The Protection gap must be bridged

Financial pressures and new legislation are spurring on an integrated approach to group risk perks, says Computacenter’s Barry Hoffman

The words “mind the gap” are a familiar refrain for train travellers, a reassuring message of concern for the welfare of everyone, regardless of status. But a far more worrying gap is developing in prime minister Gordon Brown’s Britain, which may create new class and social divisions. It is the protection gap, the extent to which the UK’s working population is without effective insurance cover. The increasingly perturbing reality is that a large percentage of workers simply do not have life or income protection cover – and these are mostly our younger co-workers.

So what is happening out there to reverse that trend? Rather like buying a burglar alarm after you have been robbed, income protection is now at the forefront of many people’s minds in the midst of the worst financial crisis for more than half a century. Current trends include a rise in the number of employers that are limiting the income protection claim term from normal retirement date to just five years. This change in benefit design often includes a lump sum, for example, twice annual salary, which can be part of a compromise agreement. I think we will continue to see this and similar innovations in the field of group income protection.

To add further gloom, some employers have also been removing the offset (a deduction for state incapacity benefit) as a result of the enhancements made by the Welfare Reform Act. To keep the design of a scheme cost-neutral, employers are reducing the typical benefit from 75% of salary to 70% and reducing the offset.

On a more positive note, employees are becoming more sophisticated and selective in their planning. Multiple pressures for cost-effective solutions force them into more research, and greater access to the internet and consumer advice makes this worth the effort. For those who are not willing to spend time on research, an online one-stop-shop from providers may be the answer.

I think we will see the more astute providers adopt an integrated approach. Many advisers are convinced that risk benefits should not operate independently in product silos, as they once did. A more holistic approach is being taken to help HR departments manage absence challenges, train line managers, adopt early intervention practices, and demonstrate savings, if not a return on investment, to the business.

Some innovative advisers are suggesting new ways to integrate employee assistance programmes, group income protection and private medical insurance policies with absence management to get to grips with potentially long-term cases at an early stage.

Is it an urban myth that we have seen more employment-related legislation in the past 10 years than in the last 50 put together? It may be apocryphal but it certainly feels true, and this is driving refinement to policies rather than wholesale change. For example, welfare reforms mean it is harder to claim incapacity benefits without actively trying to return to work. The government has hardened its stance on getting people off benefits and back into the workplace. An illustration of this is the planned replacement of the GP sick note with a fit note, which emphasises the importance of group income protection to employees.

The Equality Bill announced in the Queen’s Speech may extend rights to new categories of employee, such as agency workers, possibly impacting on employers’ costs. Add this to reviews by the Association of British Insurers on HIV/Aids, the Financial Services Authority’s Retail Distribution Review, and even more discrimination laws from Brussels, and life doesn’t look likely to get any easier for HR professionals and risk managers.

So, with the economy facing even greater pressure, providers must innovate and work even harder to provide cost-effective solutions for employees and employers alike.

Barry Hoffman is UK human resources director at Computacenter

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Key Points

  • A protection gap is developing in the UK where a large percentage of workers do not have effective insurance cover.
  • Rising numbers of employers are altering the design of group income protection schemes, for example, by limiting the claim term, reducing the benefit and removing the offset.
  • A more holistic approach is increasingly being used to integrate benefits and identify long-term absences early on.