Employers face cost of ill-health early retirement provision

Just over a third (35%) of respondents closing a defined benefit (DB) pension plan are considering the issue of how to manage ill-health early retirement provision, according to research by trade body Group Risk Development (Grid).

The research, which surveyed 500 UK organisations, also found that almost one in five (19%) respondents said their employees would still be able to take enhanced ill-health early retirement under the closed pension scheme.

It also found that 17% of respondents have replicated the provision of ill-health early retirement through an insurance policy, while 20% have totally overlooked the issue. 

An employer operating a DB pension scheme may use ill-health early retirement as an option if an employee develops a condition requiring a long period of sick leave. However, should the scheme close, alternative provision needs to be made if employers are to avoid a costly protection gap.

Katharine Moxham (pictured), spokesperson for Grid, said: “It is important for employers and employees to remember that defined benefit schemes are not just about a pension, they can have other associated benefits.

“Closing or revising a defined benefit scheme has clear implications for corporate pension policy, but it can also leave a hole in an organisation’s health and sickness provision that shouldn’t be ignored. 

“When closing a defined benefit scheme it’s vital for employers to revisit their sickness provision to ensure it remains robust enough to protect their organisation and their employees. Worryingly, our study suggests that many employers are unsure how best to do this.

“Implementing a group income protection (GIP) policy where employers offer staff access to insured protection cover if injury or illness prevents them from working for a prolonged period could be an option. 

“Under a GIP policy, individuals remain in employment so the focus is on getting them back to work as well as providing financial support for employees and their families while they’re unable to work.”