In his first all Conservative budget, the Chancellor has announced that from 6th April 2017 applicants for the Employment and Support Allowance (ESA), that are assessed as unfit for work but capable of work related activity, will receive a lower level of state benefit – equivalent to Job Seekers Allowance.
This means that the annual value of the benefits will fall from £5,312 p.a. to £3,801 p.a. A 30 percent cut! But ask yourself if anyone (including you) can live comfortably on the current level of benefit income, let alone the reduced amount? And this may be the first in a wave of welfare cuts required to reduce disability welfare costs, currently estimated in a report issued by the Association British Insurers (ABI) as £36bn annually (1).
The problem is a simple one. There are 250,000 leaving employment due to ill health in the UK every year (1), 60 percent of whom are the main household earner. This figure can only add to the existing claimant population of around 2.5m (1). So, how does the Government reduce welfare spending? By trying to reduce the number of new claimants, through support from things such as the ‘Fit for Work Service’, and by lowering the amount paid to people on benefits.
When the new Work Capability Assessments (WCA) service supplier took over the assessment process for claimants, at the end of 2014, they inherited a 500,000-600,000 person backlog of cases (2). A December 2014 review of the WCA results (3) suggested that around 76 percent claimants reaching assessment were entitled to the ESA (though only 14 percent qualified for the WRAC). There seem to be no quick fixes for reducing either the current or future benefit claims applicants.
However, with the vast volume of people already claiming and large numbers of new claimants, a simple reduction in benefit amount payable has been estimated to save the Government £100m in year one, rising to £640m in 2020-21 (4). So where does this leave employers? The obligation is still only to pay Statutory Sick Pay (though this is often exceeded with occupational sick pay) and comply with the Equality Act (2010), but are there moral issues emerging as State Benefits continue to reduce? Auto-enrolment pensions’ legislation has perhaps set the precedent of devolving State responsibility to the employer and employee. So, with the potential for further change, now may be the time for considering what should be done.
In some circumstances, ill health early retirements may be possible, but this only works in the dwindling number of Defined Benefit schemes available and, even then, there are notoriously hard qualification disability definitions and often small amounts of benefits. Aside from the Public Sector employers this is rarely an option. Long-term absence can be stressful and difficult for the employee and very costly for the employer, in terms of reduced productivity and employee support, yet Group Income Protection (GIP) cover is not widespread. Only about 1.34 percent of UK organisations have GIP in place (5).
Where it is in place, there are still things to think about. The 17,119 employers who have GIP insurance provide cover for 2.08m employees (6). Our own experience suggests that around 50 percent of these have scheme benefits which have a State deductible e.g. 75 percent salary – ESA. As state benefits reduce the level of GIP cover increases, so now may be a good time to consider benefit provisions. Employers will either have to accept increased prices (insurers have to make up the State shortfall) or revise their scheme designs e.g. flat 70 percent of salary with no State deductible.
The proposed State benefits reductions and further uncertainty should lead to an increased demand for the Group Income Protection product, as employees communicate back to their employers how hard it is to get State Benefits and the reality of benefit payments. With “budget options” starting at about 0.2 percent (7) of salary costs and an under penetrated market, there is an opportunity for employers to use it to aid staff retention and attraction. With a raft of additional services, such as vocational rehabilitation from day one, employee assistance programmes, second medical opinion and treatment sourcing services included, it has always been a mystery to the industry why this was not a more widespread benefit.
The illusions that “it will never happen to me” and “the State will provide” may be beginning to falter and employees are starting to become aware of the devastating consequences that long term absence can have on their finances as well as their health.
Sources:
1. Page 14 https://www.abi.org.uk/~/media/Files/Documents/Publications/Public/2014/Protection/Welfare percent20Reform percent20for percent20the percent2021st percent20Century.pdf
2. http://www.bbc.co.uk/news/uk-politics-31590017
3. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/385578/esa_wca_summary_Dec14_final.pdf (P3)
4. https://www.rethinkingincapacity.org/why-the-budgets-cut-to-esa-may-backfire/
and budget URL is: https://www.gov.uk/government/publications/summer-budget-2015/summer-budget-2015
5. http://www.companybug.com/how-many-limited-companies-are-there-in-the-uk/
6. Swiss Re Group Watch 2015
7. Canada Life Group Income Protection quotes.
Further background: http://www.newstatesman.com/staggers/2015/07/budget-2015-what-welfare-changes-did-george-osborne-announce-and-what-do-they-mean
