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Group risk - What pensions reform could mean for you

Described by one consultant as a “tanker rumbling through tumultuous seas”, pension auto-enrolment remains on course under the new government. Madeleine Davies investigates what the entry of millions of Britons into workplace benefits might mean for group risk.

July 2010 Features

The facts that spurred the last government to introduce far-reaching pension reform are stark. The Department for Work and Pensions estimated that around seven million Britons were not saving enough for their retirement. As things stand, over half of those earning between £5,000 and £25,000 do not contribute to a pension scheme and 750,000 employers offer no workplace pension provision at all. The case for auto-enrolment in workplace pensions is clear.

What this might mean for the group risk industry is less certain. Auto-enrolment comes on top of existing pressures on corporate payrolls following a severe recession that saw group risk in-force premiums fall by over 7% in 2009 according to Swiss Re. At the end of last year Tobin Murphy-Coles of national advisory firm Lorica Consulting warned in Health Insurance that “something will have to give” in companies upping their pension contributions, suggesting that the provision of healthcare and risks products could be “hit hard”. Nevertheless, true to plucky form, intermediaries have told us that pension reform brings with it opportunities, not just to promote their value as trusted advisers but to even to extend workplace benefits to a whole new segment of the workforce.

SLICING THE BENEFIT BUDGET

There is no doubt that some employers will be faced with increased pension provision costs. The last government estimated that their reforms would result in up to nine million people newly saving or saving more in workplace pensions. If Labour’s rules remain in place, employers will be required to contribute at least 3% of an employee’s earnings to the pension pot. Given the fact that many risk benefits are already linked to pension schemes, either in terms of scheme eligibility or by the fact that pension scheme members may be entitled to enhanced benefits, employers may also need to prepare for an increase in risk benefits cost.

However, Matthew Lawrence of employee benefits firm Aon Consulting says that there is currently “no evidence” that group risk benefits are facing the chop as a direct result of pension reform.

“I do think that it is a challenge for employers to meet the requirements for auto-enrolment but I am not convinced that it is going to eat into the benefit budget as it stands,” adds James Biggs, corporate pensions consultant at Lorica, who suggests that they will instead “slice the benefit budget in a slightly different way”.

Carlos Correia, a senior consultant in the risk benefit unit of national advisory firm Lane Clark & Peacock suggests that auto-enrolment could result in a decoupling of pensions and group risk benefits, resulting in opportunities for advisers to help clients to reconsider their offering to staff. According to Lawrence such discussions are already being triggered by other factors such as holiday pay legislation and the abolition of the default retirement age.

UNANSWERED QUESTIONS

While the new government has made it clear that it supports auto-enrolment, the detail of how pension reform will unfold has yet to be articulated. Paul Davies, marketing and business development director at disability insurer Unum, notes that the National Employee Savings Trust (NEST – the national workplace pension scheme envisaged by the previous government, open to any employer seeking to meet the requirements of the planned reforms) is now subject to review.

“Although we are proceeding with our understanding of the rules, there is an element of caution,” says Lorica’s Biggs, who recently spoke to a large employer who was unable to extract answers to several questions about implementation from PADA, the Personal Accounts Delivery Authority charged with establishing NEST.

Regardless of the detail of its roll-out, Davies is reluctant to overstate the impact of auto-enrolment on other benefits.

“While I believe that the best place to access benefits is at work, the link between auto-enrolment and group risk and flex is maybe not as close as many people may think,” he explains. “If it is auto-enrolment there is almost no activity that would lead people to have more opportunity than today to access benefits.” He adds, however, that employers may use discussions with those employees choosing to opt-out of the pension to talk through the overall benefit proposition.

Meanwhile, Aon’s Lawrence believes that the government may have missed a trick in failing to include protection benefits in the reforms.

“Arguably the brains behind encouraging people to save for the future missed an opportunity to also encourage protection for the now,” he says. “If as part of the legislation there was also some form of compulsion to provide a minimum level of protection benefits then this could have been a positive thing for all.”

NEW ENTRANTS

Without a mandate from the government, it remains to be seen whether insurers, advisers and employers will seek to extend the reach of group risk benefits to the millions of Britons accessing pensions for the first time. It is fair to say that the workers likely to enter the pension market as a result of the reforms are not traditionally the target of corporate group risk advisers. However, many believe that this is an opportunity not to be missed, particularly if online technology can be harnessed appropriately.

“As many advisers now have minimum earnings thresholds for clients, the NEST segment may not immediately seem attractive,” says Paul Avis, sales and marketing director at group risk provider Canada Life. “But by using an operationally efficient process to quote and gain clients, such as our CLASS system, there could be some market growth in group risk. Put alongside post Retail Distribution Review fee based worksite financial education and executive financial planning, the group risk aspect could be the bit that gets the hungry adviser into these clients.”

