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UP to Speed - The Employment Equality (Age) Regulations 2006Guidance Note 2 for Advisers - Group Income Protection (GIP).

Guidance Note 2.

This guidance note is the second in a series to help advisers understand the background to important new 'age discrimination' legislation, and tohelp them work with and guide their clients so that they are prepared in good time to comply with the new Regulations by 1 October 2006. This guidance note looks in more detail at the impact the Regulations will haveon GIP policies, and the relevant challenges and opportunities facing advisers.

The statements in this document do not constitute advice. Employers need to consider their circumstances and should obtain independent legal advice as appropriate to guide actions and decisions.

1. How many GIP policies in the UK will be likely to need to be changedto reflect a new terminal age of 65?

Although it is difficult to put a figure on this overall, Unum currently administers over 9,600 policies. Of these, over 3,000 have been established with a terminal age under 65, and notwithstanding a relatively small number that may be able to objectively justify an earlier retirement age, every policy should be reviewed with a view to changing its Terminal Age to 65 - the new statute-defined default retirement age. In every instance, independent legal advice should be sought.

This of course assumes that the client does not intend to self-insure any additional liability over the current policy terminal age. If this is the case, the changes offer an opportunity for discussion and an objective review of costs.

2. What are the opportunities for advisers?

We believe that the Regulations provide a number of important opportunities:

1. A topical theme to contact your existing clients to facilitate a review of their group risk policies and other employee benefit arrangements. Assuming that our own experience is not dissimilar to the rest of the UK GIP market, this suggests that one in three policies will be likely to need changing - a significant opportunity.
2. You will be able to demonstrate value to clients by promoting a detailed understanding of the Regulations. Your clients will need to obtain appropriate advice and support to help them comply with these in good time for 1 October 2006 and they will undoubtedly be looking to you for assistance.
3. Because this is a statutory change, your clients will need to take advice from their employment lawyers. This presents a valuable opportunity for advisers to work with their clients' legal advisers and developnew professional relationships.
4. Whether your advice and services are remunerated by fees, commissions, or a mixture of both, the Regulations provide a bona-fide opportunity to help further develop business. In addition to direct work on policy changes, your clients may need additional assistance with regard to other related matters such as employee communications.
5. The Regulations will also provide an effective springboard to help advisers open a dialogue with prospective new clients and to potentially develop new business enquiries.

3. When should I start to talk to my clients about the new Regulations?

There are a number of reasons why we believe that you should be acting immediately:

1. Clients will need time to fully understand the implications to their business of the new Regulations, and to seek appropriate legal and financial risk-planning advice.
2. Delay can provide opportunities for competitors to approach your clients.
3. You may miss out on some of the opportunities highlighted above.
4. All group risk providers, including Unum, will need time to process, underwrite, and administer group policy changes. You may also need to allow sufficient time for your clients to consider the costs involved in extending cover to a later age. This may leave some clients exposed to a potential breach of the Regulations if their policies are subsequently not amended in time, although of course they may decide to self-insure part or all of the additional risk.

4. How will my clients' group income protection costs be affected?

Inevitably, some clients will be subject to increased costs in one way or another as a result of compliance with the new Regulations. In addition to any professional advisory costs, group risk policy premiums will need to reflect the increased risk being run by insurers where cover is being provided to a later terminal age.

Membership, and thus the payroll upon which rates apply, may increase as a direct result of changes to policy eligibility rules.

Employers may also need to allow some time and possible related costs for their own internal management involvement and employee communication issues.

5. Will there be additional costs to member employees?

GIP policies are usually fully employer-sponsored and, on this basis, because membership of a GIP policy is not a taxable benefit for P11D purposes, there should be no cost impact on employees. As equity partnerspay premiums in their respect, they will bear any increase in their own premium.

6. What can Unum do to help employers meet the new Regulations?

For all Unum GIP policies we will be actively working to facilitate changes to the current terminal age as efficiently as possible. For all unit rated policies we will use existing data to provide a revised unit rate to reflect the new terminal age. This new rate will apply for the remainder of the existing guarantee period.

