Need to know
- Employers that fail to use the exemption available for group risk benefits allowing cover to cease at the greater of age 65 or the state pension age could find themselves having to fund cover beyond this, or face legal action.
- Amending a group risk policy is easy, with the cost of the additional cover small but dependent on the product and age profile of the workforce.
- To support older employees, group risk insurers can write cover up to age 70, or age 75 for life insurance.
Group risk products deliver benefits to employees and employers alike. But, with the state pension age (SPA) increasing, employers must ensure their policies are compliant or risk additional expense and legal action.
The current SPA is 65 for men and is gradually increasing from 60 to 65 in November 2018 for women. It will increase to 66 for both men and women by October 2020, and further increases are planned to raise it from from 66 to 67 between 2026 and 2028.
When the default retirement age was removed in 2011, rather than face a potentially open-ended liability, an exemption was secured for group risk products. This allows cover to cease at the greater of age 65 or SPA. Katharine Moxham, spokesperson at industry body Group Risk Development (Grid), explains: "Employers must ensure the benefit termination date on group risk policies is stated as 65 or SPA, if later. Without this, they are potentially exposed to uninsured liability for benefits that arise after the age specified in their cover."
Protection gapUnfortunately, many employers have not made the changes, according to figures from provider Unum. Analysis of its book of business show that around 40% of policies still cease at age 65. Extrapolated across the market, this could mean that more than 750,000 employees are in policies that are not compliant.
What is particularly worrying is that, as yet, there is no case law to show how one of these policies would be treated in the event of a complaint. The only indication comes from a case handled by the Financial Ombudsman Service involving group income protection with a termination age of 60.
The employee felt the insurer should pay the claim up to the agreed exemption age. However, the ombudsman did not uphold the employee's complaint, suggesting he direct his concerns to his employer instead.
Unlimited liabilityWhile the ombudsman's decision indicates that the employer would be liable where the exemption is not used, it is also important to note that the liability could potentially be unlimited.Paul Avis, marketing director at Canada Life Group Insurance, says: "The exemption is only guaranteed if the organisation has insurance in place. Where benefits terminate at age 60 or age 65, there's a period of non-insurance. As a result the employer could find the exemption doesn't apply and [it has] to self fund the claim until death. Alternatively, [it] could find [itself] facing a claim under the Equality Act."
To avoid this, it is relatively straightforward to switch wordings to gain the certainty of the exemption. "[Employers'] insurer or consultant will be able to arrange this but [they should] also make sure [they] review contracts of employment to ensure they reflect any changes too," adds Moxham.
Cost of coverThere can be cost implications due to the extension of cover, although these should be negligible. Morag Livingston, head of group risk and wellbeing at Secondsight, explains: "It does depend on the product and the age profile of the schemes. I wouldn't really expect to see any significant increase in cost for a group life scheme but there might be a small uplift for group income protection, especially if the workforce is relatively young."
For example, extending group income protection from age 65 to SPA would typically cost around 1% to 3% of premium, says Avis.
Going furtherWhile the exemption means that benefits provision is edging upwards already, it is possible to go further still. Group risk insurers can write cover up to age 70, with life insurance going to age 75.
Extending cover to older employees can help support a diverse workforce, which has prompted a number of employers to make the shift. Among Punter Southall Health and Protection's employer clients, for example, on group life benefits 40% go to age 70 and 22% to age 75.
With the lack of case law, however, there are concerns that plumping for an older age could be just as discriminatory as going for a straight age 60 or 65. But John Dean, managing director at Punter Southall, says: "Most sensible observers would know that if an employer offers more than legal minimum, as long as applied fairly based on the Equality Act, [it is] unlikely to be challenged for not treating employees fairly."
