If you read nothing else, read this…
•The group risk market has historically not been suited to small and medium-sized enterprises (SMEs) because of the relatively high cost of products.
•Lack of product choice has resulted in many SMEs emulating medium and large firms’ plan designs, resulting in them offering over-generous employee cover.
• Group risk cover for SMEs is becoming more affordable as providers compete.
Case study: Group income protection bridged the gap for The Wilson Organisation
Financial services provider The Wilson Organisation has had a group income protection (GIP) scheme, provided by Unum, in place for about 25 years.
Group financial director John Steele says it is a legacy policy that was first introduced with the organisation’s defined benefit (DB) pension scheme. “The DB scheme needed to attract good-quality staff, so a [GIP] scheme was an additional benefit, added as an ill-health, early-retirement option,” he says.
The aim was to provide a product to bridge the gap between the date at which an employee may have to retire on grounds of ill-health, which may be at only 30 to 35 years of age, and the state retirement age.
The Wilson Organisation closed its DB scheme to new members in 2000 and for future accrual in 2010. New recruits can now join its replacement group personal pension (GPP) plan, which was introduced in 2000. “Members of the DB scheme went to a GPP money purchase environment and if they have to retire early through ill-health, they don’t get a lot,” says Steele. “The [income protection] is a safety net, which is valued.”
The organisation has had two claims through the scheme, which costs it £20,000 a year to provide for its 60 UK-based employees. One claim involved a long-serving employee in his late fifties whose health had deteriorated.
Among other things, he had developed high blood pressure and could not work. Steele says: “He was able to call on that benefit and it was good for other staff to see that he was being looked after after all those years.”
Group risk benefits are becoming more affordable and practical for small and medium-sized enterprises, says Clare Bettelley
The group risk market has historically been devoid of providers catering for small and medium-sized enterprises (SMEs) because of the relatively high cost of available products, which have traditionally been aimed for larger employers.
But times are changing and a number of group risk providers, including Aviva, Legal and General, and Unum, have evolved their products to cater for SMEs, with new market entrant Ellipse having fuelled competition. But is this progress enough for SMEs to be able to justify the expense of group risk cover for their workforces?
One major deterrent to SMEs taking up group risk cover, which includes group income protection (GIP), group life assurance and critical illness insurance (CII), has been a lack of understanding about the cost benefits. Mike Blake, compliance director at PMI Health Group, says this is because employers tend to average one claim for every 300 to 400 lives covered, which, in view of a potential six-figure premium, seems steep.
But consider the cost of funding an employee’s long-term absence, including sick pay, pension contributions and a rehabilitation programme, plus the lost productivity if a temporary replacement worker cannot be funded or a staff member taking on the additional workload cannot cope, and the initial cost of cover may not seem quite so high.
Difference in cost
A recent quote given by Canada Life highlights the possible difference in cost. It quoted an annual premium of £8,123, equivalent to 0.107% of payroll, for a group life assurance and GIP package for a new scheme of 270 employees offering a two-year limited-payment term, with 50% of salary payable after 26 weeks’ continuous absence for all employees.
Canada Life says the additional services available with these schemes, if purchased directly from providers by the employer, could have cost far more than this amount. For example, an employee assistance programme (EAP) costs an average of £15 a year per employee (£4,050 plus VAT for this employer), and its Best Doctors medical advice and second-diagnosis service costs about £40 a year per employee (£10,800 plus VAT), making a combined annual total of £14,850.
Of course, the level of cover an employer chooses can dramatically affect its annual premium. Matthew Gregson, a managing consultant at Thomsons Online Benefits, says there has been a tendency for SMEs to emulate medium and large organisations’ plan designs because of a lack of product choice to suit their size and needs.†
“Large legacy schemes offer high levels of group life, dependants’ pension and income protection, so the big challenge for SMEs is whether they want to replicate this to compete and make the same rod for their own back or look at the fact that this is not valued [by all employees],” he says. “Do they want to over-fund and have too high a liability or recognise the diversity of employees’ needs by providing choice?”
Gregson advises SMEs to let staff make their own choices about cover, rather than providing a high level for everyone. Group risk providers’ evolved product ranges now make this possible, with SMEs able, for example, to offer staff limited-term GIP cover rather than cover until retirement, like the aforementioned Canada Life example.
More cost-effective product funding, with products part-funded by both employers and employees, is also helping to boost the attractiveness of group risk products.
But Glenn Laming, employer services director at Legal and General, says SMEs should ultimately concentrate on choosing a scheme based on their business needs and the culture of the organisation.
Group risk benefits available to SMEs:
Products: Group life, group income protection (GIP), group critical illness (CI)
Services: Employee assistance programme (EAP) and multiple helplines.
Products: Life, GIP, CI.
Services: Tele-underwriting, EAP, Best Doctors medical advice service, multiple helplines. Pricing: Group life and GIP with two-year limited cover for 270 employees: 0.107% of payroll.
Products: Group life, group CI and GIP.
Services: Bereavement counselling, master trust facility, personal nurse allocation, and absence management service. Pricing: From around £200 per employee per year.
LEGAL AND GENERAL
Products: Group life and GIP.
Services: EAP, workplace rewards service, which provides access to discounted goods and services.
Pricing: Undisclosed ides es. ndisclosed
Products: A range of GIP products.
Services: EAP, professional rehabilitation assistance, return-to-work planning, helplines, business support.
Pricing: From £200 per employee per annum for basic GIP.