Protection  

What advisers must know about state benefit cuts

    CPD
    Approx.30min
    What advisers must know about state benefit cuts

    From 6 April 2017 applicants for Employment and Support Allowance (ESA) that are assessed as unfit for work but capable of work-related activity (WRAC or Work-Related Activity Component) will receive a lower level of state benefit, equivalent to the Jobseekers’ Allowance.

    This means that the annualised value of the state benefit will fall from £5,312 a year to £3,801 a year.

    We currently have a legacy situation where group income protection scheme designs of 75 per cent, 66 per cent or 50 per cent of salary, less state benefits – the deductible – has become the norm and this is usually Employment and Support Allowance plus WRAC.

    On the surface, you could argue that a change of £1,511 in benefits a year – or £126 a month – is not a lot. However, this represents a 30 per cent reduction in the state benefit amount, which has to be factored into existing scheme pricing.

    A 30 per cent cut means that if organisations have a Group Income Protection (GIP) scheme with a state deductible, they will have to pay more since the benefit that will have to be paid during a claim has increased.

    The benefit can also be paid for more than 40 years, which adds up to a significant percentage increase in someone’s potential benefits, particularly for lower paid employees.

    Is this therefore the time to finally cease any relationship between GIP and state benefits as it ultimately complicates the message?

    Neither employer nor employee will know what the absent individual will receive, since benefit levels are prescribed by personal circumstances when claiming from the state.

    In separating the two, we could provide an income amount that can be explained and assessed quickly and easily.

    What this means for Group Income Protection

    This is clearly a huge opportunity for advisers and insurers to highlight – yet again – that state benefit support is already at subsistence level, and is only getting lower, which means an alternative is required.

    For employers that are insured, work still needs to be done.

    We estimate that around 50 per cent of all GIP schemes have a state benefits deductible, so there is a massive opportunity for advisers to consult with around 9,000 employers (representing around one million employees) about the changes they could want to make to their scheme designs.

    With state benefit reducing in monetary terms, becoming harder to qualify for and people’s circumstances (and therefore state amounts) changing once in claim, the situation gets very messy for the individual and sometimes the employer.

    ‘Net pay’ and ‘integrated’ schemes, as niche areas, will need to be reviewed in light of the reduction in state benefit levels.

    More broadly, we need to act to educate existing clients about the removal of any relationship with state benefits, i.e. no deductible.

    The time to act is now. The group market works on a two-year rate guarantee as standard, so we are already pricing schemes with potential claims after April 2017 where higher benefits will need to be paid out.

    What are the options?

    CPD
    Approx.30min

    Questions appear on the last page of this article.