Ron Wheatcroft of Swiss Re looks peers into the future and hopes an oak forest will grow from seeds planted now.
It is now more than eight years since the publication of the Turner Commission’s recommendations to tackle pension under-provision, and the first anniversary of auto-enrolment, a key Commission proposal, has now passed.
The Commission accomplished an aspiration of many and it is also a rarity – a true cross-party consensus which contributed to the proposals emerging largely unscathed from the change of government in 2010.
In August 2013, the Department for Work and Pensions reported an opt-out rate of 9%, compared with pre-automatic enrolment research suggesting it could be up to 30%. Although the survey sample was limited to 50 large employers, these early results are encouraging. Time will tell if this is replicated when medium-sized and smaller employers reach their staging dates.
Pensions and risk are linked
One major provider has stated that 50% of its group risk schemes are linked to pensions in some way; auto-enrolment is impacting the group risk market and will continue to do so.
Early signs reported in Group Watch 2013 suggest that the risk market has held up well but the threat remains that group risk benefits are seen as an easy cost-cutting target for employers looking to fund extra pension costs. This would have important implications; at the end of 2012, almost 2m lives were insured under income protection schemes, in benefit terms around 75% of all insured benefits in the UK. For many people, their cover through an employer scheme is the only life or disability insurance that they hold; as the auto-enrolment programme gathers pace, it would be unfortunate if this was to some extent at the expense of other benefits crucial to keeping more cover in the private sector.
The full impact of auto-enrolment will take a few years to bottom out as staging progresses and contribution levels increase through the roll out. There can be no cause for complacency that risk benefits will be resilient to such factors.
Short to medium term, auto-enrolment may grow the group life market where entitlement to benefits is linked to pension scheme membership. The number of lives covered under long-term disability income schemes is likely to grow more slowly. Some income protection schemes are incorporating a clause restricting eligibility by reference to a minimum pension contribution.
Looking beyond traditional group risk models, research commissioned by Swiss Re in mid-2013 presents positive messages about workplace financial provision. Ninety-three per cent of employed people think employers have a role to play, whether providing cover, raising awareness or using their influence to secure good deals. Encouragingly, 21% of employers who do not currently provide income protection say that they would consider making it available for their employees to purchase themselves.
Auto-enrolment is likely to change the perception of a pension as a benefit. As coverage becomes almost universal, it may be regarded more as an additional tax on a business, rather than helping an employer stand out from its competitors. If so, how will employers differentiate their offering in a competitive environment? Herein could lay an opportunity to develop propositions to enable income continuation and other risk benefits to appeal to a wider market.
Auto-enrolment in context
The timing for such an offering could be ideal. Auto-enrolment is just one of a combination of factors coming together:
greater employer involvement
up to eight million more people having some pension coverage
State provision reducing across pensions, care funding and other welfare benefits
greater focus on the health benefits of work and on rehabilitation following the Sickness Absence Review led by Dame Carol Black and David Frost
access to information on a scale which is unprecedented and technological advances which will allow the benefits of scale to flow down to smaller organisations
likely reduced access to financial advice for the mass market
Our research suggests that workplace pensions can provide a foundation for wider access to products and services, in addition to or complementary to today’s group risk products. In this environment, greater awareness of financial products and benefits will be important, for instance, to help DC pension scheme members understand how plans work and, conversely, how they can protect their income better.
Evidence shows that many people are apathetic to financial services and products. However, a perceived lack of trust in our industry seems to be far from the barrier to purchasing that some might expect. Nonetheless, people do tend to place trust in their employer.
Research for the latest Swiss Re Insurance Report shows more people saying that they prefer to get advice from the internet (53%) rather than from financial experts (41%). This is not necessarily a quality measure but more an indication that time and convenience drive many people to act. Well-positioned workplace propositions allowing employees to understand and purchase income protection could provide an effective means of delivery.
Historically, group risk benefits have been rather a blunt instrument, based on common factors such as a multiple or percentage of salary. Increasingly packages will need to adapt to remain relevant. As working lives change, few benefits are likely to be relevant to all members of workforces who may range between ages 20, 70 and even over.
A changing world
There are already signs of a change from the traditional role of the employer as provider . At the end of 2012, 10.4% of in-force income protection premiums were employee-paid compared with 6.7% four years previously. This trend is likely to accelerate as costs are shared, mirroring pension funding models which have altered as DC pensions have replaced DB.
A taxing question
We might consider what else will be needed to grow coverage of income protection. One option might be to seek incentives through the tax system to stimulate demand. Yet is there a convincing case that further incentives might stimulate demand rather than simply make provision a bit cheaper for existing providers? In the present economic environment, arguments for tax relief are likely to fall on deaf ears.
Furthermore, and importantly in the context of auto-enrolment, the government is unlikely to be receptive to proposals which could jeopardise the success of auto-enrolment by diverting employer spend away from pension provision.
The removal of a market distortion will always be easier to argue than a request for precious tax revenue. For example we can look at disincentives which can make private provision of little value for lower earners, such as the way that income protection interacts with means testing.
The interaction with means-tested benefits is recognised as a possible barrier to employee-paid simple income protection policies. One option here might be to lay down typical minimum earnings and household asset levels to support buying decisions. A model like this, though, cannot be entirely free of the risk that insured benefits are offset by means-tested benefits, possibly many years in the future.
Most people would agree that auto-enrolment is just a starting point in building a wider savings culture, a matter of great concern with the Bank of England in December 2013 reporting that savers have been withdrawing money from their accounts at the fastest rate for nearly 40 years.
In theory, an income protection auto-enrolment model, giving employees the right to opt out, would change the market dramatically. This, though, is probably a step too far, at least until the economy has reached a period of sustained recovery. In any event, there are very different issues involved when considering mortality and morbidity risks. Who would provide the default equivalent of NEST for those employers unable to obtain cover elsewhere? Unlike in Australia, the number of pension schemes used for auto-enrolment could be in the thousands.
There could, though, be opportunities to build on auto-enrolment by using a small part of each contribution to provide cover when the member is unable to work, to ensure that the contributions continue. This, in turn, would contribute to greater pension saving. To keep things simple, this part of the overall contribution could be relieved against tax with the proviso that benefit payments go straight into the pension pot rather than to the member. If we are to achieve this, it is important that we begin to build our rationale well ahead of the government review of auto-enrolment planned for 2017. (Readers of a certain age may recall this model as pension waiver benefits on incapacity where, sadly, approval was removed ahead of the introduction of stakeholder pensions in 2001).
As with auto-enrolment, that’s just one small step.
Build and grow
Protection business has enjoyed little government air time as other benefit- and welfare-related issues have been prioritised until relatively recently. While this has allowed a period of (relative) stability, the downside is that we have largely failed to build the understanding within government essential to deliver partnerships between the State and private sector which will be an essential part of long-term and sustainable reform. The time to begin to address that is right now.
Ron is Technical Manager at Swiss Re Europe SA UK Branch.
He works closely with product providers in the UK and Ireland looking at how regulatory and legislative change will impact on their businesses and is a member of the ILAG Board. He has led Swiss Re’s work in identifying and quantifying the Life assurance and Income Protection Gaps in the UK.