AE for group income protection: could it happen here?

There has been a lot of discussion about the possibility of auto enrolment (AE) style funding for group income protection (GIP).

This could be either with a compulsory employer contribution or an opt-in variation, possibly as part of a future increase in the level of pension contribution.

I believe this is now becoming a real possibility and is a potential political battleground.

At a recent industry forum, 80 per cent of attendees said yes to the idea of the government extending AE to GIP.

It would seem that, as corporate advisers understand the concept more, they are beginning to support it.

In the UK the discussion is around whether there’s an affordable simplified product that would be suitable for employers and meet employers’ needs. Many minds are grappling with it but can the Dutch offer any lessons?

The first lesson is that it has taken a long time for them to develop a solution, based on a collective approach that puts a lot of emphasis on the employer’s role.

The first overhaul of their system was in 1987 but the scheme was not actually finalised until 2006.

The approach was based on a report accepted by all political parties and supported (in principle) by unions and employer groups. It had also gained the acceptance of the general public, being seen as relatively fair.

The scheme is operated by a government agency, the UWV, which also judges the degree of disability.

How the scheme works

So what happens if an employee is ill? For the first two years the employer is required to pay at least 70 per cent of the employee’s salary, up to a salary cap of 51,414 euros.

In practice many employers pay more than that for the first year, up to 100 per cent of the uncapped salary.

Alongside this there is a legal requirement to provide support for rehabilitation with early intervention – the employer and absent employee should have an agreed plan after eight weeks.

This standard period of two years (104 weeks) can vary. For instance, if the employee is considered permanently disabled, the period could reduce to as little as 12 weeks.

Conversely if the UWV thinks the employer has not fully cooperated with rehabilitation support, it could be extended.

After this initial period of absence the state takes over. The absent employee (claimant) is assessed against an ‘any occupation’ definition, using objective tests. If they are deemed to be over 80 per cent disabled they will qualify for the full state benefit, which can rise to 75 per cent of their salary (up to the salary cap) if disability is considered permanent.

If disability is rated as between 80 per cent and 100 per cent but is not expected to be permanent then a benefit of 70 per cent of their salary (up to the cap) is payable, whilst rehabilitation continues.

However, if the level of disability is considered as being between 35 per cent and 80 per cent, with the potential for re-integration into the workplace, the benefit is set at 70 per cent of the difference between the salary for any work undertaken and their previous earnings.

If an employee in this situation becomes sick whilst undertaking some level of work, short-term sick pay is available. These payments are met by the state.

Contributions

The employer makes payments to cover the state benefits via a payroll tax. The amount of the contributions is based upon the overall experience of the system, with further adjustments for different sectors of industry.

So what can we learn from the Dutch model?

• Compared to the UK, their system is generous to those with a long term need

• It appears to be successful, with new claimants on state benefits falling from 100,000 in 2000 to 40,000 in 2010.

• The success is reflected in the contributions – the basic contribution rate of 4.95 per cent has fallen from 5.7 per cent in 2010.

So bearing in mind our own AE pension’s scheme has been successful and we know that Holland’s model shows positive results, my question is: Could AE for GIP be considered here?