Some measures are already in place. Given the potential for significantly higher premiums once the default retirement age was abolished, the group risk industry successfully obtained an exemption from the legislation in February 2011. This enables employers to withdraw benefits at state pension age rather than leave them open-ended.
To benefit from the exemption, employers must ensure the correct terms are in place by replacing the age 65 termination date with state pension age. Paul Avis, marketing director at Canada Life Group Insurance, says he still sees plenty of policies written to age 65. “Employers may be tempted to think they can just self-insure the additional years but this could be a risk. There is no case law yet to set a precedent but an employer could find itself with an open-ended liability if it ignores the exemption,” he explains.
Taking advantage of the exemption does carry a cost implication on some group risk products. On life assurance the cost is negligible, if anything, but on group income protection and group critical illness an organisation may see its premium increase by a couple of percentage points.
Extending cover
While it is perfectly legal to stop cover at state pension age, employers can choose to offer employees protection beyond this age if they wish. Most insurers will accommodate group life assurance up to age 75, using the claims experience seen in the individual market to set rates.
The other two products are more problematic. For group income protection, as there is no experience to draw on from the individual market, insurers will usually go up to age 70, balancing the potential for increased propensity to claim against the shortening benefit payment term.
Similarly, extending group critical illness cover can be more difficult. As well as a lack of data from the individual market, increased probability of conditions such as heart disease, stroke and cancer after this age means there is little appetite among insurers to extend cover.
With all products, the insurer’s willingness to extend cover can depend on the way it is arranged. Katharine Moxham, spokesperson for Group Risk Development (GRiD), explains: “If an employee reaches state pension age and you want to extend cover for them, the insurer will look to underwrite the employee. This means that cover is down to their individual circumstances and therefore it is not necessarily guaranteed.”
A more certain way to ensure that cover is in place for older employees regardless of their health once they hit state pension age is to take a blanket approach and raise the maximum age for everyone. Although this can mean a slightly higher premium, pooling the risk in this way is more acceptable to insurers.
However, because of the price implications, advisers say there is little appetite to do this across all group risk products. For example, Caroline Shepherd, business development manager (retention) for group risk at Jelf Group, says that while a high proportion of her clients have shifted the upper age on life assurance beyond state pension age, this is not the case for income protection or critical illness.
Limited term
While extending cover is one option for employers keen not to simply exclude employees once they reach state pension age, there has also been a move towards limited benefit term income protection products. For example, in Swiss Re’s Group Watch 2013, the percentage of limited term products had increased from 7.1 per cent in 2009 to 13.2 per cent in 2012.
These products restrict the length of time benefit is paid, typically to between two and five years, so all employees enjoy the same level of cover without the employer seeing premiums increase significantly.
Switching to a limited term product can have a significant effect on premiums. For example, figures from Canada Life, shown in Table 1, show an employer could save almost two thirds of the full premium if they implement cover with a two-year benefit payment term.
Even if the employer looks to provide a lump sum at the end of the payment term – which could be used as a golden goodbye or go towards the employee’s ill health early retirement package – it can still be significantly cheaper than a full product. For example, according to Canada Life, a three-year payment term followed by a lump sum payment of two times salary is around 30 per cent cheaper than the full product.
Flexible option
Rather than attempt to provide every employee with the same benefits, using a flex scheme that enables them to select the package they want is another option. Peter Fenner, communications manager at Ellipse, says this can work particularly well with group risk benefits. “Someone in their 60s is likely to have very different protection needs to someone in their 30s. Hopefully the mortgage is paid off, the children are no longer financially dependent and there’s some pension income set to replace or supplement their earnings. An older employee should need much less life assurance and income protection,” he says.
As well as enabling an employer to satisfy employees’ varied needs for protection, implementing a flex scheme has also become easier and cheaper. Technology has driven down the cost of flexible benefits platforms, making it possible for smaller employers to buy off-the-peg schemes.
Medical demands
Providing medical insurance to these older employees presents additional problems. While employers can take advantage of the exemption and stop their group risk benefits at state pension age, this is not the case for private medical insurance. And, as the need for medical interventions increases with age, it can mean premiums for those aged 65 plus can rise significantly too.
On a smaller scheme, where premiums are based on age, hitting 65 will result in an increase in cost to reflect the increased risk of claims, but the real price hikes come on larger experience-rated schemes. On these as soon as an employee reaches 65 the rate they are charged is doubled.
John Russell Smith, client director for Lorica Employee Benefits, believes this is unacceptable and challenges insurers when they double the rate. “Employees do not suddenly become unhealthy at age 65 but you can have a situation where a 66-year-old employee is being charged twice the rate on his P11d compared to that for his 64-year-old colleague,” he says. “In most cases the insurer will back down when challenged, and I think they will change this approach in time, but advisers need to be on the ball with them.”
Although there have been some issues when it comes to arranging protection for older employees, removing the default retirement age has largely had a positive effect. As well as helping to keep talent and experience in the workplace, employers have relied on the expertise and experience of their advisers to design more creative cover solutions that suit the needs of this more diverse workforce.