Steve Ellis, head of group risk and national specialist intermediary Premier Choice Group, is very much alive to the opportunities.

“This opens up a whole new range of products to people,” he says “But it does need better marketing. It is going to be a challenge to get into these new organisations because they will not know how to access the business. But because we have a large number of small private medical insurance (PMI) schemes we have already have ways of doing that. We are geared up for the small end of the market.”

CHANGE OF TACK

If advisers are to approach this new segment of the market there is no question that it will require significant changes in the way that insurers operate. LCP’s Correia points out, for example, that their current frostiness towards late entrants to schemes will need to thaw, given the fact that employers will be required to re-enrol an opted out member of staff every three years. Lorica’s Biggs also anticipates an impact on rates given the potential for large numbers of employees to become eligible for access to a scheme on joining the company pension.

Canada Life’s Avis is the first to admit that the industry would need to change to address this new segment of the workforce.

“Traditionally, the group risk product and procurement process has been quite technical and onerous for both the client and adviser and so one of the challenges is how we make our product simpler to understand and buy,” he says. Could this extend to going straight to market, bypassing advisers?

Avis explains: “While we have no plans to disintermediate we have asked several of the industry’s leading advisers what they thought of simpler and easier to buy products and they suggested that if we were to launch this then our competition would follow and this would lead to greater consulting opportunities for them. They also mentioned that they would like this for those clients that they could not afford to service.”

Lorica’s Biggs is confident that advisers can find ways of communicating with all levels of an employer’s workforce.

“We can help the client to segment their staff and target their message accordingly,” he says. “We might find the complexity of the product goes up the scale in proportion with the advice offered. You need to remember that people will migrate up through a company to the point where they are accessing pensions. We are not of the view that advisers will be leaving these people behind.”

FLEX

Against this backdrop, Biggs forsees great potential for flex propositions such as Lorica’s Cube – an online flexible benefits platform that could be adapted to suit the needs of a range of clients including those with NEST-enrolled employees. His faith in flex is shared by intermediary colleagues and insurers alive.

“With the flex market still growing and alongside it the group critical illness market this could prove to be a popular with pensions buyers and so we may see more group risk coming in through this route as people see aspects such as total rewards statements becoming more important,” says Canada Life’s Avis. “NEST could lead to putting pension funding on the organisational agenda and hence the further scrutiny of DB schemes – in turn this could lead to an increase in flexible benefit enquiries which will help the group risk market”

Given pressure on the corporate payroll – Biggs point out that many employers have not given pay rises for two years in a row – advisers believe that voluntary benefits may be the way to extend the group risk offering to more employees.

“We do believe that more employees should have access to benefits in the workplace, even if employers do not intend to pay for them or split payment,” said Unum’s Davies, who believes that the benefit structure will need to change to allow people to do mixed funding.

Whatever the eventual shape of corporate pensions and benefits, advisers are confident that discussions that succeed in engaging employers and staff in the somewhat dry topic of auto-enrolment can also bring to life the entire benefits proposition.

“If people think positively about subjects like pensions they will be opening up to subjects like benefits,” concludes Lorica’s Biggs. “That turns a blunt instrument like auto-enrolment into something positive leading to greater appreciation of the value of working for that company.”

WHAT IS HAPPENING WITH PENSIONS?

Q. What are the key elements of workplace pension reform?

A. The Pensions Act 2008 placed new legal duties on employers, requiring them to automatically enrol employees into a qualifying pension scheme and to make a minimum contribution to this fund. It also established a new national workplace pension scheme called NEST (National Employment Savings Trust) that will be open to any employer who wants to use it to meet these new duties.

Q. Are all employees eligible for auto-enrolment?

A. Eligible employees are those aged at least 22 but who have not yet reached the state pension age and who earn more than £5,035 a year.

Q. How much do employers have to contribute to the scheme?

A. Employers will be required to contribute at least 3% on a band of earnings for eligible jobholders – between £5,035 and £33,540 a year. This will be supplemented by the jobholder’s own contribution and around 1% in the form of tax relief. Overall contributions will total at least 8%.

Q. When does this come into force?

A. From 2012. The plan is to stage in automatic enrolment over a period of time, starting with large employers, medium and then small. To help employers adjust gradually, the plan is to phase in the employer contribution levels – starting at 1% and then moving to 2% and finally 3%. The jobholders’ contributions will also be phased in the same period.

Q. Will employees be able to opt out of enrolment?

A. Yes at any time.

Q. How many people will be affected by the reforms?

A. The previous government estimated that it will need to help more than one million employers comply with their obligations to enrol up to 11 million workers. Statistics show that in 2008 the average employer contribution rate for defined contribution schemes was 6.1% of salary.

