Group risk

An ageing workforce throws up tough decisions. But it may not be as grim as it seems, says Sam Barrett

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Attracting and retaining key employees is one of the main reasons for offering a comprehensive benefits package. But, with changing demographics potentially pushing costs up, employers could find themselves forced to withdraw benefits.

Improvements in healthcare, coupled with a declining birth rate, mean there’s a growing number of older people in the UK. According to the Central Office of Information’s report Winning the generation game, there are currently around 19 million people aged 50 years and above. They already make up 40% of the adult population. By 2020, this number will have increased by a further three million. Meanwhile, the number of people old enough to work but under 50 will have decreased by two million.

Therefore, to keep the economy on track, it’s essential to keep these older people in the workforce. Age discrimination legislation, which comes into force next October, should help encourage this. It will introduce a new default retirement age of 65 years, and make it illegal for an employer to discriminate against an employee on the basis of age.

However, the legislation will also present challenges for employee benefits professionals. Employers won’t be able to offer a poorer benefits package to older people. So where the retirement age has been extended to 65 years, they will need to look at making benefits available up to this age too.

Unfortunately, because the likelihood of someone making a claim increases as they get older on all group risk products, this will inevitably mean increased costs for employers providing these benefits.

Experts say that group life cover is probably the easiest to extend, because there is a good understanding of the additional risk. But with income protection it’s more complex. Not only is there a greater risk of a claim, but it’s also more likely to be a prolonged claim, because rehabilitation is not always so successful. This can make it prohibitively expensive to extend cover.

These escalating costs leave employers with a number of options: stump up the extra cash for cover, self-insure, reduce the amount of cover available to all employees, or withdraw it completely.

If an employer has to reduce or withdraw cover, it means any employee who is unable to work due to sickness or injury may have to fall back on the State.

The government is keen to reduce the number of people claiming incapacity benefit. Workplace benefits play a vital role in keeping the number of claimants down, for example, 35-40% of life assurance and 60% of income protection cover are currently provided through employers.

The Department of Trade and Industry (DTI) is expected to publish guidance on the impact of age discrimination legislation in this area of group risk in the first three months of 2006. Group risk companies are hoping that the DTI will consider making some allowance where costs are "untenable or disproportionate".

But the situation may not be as bad as it first appears. Research by the Chartered Institute of Personnel and Development (CIPD) into age discrimination in the workplace: Tackling age discrimination in the workplace, suggests that employers are positive about the prospect of employing older people. Gerwyn Davies, public affairs manager for the CIPD, says: "85% of respondents said that older employees aren’t any more costly and 85% said they thought employees over 65 years should continue to have employment protection rights."

Additionally, the research found that more than a third of respondents (36%) would like to see their organisation offer critical illness cover to encourage the recruitment and retention of older staff.

The government’s strategy to improve the health of the working population may also make it easier, and cheaper, for employers to provide group risk benefits. The strategy: Health, Work and Wellbeing – Caring for our Future, involves the Department of Work and Pensions, the Department of Health, and the Health and Safety Executive collaborating with employers, individuals and the healthcare profession to develop ways to reduce occupational ill-health and injury.

The initial proposals put forward greater use of occupational health and rehabilitation to tackle long-term health issues. Jonathan French, a spokesman for the Association of British Insurers (ABI) says: "We’re very encouraged by this. It’s an important step towards a holistic system that’s geared towards the interests of employers and employees."

The current system doesn’t have this focus. The NHS is not set up to deal with the two main causes of claims on income protection, stress and musculoskeletal problems, so these claims can easily drift.

A system that enables early intervention could alleviate the problem, making it easier for insurers to design cheaper products that offer protection for cases that aren’t easily returned to work. So employers may not be faced with the prospect of withdrawing such a valued benefit .