Why every Group Income Protection scheme should be reviewed this April

The government is making changes to state disability benefits this April, which will have a significant impact on large numbers of group income protection policies, also known as long-term sick pay.

On 6 April 2017, the work related activity component (WRAC) of the employment and support allowance (ESA) is being removed. This means that anyone who makes a successful new claim for state benefits after this date will only receive the ESA, unless they qualify for the support component (SC). For many employees, this means the benefits they get from the state will be significantly reduced.

As the below table shows, for an employee earning £40,000 with a typical group income protection benefit structure, instead of receiving £5,312 from the state each year, they will only receive £3,801, a 28% reduction.

A worked example

Absent 1 January 2017 Absent 6 April 2017
Salary £40,000 £40,000
75% of salary £30,000 £30,000
ESA £3,801 £3,801
WRAC £1,511 £0
Insured benefit £24,688 £26,199

(2017 ESA figure sourced from: http://www.focusondisability.org.uk/brates-1.html)

As this example shows, this change impacts specifically on policies that provide the benefit as a percentage of salary, less an amount equal to the ESA and WRAC. As the WRAC amount will be zero, this means that the insured benefit will increase to make up the shortfall and as a result premiums will increase to pay for this extra cover.

The ultimate choice for employers

  • Maintain the same overall target income for sick employees and the insured benefit will make up the shortfall, causing premiums to increase, OR
  • Maintain the same premium level and reduce the overall benefit provided to employees by lowering the percentage of salary

There are of course many nuances to making this choice. Employers will need to engage with their adviser to find a solution that best suits them, but regardless now is the time to review.

Remove any link to state benefits altogether
Looking at the longer term, and reflecting on a state benefit system which seems only likely to further contract in terms of the range and generosity of benefits, some employers may consider removing the link between income protection and state benefits altogether.

This can be done by adjusting the policy to remove the state benefit deduction. This has the advantage of simplifying the benefit, making it easier for employees to understand and avoids any implications from future state benefit changes.

But this is not a simple decision. The overall benefit, insured and state, available to an employee relative to their normal salary will not be clear, and for employees on lower salaries, that can make quite a big difference to the overall financial support they will receive. There are often administrative issues too in changing the policy benefit structure, especially when contracts of employment also need to be amended.

In a nutshell
The state benefits available to employees who are absent from work due to illness or injury are changing in April 2017. While there are a number of different considerations for employers and their advisers, both in terms of immediate and long term impact, it is crucial that employers and their advisers take the time to review their scheme as soon as possible.