Note: These plans may change under the new government

The facts that spurred the last government to introduce far-reaching pension reform are stark. The Department for Work and Pensions estimated that around seven million Britons were not saving enough for their retirement. As things stand, over half of those earning between £5,000 and £25,000 do not contribute to a pension scheme and 750,000 employers offer no workplace pension provision at all. The case for auto-enrolment in workplace pensions is clear.

What this might mean for the group risk industry is less certain. Auto-enrolment comes on top of existing pressures on corporate payrolls following a severe recession that saw group risk in-force premiums fall by over 7% in 2009 according to Swiss Re. At the end of last year Tobin Murphy-Coles of national advisory firm Lorica Consulting warned in Health Insurance that “something will have to give” in companies upping their pension contributions, suggesting that the provision of healthcare and risks products could be “hit hard”. Nevertheless, true to plucky form, intermediaries have told us that pension reform brings with it opportunities, not just to promote their value as trusted advisers but to even to extend workplace benefits to a whole new segment of the workforce.

SLICING THE BENEFIT BUDGET

There is no doubt that some employers will be faced with increased pension provision costs. The last government estimated that their reforms would result in up to nine million people newly saving or saving more in workplace pensions. If Labour’s rules remain in place, employers will be required to contribute at least 3% of an employee’s earnings to the pension pot. Given the fact that many risk benefits are already linked to pension schemes, either in terms of scheme eligibility or by the fact that pension scheme members may be entitled to enhanced benefits, employers may also need to prepare for an increase in risk benefits cost.

However, Matthew Lawrence of employee benefits firm Aon Consulting says that there is currently “no evidence” that group risk benefits are facing the chop as a direct result of pension reform.

“I do think that it is a challenge for employers to meet the requirements for auto-enrolment but I am not convinced that it is going to eat into the benefit budget as it stands,” adds James Biggs, corporate pensions consultant at Lorica, who suggests that they will instead “slice the benefit budget in a slightly different way”.

Carlos Correia, a senior consultant in the risk benefit unit of national advisory firm Lane Clark & Peacock suggests that auto-enrolment could result in a decoupling of pensions and group risk benefits, resulting in opportunities for advisers to help clients to reconsider their offering to staff. According to Lawrence such discussions are already being triggered by other factors such as holiday pay legislation and the abolition of the default retirement age.

UNANSWERED QUESTIONS

While the new government has made it clear that it supports auto-enrolment, the detail of how pension reform will unfold has yet to be articulated. Paul Davies, marketing and business development director at disability insurer Unum, notes that the National Employee Savings Trust (NEST – the national workplace pension scheme envisaged by the previous government, open to any employer seeking to meet the requirements of the planned reforms) is now subject to review.

“Although we are proceeding with our understanding of the rules, there is an element of caution,” says Lorica’s Biggs, who recently spoke to a large employer who was unable to extract answers to several questions about implementation from PADA, the Personal Accounts Delivery Authority charged with establishing NEST.

Regardless of the detail of its roll-out, Davies is reluctant to overstate the impact of auto-enrolment on other benefits.

“While I believe that the best place to access benefits is at work, the link between auto-enrolment and group risk and flex is maybe not as close as many people may think,” he explains. “If it is auto-enrolment there is almost no activity that would lead people to have more opportunity than today to access benefits.” He adds, however, that employers may use discussions with those employees choosing to opt-out of the pension to talk through the overall benefit proposition.

Meanwhile, Aon’s Lawrence believes that the government may have missed a trick in failing to include protection benefits in the reforms.

“Arguably the brains behind encouraging people to save for the future missed an opportunity to also encourage protection for the now,” he says. “If as part of the legislation there was also some form of compulsion to provide a minimum level of protection benefits then this could have been a positive thing for all.”

NEW ENTRANTS

Without a mandate from the government, it remains to be seen whether insurers, advisers and employers will seek to extend the reach of group risk benefits to the millions of Britons accessing pensions for the first time. It is fair to say that the workers likely to enter the pension market as a result of the reforms are not traditionally the target of corporate group risk advisers. However, many believe that this is an opportunity not to be missed, particularly if online technology can be harnessed appropriately.

“As many advisers now have minimum earnings thresholds for clients, the NEST segment may not immediately seem attractive,” says Paul Avis, sales and marketing director at group risk provider Canada Life. “But by using an operationally efficient process to quote and gain clients, such as our CLASS system, there could be some market growth in group risk. Put alongside post Retail Distribution Review fee based worksite financial education and executive financial planning, the group risk aspect could be the bit that gets the hungry adviser into these clients.”

