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Advisers' guide to the impact of incapacity benefit changes on Group Income Protection

The changes resulting from the introduction of the new Employment and Support Allowance (ESA) to replace Incapacity Benefit in October 2008* will affect all Group Income Protection (GIP) policyholders. This document is a guide for you, as their advisers, to the changes Unum will be introducing to GIP policies to make certain we are able to respond to your clients’ resulting needs.

*For further details on the benefit changes being introduced please refer to the document UP1498 ‘Employers’ Guide to the Impact of Incapacity Benefit Changes on Group Income Protection’ and UP1418 ‘Your Guide to Welfare Reform’, both available on our website www.unum.co.uk

Impact on Gross Pay Policies (Includes Capital Option, Pay Direct and Flex GIP)

Areas of Gross Pay policy affected are:

Offset for calculation of basic benefit basis
Overall limitation of benefit (OLB)
Deferred periods

Basic Benefit

A number of Gross Pay policies use a Long-term State Incapacity Benefit (LtSIB) offset on basic benefit, e.g. 66% earnings less LtSIB or 75% earnings less LtSIB.

Overall Limitation of Benefit (OLB)

On Gross Pay policies the OLB is 75% earnings less LtSIB, i.e. some policies on a flat % of earnings will currently see lower earners restricted to 75% earnings less LtSIB, where it is lower than the flat % of earnings.

E.g. where earnings are £12,000 and basis is a flat 50% = £6,000, however, 75% earnings less LtSIB = (£9,000 less £4,230) = £4,770 and would therefore be restricted to £4,770.

Unum will be increasing its standard OLB for new gross pay policies to 80% earnings (to include any insured employee pension fund contributions). The OLB increase will be available upon request to existing policies at review, in the absence of any request to increase, the OLB remains as 75% earnings less Notional LtSIB.

Deferred Periods

Deferred periods tend to reflect either State Benefit provision in the form of Statutory Sick Pay (SSP) and Incapacity Benefit (26/28 weeks) or the employer’s own sick pay provision. With the introduction of ESA, a new deferred period option will be offered of 41 weeks - this corresponds with the end of the 13 week ESA assessment period following SSP.

2008 Timeline: Unum changes*
January	February	March	April		May	June	July	August	September	October	Novemeber	December
	Policy endorsement will be issued			Net Pay and Fully Integrated GIP policies: Unum will advise you if a rate review is required. Please see the 'Impact on Net Pay and Fully Integrated Policies’ section for further details.
			Confirmation of the Government’s benefit amounts*					ESA Day (Employment Support Allowance Day) - 1/10/08* Gross Pay GIP Policies: As standard and unless otherwise requested, Policyholders’ endorsements will come into effect reflecting the legislative changes to the Welfare Reform system, as follows: Any LtSIB will become Notional LtSIB** OLB will be 75% less Notional LtSIB

*These Unum timescales are correct as at January 2008, but are subject to Government timescales currently unconfirmed.

** To equal government figures issued for LtSIB post-introduction of ESA. This will be updated if the government publishes a new LtSIB value, otherwise Unum will apply an increase that reflects the Retail Prices Index.

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Some options for Gross Pay policyholders:

1. Remove offset from basic benefit

E.g. 75% earnings less LtSIB to 70% earnings - this would result in a percentage of earnings basic benefit; simple for employees to understand and removing any link with State Benefits and any future changes to them.

2. Replace offset with ESA related one

Unum will be offering an extended range of offsets. We anticipate the nearest equivalent to LtSIB will be ESA basic + wrac, which comprises the Basic Allowance plus the Work Related Activity Component. See table below for the full range of offsets:

Full range of offsets:
Offset (updated annually based on published government figures where applicable.)
ESA basic means the annual rate of the Basic Allowance, payable after the assessment phase, of the Employment and Support Allowance.
ESA basic + wrac means the annual rate of the Basic Allowance and Work Related Activity Component at the full level, payable after the assessment phase, of the Employment and Support Allowance.
ESA basic + support means the annual rate of the Basic Allowance and Support Component, payable after the assessment phase, of the Employment and Support Allowance.
Notional LtSIB means the annual rate of Long-term State Incapacity Benefit payable in the UK to a single person, under the Social Security Incapacity Benefit provisions prior to the introduction of the Employment and Support Allowance.**
Stated offset - a flat sum specified by the client.
None - Flat % of earnings no offset.

**To equal government figures issued for LtSIB post-introduction of ESA. This will be updated if the government publishes a new LtSIB value, otherwise Unum will apply an increase that reflects the Retail Prices Index.

NOTE: For our non-reviewable policyholders, any move from a pre-ESA benefit basis to a post-ESA benefit basis will require a move to reviewable terms.

3. Deferred periods

Policyholders with a deferred period of 52 weeks, aligned with the current State assessment process, may wish to change to 41 weeks to align with the new ESA regime. NOTE: the three options detailed above would require a rate review on the policy.

4. Do nothing

Existing policyholders with Unum will have their policies endorsed to reflect the legislative changes to the welfare system. Any LtSIB offset will become Notional LtSIB and OLB will be 75% earnings less Notional LtSIB.

Impact on Net Pay and Fully Integrated Policies

Net Pay schemes pay a percentage of net pay up to a maximum 90%, Fully Integrated schemes pay a percentage of gross pay up to a current maximum 75% - both from all sources including State Benefits. There is therefore no chance of the individual receiving more income while not working than while working.

Net Pay and Fully Integrated GIP product specification is actually not affected by the changes, however the potential lessening level of State Benefit and different regime for claims for ESA could mean increased liability for the insurer and cost implications for policyholders. Unum will inform clients in advance where a rate review is required before the introduction of ESA in October 2008.

All claims on Net Pay and Fully Integrated policies will be paid taking into account the actual State Benefits received by the member, be they Incapacity Benefits or ESA benefits.

For more information, call your Sales Consultant on 01306 887766 or visit unum.co.uk

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UP1517 01/2008