Protection  

What advisers must know about state benefit cuts

    CPD
    Approx.30min

    Option one is retaining a state deductible (but not necessarily the WRAC).

    For example, employers could set it as a fixed amount or link it to another state benefit, e.g. employment support allowance plus support component, which would broadly maintain the existing level of insurance benefit when aligned with state benefit.

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    It is worth noting however, that if retaining an ESA and WRAC deductible, a higher premium will have to be paid, due to the increase in benefit payable from the insurer, as a result of the reduction of the state benefit from 2017.

    If employers retain any deductible, they need to be made aware that these recent changes are not necessarily going to be the final iteration of state benefits.

    This could be the first benefit design review of many as state benefits continue to evolve and will most likely decrease further. It is possibly just the first wave of expected welfare cuts needed to reduce the disability welfare bill, estimated to be £36bn annually.

    Retaining any state deductible clearly does leave an organisation with a risk of future price increases if further reductions do follow.

    If there is any change to an organisational scheme design, now or in future, advisers should confirm that they may have to go through a consultation process if the GIP benefit has been communicated in any way.

    Any changes to employment terms may have to go through an employee consultation process which allows all employees the chance to raise concerns and, if the change is agreed, the organisation should then confirm and communicate the final benefit design.

    If the deductible (and state benefit relationship) is maintained, this could mean that a consultation is required every time the benefit design changes, opening up the possibility for many consultation exercises, which could prove to be a rather time consuming exercise.

    Option two is delinking the deductible.

    We believe that the best thing for an organisation is to have a fixed benefit percentage scheme design and to remove the deductible or any other reference to state benefits.

    For new to market schemes, a 75 per cent, 66 per cent or 50 per cent flat benefit scheme helps to keep it simple for both employer and employee and makes the benefit understandable.

    For existing schemes, providing a review service to schemes if a deductible exists (with an aim to get it removed and a flat percentage scheme replacing it) provides a great consulting opportunity.

    We believe that a straightforward benefit basis, where it is expressed as a percentage of salary – with no state deductible – would be clear and easy for employees and employers to understand. It is also likely to require fewer amendments when the government makes future changes to the benefit system.