ProtectionOct 24 2014

ABI proposes income protection workplace reforms

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A report published this week by the Association of British Insurers has proposed two possible models for reforms to build the role of income protection into the workplace in a similar fashion to auto-enrolment for pensions, ensuring people have protection following welfare cuts.

The ABI commissioned the Centre for Economic and Social Inclusion to carry out research on income safety nets for working households in the UK if one person could no longer work.

One proposed model is a ‘time-based collective insurance scheme’ that would require all employers to put in place insurance that provides full income replacement for all employees up to one year of serious illness or injury.

Individuals would be expected, through an auto-enrolment push or even through compulsion, to have some form of income insurance to cover further absence up to a specified limit, for example five years.

After five years of absence due to illness or injury, the state would provide an income safety net for those that meet certain conditions, potentially at a higher rate than now.

If the second tier were auto-enrolled, for example with a lower rate of NICs as an incentive, it would need to be underpinned by a basic state safety net for those that choose to opt-out. This could follow the model of a basic flat rate state pension, the report said.

The second option Cesi proposed would involve voluntary or compulsory individual ‘accounts’, which people would pay for through their own - and perhaps also employer - contributions alongside their pension and other workplace benefits

The ‘individual income replacement’ insurance could be an auto-enrolment opt-out model with national insurance contribution incentives.

This would go with the grain of pension auto-enrolment policy, as well as the recent removal of the requirement to annuitise pension pots, Cesi said, as people would be able to build up a safety net while they can afford to and draw on when they can no longer work.

The report said: “As with the collective option... this approach would require the issues around awareness, complexity and perceived value to be addressed, and would need simplification of the welfare system to ensure that the benefits of insurance for individuals were clear.”

In addition, there would likely need to be additional state top-ups or ‘credits’ for those that could lose out due to absence from work for caring responsibilities as exists in state pensions, or for long-standing health conditions.

Cesi is not the first to propose auto-enrolment inspired income protection models within the workplace. Earlier this year Canada Life said that auto-enrolment for income protection would be the single biggest thing to get most people in Britain within some form of protection product.

The topic is becoming far more relevant due to the welfare reforms, which will see contributory employment support allowance claimed for only one year.

According to the ABI’s welfare report, around 10.8m households, equating to more than 60 per cent of working families, would see their income fall by a third if the main earner could no longer work and they had no insurance back-up.

Of these, 40 per cent would see their income fall by more than half, without insurance to provide a safety net.

Dougy Grant, Aegon’s protection director, added that the industry needs to “take steps to address this, by raising consumer awareness of the benefits and improving the product design so that it’s easy for consumers to buy and have confidence that it will pay out in the event of a claim”.

He said: “It’s not only ‘income’ that a family loses when they are unable to work. There are additional costs like increased heating and lighting bills that need to be covered. Families need to plan for the unexpected.”