ProtectionOct 31 2014

ABI joins call for employer-led income protection auto-enrolment

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Compulsory employer-led insurance schemes could help to bridge the protection gap, the Association of British Insurers has suggested. The call comes five months after Canada Life suggested using the pensions auto-enrolment model for group income protection.

In May this year, Paul Avis, marketing director for Canada Life, called on politicians of all parties to put protection on the agenda, and encourage a form of auto-enrolment for group income protection.

Mr Avis said: “It could have been that a story in May has helped to shape the thinking in the industry about how to get people back into the workplace after being off sick, and how to get more people covered through the workplace.”

The ABI’s 28-page report, Welfare Reform for the 21st Century, discussed time-based collective insurance, similar to approaches taken in Australia, where employers are required to put in place insurance that provides full income replacement for all employees for up to one year of serious illness or injury.

It said: “Individuals/employers would be expected through auto-enrolment or compulsion to have some form of income insurance to cover further absence up to a specified limit.”

Employers could be given lower national insurance contributions as an incentive, and the scheme would be underpinned by a state-led basic safety net for those who opt out.

However, according to Mr Avis, one way to make it work in the UK without placing additional burdens on employers would be for parliament to allow employers to wait until the next pensions contribution increase on them, for example when auto-enrolment contributions rise in 2018.

As an example, he said employers could then put 0.5 per cent towards funding what he called “extended sick pay”, which would be a compulsory disability scheme provided by the employer, and 0.5 per cent towards the pension, rather than the full 1 per cent towards pension contributions.

He said: “This could solve a number of business issues.”

Key Facts

10.8m households need greater income replacement than the state currently provides.

Only 11% of UK employers offer group income protection to all staff.

1 per cent of the workforce in the UK suffers significant illness or injury each year, equating to 330,000 people a year seeking disability benefits and incapacity.

Yearly gains from return-to-work activities benefit taxpayers to the tune of £20m; employers are £15m better off and individuals are £5m better off.

Source: ABI

Adviser view

Peter Lovett, of Essex-based Paragon Independent Ltd, said: “The concept of auto-enrolment for income protection insurance is good, but the problem I would have would be the cost.

“Income protection can be quite expensive. With pensions you see 3 per cent of someone’s salary going out and it is not so bad, but income protection can be a lot more than that.

“It is difficult to say how you can get more people to sign up for it. You need more promotion.

“You would be surprised how many people are not aware of it. A lot of people think their employers pay them when they are off sick until reality hits.”