If you read nothing else, read this…
- The design of group income protection (GIP) schemes can be tweaked to provide a valuable benefit but at a cheaper price for employers.
- Using added-value services can save money on the cost of providing the benefit.
- The benefit should be promoted to staff to ensure a good return on investment.
While chopping benefits may seem the obvious way to cut costs, there are other ways to achieve greater value from this product.
Tweak the benefit features
Although GIP typically costs around 1% of payroll, the product design offers plenty of opportunities to trim this expense back. Alex Pickard, senior consultant at PMI Health Group, says that because GIP evolved out of the pensions environment, it has traditionally been benefit rich. “[Employers] could cut back on the percentage of salary covered, remove escalation from benefits or increase the deferred period,” he explains. “Any of these steps will help to reduce the premium.”
For example, cutting the percentage of salary from the traditional 75% to 50% saves around 20% while removing escalation will take about 15% off the premium. But if employers do want to cut benefits, they should be aware that this may require consultation with employees if it is a contractual or implied benefit.
Cut the term, with caution
While steps such as reducing benefit levels and removing escalation can trim the cost of cover, reducing the length of time a plan will pay out can drop the price significantly. For example, figures from Canada Life show that a plan with a five-year payment term costs a third less than a plan paying out until normal retirement age, while opting for a two-year payment term can be almost two-thirds cheaper.
However, advisers warn against cutting the benefit payment term on an existing scheme. David Dolding, director of consulting at Portus, says: “Doing this fundamentally changes the reason to have the benefit. A limited-term policy is great if [an employers is] introducing GIP, but if it already has cover [it could] consider reducing the benefit level or removing escalation before slashing the payment term. This way, if someone is never going to return to work, at least they’ll have some income.”
Check the added-value extras
Over the past 10 years, GIP insurers have added a variety of extras to their plans including employee assistance programmes (EAPs), second-opinion services and absence management systems. But these extras can often go unnoticed and some will even be duplicated at an additional cost.
For example, an organisation that provides an EAP to its 14,000-strong workforce at the annual cost of £5 a head could save itself £70,000 a year instantly by switching to its free EAP, according to Paul Avis, marketing director at Canada Life Group Insurance. Employers must check the product literature to make sure they’re getting as much value as they can from these extras. “We also find that employers overlook the early intervention services,” he adds. “These provide vocational rehabilitation to help an employee return to work and can often prevent a claim altogether.”
Look smart and shop around
Thanks to healthy competition in the GIP market, it is well worth shopping around for a lower premium. Nick Homer, corporate propositions manager for protection at Zurich, recommends that employers highlight their organisation’s approach to employee wellbeing and absence management to get the biggest savings. “A proactive approach is important to an insurer,” he explains. ”As well as indicating that [an] organisation is lower risk, it also means it’ll be able to work more effectively in the event of a claim. It’s even worth spelling out any changes to [an] existing insurer: a new approach to health and wellbeing won’t show in [the] claims experience.”
Promote the plan
With GIP often seen as a way to cover an employer’s salary expenses when someone is unable to work long term, it’s not always communicated properly to employees. Dolding says that as a valuable benefit, it needs to be promoted to staff. “Some organisations worry this will encourage more long-term absence but we find that employees usually appreciate their employers more when they understand what cover they have. This can deliver benefits that far outweigh a 10% reduction in the cost of GIP.”
