Advisers face legal threat from group risk timebomb

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Advisers face legal threat from group risk timebomb

According to one estimate, more than three quarters of a million employees are covered by group income protection (GIP) policies that terminate at an old definition of the state pension age - and advisers are liable if they have not informed employers that the policies can be amended.

Back in 2011, the group risk sector secured an exemption to legislation to remove the default retirement age from group protection policies.

This was so that employers could terminate an employee’s entitlement to benefit when they reached a cessation age of ‘the greater of 65 or state pension age’.

The move followed fears that a claimant may be entitled to payments until they died, as the contract of employment could not be ceased without going through a formal capability dismissal.

Such a situation could have led to skyrocketing premiums, as age is the biggest determinant in setting group risk prices.

But six years after the exemption was secured, several providers have revealed a large number of their policies still have termination dates of 65 or under.

Canada Life told FTAdviser that just over two-fifths (43 per cent) of its GIP policies still have a fixed termination age of 65 or less, along with 33 per cent of group life policies.

Unum said 40 per cent of its GIP policies terminate at age 65 or less, while for Ellipse the figure is 30 per cent.

Unum said that if its figure is indicative of the market in general, there are currently more than 750,000 employees in policies that terminate at 65.

However, a spokesperson for Zurich said the vast majority of its GIP customers provide cover to 'the greater of 65 or state pension age', "therefore we don't have the same concern as Canada Life". 

They added: “We proactively highlighted this point to customers when the default retirement age was removed, in order to encourage them to review the termination age under their policy.”

MetLife and L&G were contacted but had not commented on the number of their policies that still have termination dates of 65 or under by the time this article was published.

This year, Canada Life had a complaint brought against it at the Financial Ombudsman Service (Fos) by an employee who feared his benefit payments would stop when he turned 60.

He claimed this was a breach of the Equality Act 2010, which states that it is unlawful to discriminate on the grounds of age.

The complaint against Canada Life was not upheld because the ombudsman ruled the provider had given the employer the opportunity to amend the terms.

The concern among advisers is that where complaints are made about these types of group risk policies, the liability for not updating policies will fall on them.

Kathrine Moxham, spokesperson for industry body Group Risk Development, said advisers would be at risk of having claims against their professional indemnity if they had not notified employers about the exemption.

But she added: "Very often it is the case that the issue has been raised but [the employer] has chosen not to deal with it", in which case advisers would not be at risk.

John Kerr, director at London-based advice firm Kerr Henderson, said: “Unless advisers actively review the group risk arrangements regularly with their clients, mindful of recent legislation and so on, they are inevitably going to expose themselves to professional indemnity claims should some relevant issues not be discussed with their clients. 

“Needless to say, these discussions should be documented in writing with the client especially should the client choose to ignore their advice

“I think a lot of people out there are being looked after by advisers who do it as a sideline rather than a specialist. They are possibly leaving themselves exposed by not being specialist.”

Paul Avis, marketing director at Canada Life, said: “I find it astonishing that since Grid got the default retirement age exemption for group risk products in October 2011, that advisers have not amended the cessation age to ‘65 or state pension age’ in 43 per cent of group income protection cases.

“I do wonder, after such a long time period has elapsed, how much actual group risk consulting is going on in the market when such a great win by the industry has not been communicated to employers.

“The direction of travel is clear. The state pension age will only go up, and in a recent Fos case the need to get termination ages on the correct basis was highlighted when a client said that he was not happy that his termination age of 60 was not maximising the 65 or state pension age exemption. 

“Fos found that because the adviser and employer had not amended the age, there was no case to answer from the insurer, and so it is incumbent on the adviser to tell employers to utilise this exemption to make sure there is no period of self-insurance, which could undermine the exemption.”

Glenn Thompson, Unum's director of customer solutions, said the provider was working proactively with customers to address any gaps in their protection.

Chris Morgan, chief marketing officer at Ellipse, said the provider had been encouraging advisers to review their clients’ policies.

simon.allin@ft.com