Should any of your clients find themselves considering an increase that they feel unable to support, we will work with you to help them consider alternative bases for cover: for example, devising a strategy to enable them to continue to meet the legislative requirements within their cost constraints.

7. Are there any special provisions in the Regulations that apply to Partnerships?

In respect of Partners covered under a GIP policy, you should be aware that although Partnerships still fall within the new Regulations, the retirement exception definition of 'employee' does not extend to partners. So in the case of partners, expulsion from a partnership based on age at any time (even over age 65) will constitute age discrimination unless objectively justified.

8. One of my clients has a GIP policy providing different benefits linked to age - how will this be affected by the Regulations?

Your client will need to take legal advice to ascertain whether they qualify for any of the exemptions permitted under the Regulations. However, generally speaking we would expect that most employers in this positionwill need to consider equalising benefits for all ages. You may possibly also come across some older contracts, originally intended to align with state retirement benefits, which may still be differentiating between male and female employees e.g. male terminal age is 65, but female terminal age is 60. Such policies should be reviewed and may require alteration as a matter of urgency.

9. I'm concerned that some of my clients may be disadvantaged because of underwriting requirements and 'selection against the insurer' issues - what is Unum's position here?

There is no doubt that the new Regulations will pose challenges for group risk policy providers. Although we cannot responsibly waive all of our underwriting requirements, Unum is currently undertaking a formal internal review to provide stream-lined underwriting which is intended to accelerate our normal underwriting processes. We need to do this for two important reasons - first, to make it easier for you and your clients to obtain the cover needed to comply with the new Regulations, and second to ensure we can process enquiries.

We are also currently considering our stance to address 'selection' issues. A typical situation that we foresee arising is where an employer may have a request from an employee to work past age 65. The Regulations impose a 'duty to consider' on the employer and if the employer subsequently accedes to the request, then that employee will be entitled to receive the same benefits as other employees. If the GIP policy has a terminal age of 65, understandably the employer may then need to seek an extension of cover under the GIP policy for that individual or consider self insuring all or part of the risk.

Although we need to ensure protection against possible abuse, we will be reviewing our approach on 'selection' and we will try to be as flexible as we can to help your clients comply with the Regulations. We would not expect many 'duty to consider' situations to arise, but we would normally be seeking to continue cover for an individual to age 65 without further underwriting, provided they are actively at work on the date of the change in their terminal age. For ages over 65, underwriting is likely to be required.

We have also considered the situation where an employee whose cover has expired on the existing policy basis becomes eligible again when the terminal age increases (to a maximum of age 70). In this scenario, we would normally allow the employee to rejoin the policy without underwriting provided that they are actively at work on the date of the change to terminal age.

We are committed to offering as much flexibility under your clients' Unum GIP policies as is reasonably possible, to help them comply with the Regulations. There are bound to be some difficult cases and we will give these individual consideration.

10. What key themes should I be looking for when reviewing my clients' GIP policies?

A good starting point is always to ask your client for sight of their typical contracts of employment - and there may be more than one. All formal legal advice should of course be left to your clients' legal advisers, but an informal review could for example highlight the Company's retirement age and whether this is consistent within each type of contract. There may also be specific reference to employee benefits, and you may be able to identify anomalies between the employment contracts and the benefits in place. For example, the employment contract may refer to a GIP policy covering employees after a deferred period of 13 weeks to age 65, whereas the policy in place has a deferred period of 26 weeks and a terminal age of 60.

When reviewing the GIP policy itself, the following themes will need to be examined: -

- Whether there are any minimum entry age levels - age discrimination works both ways!
- Are benefits only available for part of the workforce e.g. senior grade or older employees?
- Are there reduced benefits for any section of the workforce e.g. younger employees?
- Is there any length of service criteria which is over 5 yrs?

The nature of your client's business may have had a bearing on how employee benefits were originally designed and why different sections of the workforce might receive different benefits. An example could be a manufacturing business whereby GIP is in place for managers, but not factory workers. This can often be for quite valid reasons. The costs of GIP can often be more expensive and difficult to obtain for those employees using machinery, and particularly if some of those workers are part-time the level of benefit may be too small to be a realistic benefit. Some employers have even endeavoured to compensate such employees by establishing a group critical illness policy. A review of the age-range of employees would be prudent because there may now be issues under the new Regulations, and specialist guidance will need to be obtained by your clients from their legal advisers.

