An opportunity to realise the value of group income protection and get some significant market growth?
I have been going on for years about the value of group income protection (group IP) cover, especially in the context of ill health early retirement pensions (IHERP), without a great deal of success.
In the current world of defined benefit (DB) pension scheme funding scrutiny and de-risking, the focus has been on reducing scheme benefits or closing the scheme to either new entrants, future benefit accruals or completely.
What has not been considered is an alternative approach to providing IHERP in a DB pension scheme. With a switch from a DB pension scheme to a defined contribution (DC) pension scheme, we all know that IHERP provision is lost, and can only be provided by a group IP scheme, but the government is now advocating the use of group IP to avoid ‘spiky' benefits in DB pension schemes.
All this adds up to a significant boost to the use of group IP coverages, running alongside the pension scheme to provide IHERP benefits.
Standard group IP provides a regular income benefit for an employee, right up until their expected normal retirement, if they don't recover from their illness or disability. So they can remain as an employee, and more importantly part of the employer's pension scheme. Contributions to the pension scheme can continue, enabling the employee to continue to accrue pension benefits. And the pension scheme contributions can be insured as well as a basic benefit.
With the government's intention to reduce the annual allowance (AA) to between £30,000 to £45,000, any enhancement to an IHERP could more easily result in the AA being breached, such that a tax charge is payable. The enhancement could be significant when you consider discount factors of perhaps 3% or 4% for every year a pension is taken early and the addition of prospective service to the pension calculations
Group IP as an alternative to IHERP also has other advantages.
• Group IP provides a more level funding mechanism and provides a competitive alternative to the cost of funding IHERP under a DB pension scheme.
• The insurer provides an independent assessment of the employee's health, with regular reviews and mechanisms to help employees return to work if their health improves.
• An IHERP may only be paid if the employee is unable to carry out any occupation or is permanently disabled. Group IP is usually based on the assessment against an employee being able to carry out their own occupation.
• The employee does not loose out on pension benefits as they and the employer can continue to pay contributions to the pension scheme, so that the employee continues to accrue pension benefits right up to the time they would normally have expected to retire.
If the government doesn't go ahead with their plans for a reduced AA, limited pay group IP would be a lower cost alternative to standard group IP, especially with a lump sum benefit payable at the end of the limited payment period, as the employer can use this lump sum to help fund any enhancements to any IHERP.
Nothing new here, but we seem to have forgotten the basic value of standard group IP benefits. You don't even need to think of any new product ideas, we have one off the shelf, which meets the need and is available now.
