According to the Pension Protection Fund, there were over 5,500 defined benefit (DB) pension schemes in the UK’s private sector in 2017.
Fifty-nine percent of DB schemes are still accruing future benefits and potentially supporting ill-health retirement, 1.3 million employees are still active in them, and 12 per cent of DB schemes are still open to new members.
But expenses related to longer life expectancies coupled with other economic factors are driving a societal shift away from DB pension schemes.
A pension scheme change, whether its closure for future accrual or a transition to defined contribution (DC) pension schemes, can cause substantial financial risk for members since it impacts both their important ill-health protection and their ability to fund another plan if they are unable to earn a living due to illness or injury.
Group Income Protection (GIP) insurance can help fill this gap, supporting the DB pension scheme closure or amendment successfully without impacting the important protection employees have.
While GIP can work alongside active DB or DC pension schemes, here are five compelling reasons advisers should consider GIP for employers who are in the process of a pension change:
1.Remove the burden of financial strain of ill-health retirement for employers.
Ill-health retirement can put financial strain on DB pensions and employers as plan sponsors. GIP cover can help relieve this financial risk by paying an agreed percentage of the scheme member’s income if the defined incapacity definitions are met.
Further, access to early intervention and rehabilitation support is also provided for employees who fall ill or are injured. If return to work proves not to be possible within an agreed time period for an employee, a final lump sum can be paid by the provider, enabling the employer to take the employee off the payroll.
If there are early retirees with ill health pensions already in payment, Unum, for example, could take over this commitment in addition to insuring against new ill health situations, relieving the employer of those liabilities.
2. Continuation of disability-related protection for employees.
Perhaps most importantly, employees would have financial protection in case of ill-health. Typically, GIP pays a percentage of their salary after they have been off work for the long term (such as six months, though the employer can choose other deferred or waiting periods).
This solution can also help ensure that individual’s ongoing pension contributions can be financed if they have to retire through ill-health.
3. Enable objective review of ill-health retirement situations.
Deciding whether individual members are entitled to early retirement pension can be challenging for trustees because of the risk of inconsistency in incapacity decisions. With GIP, these decisions are made by experienced assessors, backed up by doctors, nurses, psychiatrists and psychologists.
This removes the burden of assessing and judging ill-health retirement situations from trustees, allowing them to get on with managing the mainstream issues associated with pension governance while protecting member benefits.
4. Access to a wide breadth of consultancy services.
With GIP, the whole workforce can be covered, not just DB members, which can help HR harmonise employee benefits, while having support on absence management policies and health and wellbeing.
GIP cover can also provide access to a range of added value services for employees, like vocational rehabilitation, Employee Assistance Programmes, and specialist support – important services to pre-empt some conditions that can result in an inability to work, or to support a return to work if conditions arise so that early retirement is not needed.
5. Opportunity for advisers to add value for their customers
Importantly, using GIP to help plug the pension gap can ease concerns of all stakeholders, which is why Unum’s internal data shows an influx in these cases among large employers with 500 employees or more.
Although GIP can be introduced at any time, the rise in pension scheme changes present an opportunity for advisers to introduce this as a valuable solution for their employer customers - at a time when they need to derisk the scheme whilst also protecting pension scheme members.
Ambika Fraser is head of proposition development at Unum UK
