Paul Avis of Employ-Mend Ltd explores the Group Income Protection contract as a way to manage both long-term absence strategy and support disabled employees back into the workplace. He also highlights its weaknesses.

Whilst Group Income Protection (GIP) cover is provided for only 6-7% of UK employees, it is my preferred long-term absence management strategy. When an employee becomes unable to perform the tasks associated with his or her work, the cover provides the funding to enable the employer to retain the employee in service whilst work reintegration opportunities are explored.

The GIP strategy certainly looks attractive when comparisons are made with the costs associated with the use of pension ill-health retirements or the use of solicitors where there is to be a capability dismissal and often facilitates the respite necessary to consider a broader range of options to the ultimate benefit of both employer and employee.

However, it does have its weaknesses, which include an emphasis upon the broking aspect as opposed to the professional guidance required at the crucial claims stage by advisors, the issues are more complex when the employee cannot return to their own or any job within the organisation. Also, perhaps more worryingly, the increasing numbers of court case precedents which threaten to undermine the use of this benefit.

Group Income Protection – What is it?

GIP is the name for a benefit that has traditionally been called Permanent Health Insurance (PHI), long-term disability insurance, prolonged disability insurance and salary continuance during disability. Such schemes usually provide an income of between 50% of salary and a maximum of 75% less the long term incapacity benefit which begins after a waiting/deferred period of incapacity of 13, 26/28, 52 or 104 weeks.

Benefits are usually assessed on the basis of an employee’s inability to perform his or her ‘own occupation’ but for high risk occupations this basis can be replaced by an ‘any occupation’ criteria (under which the employee is assessed upon the basis of his or her ability to undertake any task for which he or she may be suited by reference to training, education and experience of other roles). New variants on these definitions are constantly appearing (eg. two years of assessment based upon ‘own’ occupation with the basis then reverting to an ‘any’ occupation basis for mental health cases). We would usually advise employers to organise cover on an ‘own’ occupation basis wherever possible.

The basic salary related benefit can be augmented by adding cover for employer pension and NIC contributions and this is also recommended as this will ensure that the employee costs are fully funded whilst in service. Cover can also be organised on the basis that benefit payments escalate in claim for inflation proofing.

Traditionally, cover has been organised with benefits payable for a maximum period ending at the employee’s normal retirement date but can now be arranged with benefit payable for maximum periods of 2, 3 or 5 years. Industry statistics show that approximately 50% of claimants will die, return to work or retire within the first 3 years of a prolonged period of incapacity. If the 2 year payment option is adopted employees can extend the period protected on a personal basis relatively inexpensively but will normally be subject to medical underwriting procedures. On this point, a GIP scheme does not have a pre-existing condition clause and will normally offer generous ‘free cover/non selection limits’ which will apply to all employees who are actively at work on the scheme inception date.

The importance of advice on GIP schemes:

Whilst there are some specialist advisers for schemes of this type, a significant proportion of the total are set up on the basis of advice from generalists who may also offer mortgage, pension and investment advice. Many such advisers view their role as that of a placing agent and once the market review has been undertaken, believe their contribution to have finished until the next renewal date.

It is becoming increasingly important to ‘sell the risk’ by reference to the client’s levels of occupational health support, the use of Employee Assistance Programmes or Private Medical cover, the corporate absence policy and accident book procedures all help to give the underwriter a better understanding of the organisation’s commitment to the management of employee health. Few advisers provide this level of service as yet but this can lead to premium discounts of 15%+.

The general lack of effective support to employers in dealing with claims is even more damning as many underwriters regard past performance as a guide to future performance and hence employers must take whatever steps may be possible to minimise the impact of claims. One organisation has premiums as high as 7% of salary costs (it is contractual and hence withdrawing the benefit is not an option) and another has 80 employees where the benefit is costing £40,000 and both have been the victims of bad claims experience.

As many insurers now offer ‘value added’ services such as vocational rehabilitation, payment, functional capability assessments and will often fund private medical treatment costs, one of the best ways to lower the claims impact is to get the insurance company involved as early as possible. They will do as much as they can to mitigate a potential claim with the financial motivation driven by the desire to lower the claim reserve which has to be held to meet future years benefit payments for accepted claims.

Often claims forms are submitted after the deferred period has ended which significantly reduces the potential for an effective intervention. Mental health problems often begin to supersede the physical aspects of a disability after just six weeks of absence and industry experience indicates that by month 6 there is only a 1 in 10 chance of a return to work. Hence, employers can look forward to unchecked premium increases if they fail to co-operate with the insurers by providing early notification of potential claims.

Contractual terms and legal issues

If an employee will never be able to return to work, the employer will often wish to replace them but is prevented from doing so as this could be deemed to be constructive dismissal. If an employee is sacked, capability dismissed or made redundant, the definition of disability can change from ‘own’ to ‘any’ occupation and hence the benefit may cease.

In such cases the employer could even become responsible for payment (Crossley vs Faithful Gould Holdings [2004] provides some comfort here but employers should also be aware of Aspden v Webbs Poultry & Meat Group (Holdings) Ltd [1996] and Villella v MCI Furniture Centres Ltd [1999]).

Even where an employer tries to keep an employee in service, where the benefit is based upon say, 2 years ‘own’ moving to ‘any’ occupation, then the employer may still have liabilities if the contract of employment implies that the benefit will be paid on ‘own’ or the terms are not made expressly clear to employees (Jowitt vs Pioneer Technology [2002] & Marlow vs East Thames Housing Group [2002]).

Furthermore, with refinements to Kigass Aero Components v Brown [2002] in the form of Inland Revenue vs Ainsworth [2004], implying that a Court of Appeal review of employee’s rights to statutory holiday pay is now due, any employee who is dismissed may qualify for their statutory holiday entitlement. Put alongside the Canada Life vs Farrar [2003] and List Design Group vs Douglas [2002] cases and employers may have to retrospectively pay the holiday pay entitlement for every year that the employee has been a GIP claimant!

All this suggests that the strategy should be to keep the employee in service and the best way to do this is to also add cover for employer pension and NIC contributions so that retention becomes more of an administrative than a financial burden. The insurer will also conduct regular reviews to see if any support can be given to assist with work reintegration.

If the employer is absolutely set on ceasing the employment contract it may be possible to do so with the agreement of the insurer and the employee. This should always be approached under the guidance of an employment lawyer who will need to review the court case precedents surrounding the GIP cover and also consider the impact of the loss of other benefits (the loss of death in service cover or private medical insurance could be catastrophic for the employee and dependants).

Preferred long term absence strategy

Against this background of increasing costs and a complex legal framework why is it that we believe that GIP schemes are a good solution in managing long-term absence? As indicated above, the alternatives are much less attractive: ill health retirements are expensive and are an anti diversity strategy whilst dismissal can be devastating for an employee expected to live on State Benefits and with the Disability Bill of 2004 a dismissal will be much harder to achieve.

Possibly the best reason, is that when a claim arises this route provides a best practice approach to case management at no additional cost to the employer. Insurers are beginning to view their ‘value added’ services as being of critical importance with some now considering whether case management services should be offered to employers independent of an insurance context.

If you are considering the benefit, have it already or acknowledge that solicitors and pensions are not the best way to manage long-term absence, then ensure that you appoint a specialist advisor, get the claim forms in early and outsource case management to the experts.