Steve Ellis, head of group risk and national specialist intermediary Premier Choice Group, is very much alive to the opportunities.

“This opens up a whole new range of products to people,” he says “But it does need better marketing. It is going to be a challenge to get into these new organisations because they will not know how to access the business. But because we have a large number of small private medical insurance (PMI) schemes we have already have ways of doing that. We are geared up for the small end of the market.”

CHANGE OF TACK

If advisers are to approach this new segment of the market there is no question that it will require significant changes in the way that insurers operate. LCP’s Correia points out, for example, that their current frostiness towards late entrants to schemes will need to thaw, given the fact that employers will be required to re-enrol an opted out member of staff every three years. Lorica’s Biggs also anticipates an impact on rates given the potential for large numbers of employees to become eligible for access to a scheme on joining the company pension.

Canada Life’s Avis is the first to admit that the industry would need to change to address this new segment of the workforce.

“Traditionally, the group risk product and procurement process has been quite technical and onerous for both the client and adviser and so one of the challenges is how we make our product simpler to understand and buy,” he says. Could this extend to going straight to market, bypassing advisers?

Avis explains: “While we have no plans to disintermediate we have asked several of the industry’s leading advisers what they thought of simpler and easier to buy products and they suggested that if we were to launch this then our competition would follow and this would lead to greater consulting opportunities for them. They also mentioned that they would like this for those clients that they could not afford to service.”

Lorica’s Biggs is confident that advisers can find ways of communicating with all levels of an employer’s workforce.

“We can help the client to segment their staff and target their message accordingly,” he says. “We might find the complexity of the product goes up the scale in proportion with the advice offered. You need to remember that people will migrate up through a company to the point where they are accessing pensions. We are not of the view that advisers will be leaving these people behind.”

FLEX

Against this backdrop, Biggs forsees great potential for flex propositions such as Lorica’s Cube – an online flexible benefits platform that could be adapted to suit the needs of a range of clients including those with NEST-enrolled employees. His faith in flex is shared by intermediary colleagues and insurers alive.

“With the flex market still growing and alongside it the group critical illness market this could prove to be a popular with pensions buyers and so we may see more group risk coming in through this route as people see aspects such as total rewards statements becoming more important,” says Canada Life’s Avis. “NEST could lead to putting pension funding on the organisational agenda and hence the further scrutiny of DB schemes – in turn this could lead to an increase in flexible benefit enquiries which will help the group risk market”

Given pressure on the corporate payroll – Biggs point out that many employers have not given pay rises for two years in a row – advisers believe that voluntary benefits may be the way to extend the group risk offering to more employees.

“We do believe that more employees should have access to benefits in the workplace, even if employers do not intend to pay for them or split payment,” said Unum’s Davies, who believes that the benefit structure will need to change to allow people to do mixed funding.

Whatever the eventual shape of corporate pensions and benefits, advisers are confident that discussions that succeed in engaging employers and staff in the somewhat dry topic of auto-enrolment can also bring to life the entire benefits proposition.

“If people think positively about subjects like pensions they will be opening up to subjects like benefits,” concludes Lorica’s Biggs. “That turns a blunt instrument like auto-enrolment into something positive leading to greater appreciation of the value of working for that company.”

WHAT IS HAPPENING WITH PENSIONS?

Q. What are the key elements of workplace pension reform?

A. The Pensions Act 2008 placed new legal duties on employers, requiring them to automatically enrol employees into a qualifying pension scheme and to make a minimum contribution to this fund. It also established a new national workplace pension scheme called NEST (National Employment Savings Trust) that will be open to any employer who wants to use it to meet these new duties.

Q. Are all employees eligible for auto-enrolment?

A. Eligible employees are those aged at least 22 but who have not yet reached the state pension age and who earn more than £5,035 a year.

Q. How much do employers have to contribute to the scheme?

A. Employers will be required to contribute at least 3% on a band of earnings for eligible jobholders – between £5,035 and £33,540 a year. This will be supplemented by the jobholder’s own contribution and around 1% in the form of tax relief. Overall contributions will total at least 8%.

Q. When does this come into force?

A. From 2012. The plan is to stage in automatic enrolment over a period of time, starting with large employers, medium and then small. To help employers adjust gradually, the plan is to phase in the employer contribution levels – starting at 1% and then moving to 2% and finally 3%. The jobholders’ contributions will also be phased in the same period.

Q. Will employees be able to opt out of enrolment?

A. Yes at any time.

Q. How many people will be affected by the reforms?

A. The previous government estimated that it will need to help more than one million employers comply with their obligations to enrol up to 11 million workers. Statistics show that in 2008 the average employer contribution rate for defined contribution schemes was 6.1% of salary.

Note: These plans may change under the new government