Pensions World

Jamie Winter, Towers Watson, considers the impact of auto-enrolment on group risk benefits

As part of the government’s latest pension reforms and the requirement to put employees into a qualifying pensions scheme, auto-enrolment will begin to impact upon UK pension schemes from late 2012 onwards. Yet, given the focus on the pension implications of Nest, it is easy to miss the potential impact on benefits such as group income protection (GIP) and group life assurance (GLA) schemes.

A question of eligibility

In recent years, the move from defined benefit (DB) to defined contribution (DC) pensions has meant a loss of access to the ill health and death in service benefits provided through DB pension schemes. New hires are often given access to insured GIP and GLA cover through insured arrangements, but this cover is frequently only provided – or enhanced cover is provided – to those who join the DC pension scheme.

Where group risk benefit levels are linked to pension scheme membership, any increase in pension membership as a result of auto-enrolment will result in an increase in the cost of providing these benefits. These cost implications should therefore be factored into any review project as a result of the 2012 changes.

Cost implications

The tables provide examples of the cost increases that could arise in an auto-enrolment environment.

TABLE 1

TABLE 2

Under the three year auto re-enrolment proposals, some members will be joining a scheme three, six or more years “late” and may well be regarded by insurers as discretionary entrants. They may be required to provide evidence of health before the insurer will confirm whether any group risk cover is in place. This approach brings with it the potential for members to have adverse terms imposed, including a possible decline of cover.

Design elements

The potential for significant increases in cost and medical underwriting requirements means that employers and trustees should plan their design elements carefully. By considering these design elements in advance of Nest, it is possible to develop solutions which provide employees with access to valuable benefits and at the same time designed in a cost effective and sustainable way.