage further take-up. They could simply do this by making a contribution to the payroll.

Advisers should also try to tailor the cover around the employer's existing sick-pay arrangements and produce a personalised illustration for each employee, having obtained the appropriate information from the employer.

Other pointers to consider include the importance of managing expectations in the workplace. This means ensuring women and blue-collar workers understand why they pay more, explaining the underwriting process and alerting those who have a chequered medical history to likely delays in the processing of their applications or the possibility of adverse terms. Managed appropriately, underwriting should not be a barrier to the sale and it is often worth phoning the insurer for guidance on the likely underwriting action.

Advisers looking to benefit from the opportunity that IP presents should contact the relevant insurers for details of the support they are able to provide. However, a good starting point would be to visit the Group Risk Development (GRiD) website (www.grouprisk.org.uk). GRiD is a lobby group, consisting of insurers, reinsurers and intermediaries, that seeks to promote group protection benefits.

Employers who do not consider either funding a group IP scheme or sponsoring a voluntary arrangement could face the risk of major disruption to their business. Otherwise their employees may have to survive on the statutory sick pay and short-term higher rate Incapacity Benefit ' just £63.25 a week. When talking to clients about group IP schemes, the benefits should speak for themselves.

Nick Homer is income protection product marketing manager at Norwich Union Healthcare