11. Will any of my clients be able to retain a terminal age of less than 65 under their GIP policies, if they wish to do so?

As stated previously, for most employers the Regulations will be imposing a default retirement age of 65. For any employer to retain a retirement age below 65 the following requirements will have to be satisfied in order to claim an exemption:

- Objective justification.
- Legitimate aim.
- Proportionality.

These have already been covered in our Guidance Note 1 for advisers, which explains these requirements in detail.

12. I have a client with a claim in payment for a 59 year-old, but the policy has now been changed from age 60 to age 65. Will payments continue past 60?

Where there is an existing ongoing claim for an employee nearing age 60 on a policy under which cover terminates at that age, the employer will have to rely on the terms of the policy as incorporated into the employee's contract of employment to justify the ending of cover whilst employment continues. In other words, if it is clear in the contract of employment that the employee's cover terminates at age 60 in line with the rules of the policy, the employer will not be contractually obliged to continue payments following the policy benefits ceasing at age 60. However, any discrimination claim based on a failure to provide continued new cover from age 60 would have to be defended on the basis of objective justification.

Potentially serious contractual issues will arise, however, if the employer does not have a clear contractual agreement linking the contract of employment with the terms of the GIP policy. Unfortunately, many employers do not have sufficiently specific employment contractual documentation that makes this clear. Some contracts only refer to cover terminating at retirement age. Where this might have previously have been regarded as 60, it will now become 65. Where contractual wording is weak and GIP cover terminates at age 60, an existing employee claimant may be able to argue that they have a legal right to continue to be paid until the later age of 65; beyond the coverage of the original policy. Moreover, case law indicates that a termination will not be lawful if the primary reason for the termination is the fact that the employee is claiming under a GIP policy. In other words, the inference is that the employer might be obliged to continue to pay the employee until 65.

For those employers with a pre-existing retirement age of 65 with GIP cover to match, it seems unlikely that a GIP claimant would make a formal request to work beyond the age of 65 when by definition, they were clearly not fit enough to work. However, this is technically possible. The employer would be well-advised to follow the "duty to consider" process carefully and to "retire" the employee at the age of 65. A potential problem would arise for an employer should they have a track record of allowing other employees to work beyond 65. It would open up the possibility of a claim by the retired employee arguing that their employment was actually terminated by reason of their illness or disability and not retirement.

13. How should my clients communicate any changes to their GIP policy to employees?

Although this is entirely a matter for each employer to consider, good employee communications are an important component of any successful employee benefit offering. This is a theme that may require joint input from you and your client's employment lawyers. It may also depend on the type and number of other benefits in place. Communications could range from a simple e-mail or letter to employee seminars and an update to any employee benefit booklets adopted. Whichever route is selected, it is important that the message is straightforward, clear and accurate so that employees understand the changes and how these will affect them.

About Unum.

Unum is the UK's leading provider of group income protection insurance, with over 35 years of experience. Our critical illness and life insurance products enable our customers to purchase complementary protection solutions that together make a comprehensive protection package.

Our income protection customers benefit from our expertise in the specialist areas of disability, rehabilitation and return-to-work. We enable individuals to protect their incomes, ensuring their financial security if they are unable to work because of illness or injury. For employers, we safeguard one of their most valuable resources by helping employees return to work following long-term absence.

At the end of 2006, Unum protected over 2 million lives through almost 18,600 schemes. During 2006 we paid total benefit claims of £285 million – of which more than £191 million related to income protection claims.

Our US parent company, Unum Group, traces its history back to 1848 and is today the market leader of group and individual income protection insurance in the United States. Premium income for Unum Group and its subsidiaries exceeded $7.9 billion in the year ended 31 December 2006. Total assets were $52.8 billion at 31 December 2006.

For more information visit http://www.unum.co.uk.

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