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UP to Speed - The Employment Equality (Age) Regulations 2006Guidance Note 3 for Advisers - An introduction to the new Regulations.

This guidance note is the third 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 GLA 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. 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. Many GLA policies have been established with a terminal ageof 60, and unless the employer qualifies for one of the exemptions permitted in the Regulations, the terminal age may need to be changed to 65 - the new statute-defined default retirement age. This of course assumes that the client is not intentionally self-insuring past the current policy terminal age. If this is the case, the changes offer an opportunityfor discussion and an objective review of costs.
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 develop new 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.

2. 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 overleaf;
4. All product 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.

3. Will the GLA trust deed and policy rules need to be changed?

If the policy has to be changed from a terminal age of 60 to 65, then it is almost certain these will need alteration. The new Pensions Simplification rules that came into effect on 6 April 2006 ('A-Day') will also need to be considered if no changes to the policy have yet been made. The Pensions Simplification rules allow a transitional period of 5 years for employers and scheme trustees to implement any necessary changes to the scheme rules and trust deed. Employers may therefore need professional guidance in this regard from their financial adviser, as well as possible support from their legal advisers, to make drafting changes that cover both pensions simplification and age discrimination.

4. What is the position with regard to an 'unapproved' GLA policy?

Although most GLA arrangements were established under the pre- A-Day occupational pension scheme (discretionary approval) rules permitted under s591 of ICTA 1988, your client may also have what was previously referred to as an 'unapproved' GLA policy. Such arrangements will also be established under a trust deed, but this will be separate to the s591 'approved' trust deed because unapproved benefits were not subject to the same restrictions. Nevertheless, the new Regulations are likely to impact on these policies also, where the terminal age or eligibility rules need review.

Most unapproved arrangements were established because either the cover exceeded the previous maximum benefit or earnings cap rules, or becausethe individual was a Partner (taxed under Schedule D self-assessment rules) and not an employee. Post A-Day, 'Approved policies' are now referred to as 'Registered' policies. Although there may still be bona-fide reasonsto keep the previously 'Unapproved' policy separate (for example, such benefits do not form part of the Lifetime Allowance rules), the new post A-Day regime affords significant flexibility to incorporate these arrangements into the 'Registered' GLA policy. This is because the earnings cap no longer applies, there is no longer a maximum lump sum death in service benefit of 4 x salary, and Partners may now be included.

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

In respect of Partners covered under a GLA scheme, 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.

6. How will my clients' GLA costs be affected?

Inevitably, some clients may 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 needto reflect the increased insurance risk being run by insurers where cover is being provided to a later terminal age. Sometimes this may not be fully in the control of insurers where certain reinsurance treaty arrangements are in force.

Membership, and thus the benefits upon which rates apply if the policy is unit rate costed, may increase as a direct result of changes to policy eligibility rules and the admission of older lives.

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

However, we would not generally expect there to be any significant change to the premium costs of a GLA policy with Unum where there are minimal membership additions and the terminal age is increased from age 60 to 65.

7. Will there be additional costs to member employees?

Registered GLA policies are usually fully employer sponsored and on this basis, because membership of a registered GLA policy is not a taxable benefit for P11D purposes, there should be no cost impact on employees. However, for a non-registered GLA policy, though not normally treated as a taxable benefit in kind for employees, the employer premium is considered by the local tax inspector under the "wholly and exclusively" provisions. As equity partners pay premiums in their respect, they will bear any increase in their own premium.

8. One of my clients has a GLA 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 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 as we realise that the position is being artificially influenced by the Regulations. 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 GLA policy has a terminal age of 65, understandably the employer will then need to seek an extension of cover under the GLA policy for that individual.

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 were previously covered under the GLA policy. For ages over 65, underwriting will be required.

We are committed to offering as much flexibility under your clients' Unum GLA policies as is reasonably possible, to help employers 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' GLA 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 employer'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 GLA policy covering employees to age 65, whereas the policy in place has a terminal age of 60. Alternatively, there may be reference to eligibility requirements.

When reviewing the GLA 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 only receive benefits based on 2 x salary, whereassenior employees may receive benefits based on 4 x salary)?
Is there any length of service criteria which is over 5 yrs?

In respect of registered stand-alone group life arrangements, the Regulations would prohibit the trustees or employer from operating minimumor maximum age restrictions for different classes of employees.

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. A review of the age-range of employees would be prudent if there is any differentiation in benefits or eligibility 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. Do the exemptions available to occupational pension schemes apply to GLA policies?

The exemptions do apply to GLA policies that insure liabilities promised under an occupational pension scheme as defined under section 255 of the Pension Act 2004. However, this definition does not apply to schemes that provide death benefit only. This means, for example, that such schemes will be unlawful if they apply minimum and maximum entry ages.

12. Will any of my clients be able to retain a terminal age of less than 65 under their GLA 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 all employees. 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.

13. How should my clients communicate any changes to their GLA 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 this 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.

Unum Limited, trading as Unum, is authorised and regulated by the Financial Services Authority.
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Tel: 01306 887766 Fax: 01306 881394 Textphone: 01306 887784

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