The Welfare Reform Bill was presented to Parliament on 4 July 2006, entering the statute books on 3 May 2007.
Currently, 2.7 million people are reliant on Long Term State Incapacity Benefit (LtSIB) – one in every fifteen workers. Unsurprisingly, the Government is looking to get more people back to work by revising the current benefits system. This is why, from October 2008, the existing State Incapacity Benefit will be replaced by the new Employment and Support Allowance (ESA). But what are the differences between the two systems, and what impact will these changes have on your Group Income Protection scheme?
Why change the existing benefits system?
By changing the structure of the welfare system, the Department of Work and Pensions is looking to:
- increase the numbers of people who remain in work when they fall sick or become disabled
- encourage larger numbers of people claiming benefit to re-enter the workforce
- better address the needs of those who need extra help and support
With this in mind, those looking to claim the new Employment and Support Allowance, will be divided into two categories - depending on the extent of their incapacity and the likelihood of their being able to return to work.
The majority are expected to fall into category 1, defined as having a ‘limited capability’ for work. On top of a basic allowance of £60.50, anyone in this category will be entitled to a Work Related Activity Component (WRAC), amounting to £24 a week. However, the receipt of these payments is conditional on the claimant agreeing to participate in ‘work-related’ actitivies –a move which has prompted a good deal of discussion among intermediaries, employers and insurers on how best to redesign GIP schemes.
How will these changes affect Group Income Protection schemes?
All Group Income Protection (GIP) customers will be affected by the changes outlined above – because the current Long Term State Incapacity Benefit (LTSiB), used as an offset value in most policies, will be replaced by the Employment and Support Allowance (ESA).
Unum has carefully considered the impact of these changes on our customers, and have consulted with our intermediary partners to ensure that the changes to our products have the least possible impact on your business and minimum impact on cost, while continuing to offer you the greatest possible flexibility.
What will the impact be for customers with Gross Pay policies?
Within Gross Pay policies, where benefits are defined as a percentage of gross pay, the most common benefit basis is ’75 per cent of salary less LTSiB. Alternatively, where there is no offset, the LTSiB forms part of the overall limitation of benefit. For example, 50 per cent salary is subject to a maximum of 75 per cent salary, less LTSiB.
Customers whose benefit basis includes a LTSiB offset may want to remove any tie-in with State Provision, moving to a simpler flat percentage of salary Others may prefer to replace the LTSiB offset with one relating to the new ESA benefit.
What about Net Pay and Fully Integrated schemes?
Changes to the State Welfare System will increase Unum’s liability for benefits within both Net Pay and Fully Integrated GIP schemes. If the Government succeeds in getting more people back to work - fewer people will qualify for State benefits, but many who fail will still have valid claims on their employer’s Income Protection policy, On top of this, there are no longer additional payments for adult dependants (such as a wife or husband) or extra payments based on age, reducing total benefits for many – so there will be cost implications for customers with either type of policy.
Want to know more?
For further information on welfare reform and its effect on GIP schemes, please contact your intermediary. You can also download the ‘Employers’ Guide to the Impact of Incapacity Benefit Changes on Group Income Protection’ available in PDF format.