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Pension schemes or healthcare? You must be mad

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Paul Avis, director of Employ-Mend Ltd, argues that healthcare benefits are a much better option than pension schemes – but given the profits available for the people selling you pension programmes, it’s hardly surprising we’re putting ourselves at risk of financial ruin if our health fails us.


Think transferable benefits rather than immediate ones- You must be mad! Why is it that such a lot of money is invested in employee pension schemes when employees take these with them when they leave? Surely the correct way to think is for immediate benefits; that is, those that benefit you whilst in service?

I recently wrote in an ‘Any Answers’ response to what employers should be thinking about in benefit provision, as follows:

It never ceases to amaze me why employers spend so much on employees’ pensions when they are fully transferable benefits which employees take when they leave the organisation. Let’s put this in context. Employee movement between roles is increasing with an expansion to 11 roles in a working lifetime as opposed to seven some 20 years ago (Source: Employment Policy Institute). So in a working period of 40 years that means that each employee will have an average service of 3.63 years as opposed to an historical figure of 5.71. With the shortening of time in employment and the lengthening of time whilst enjoying a pension, the organisation should be saying “Whilst you are here we will do all that we can to look after you, whatever happens. You as an employee have one benefit job to do, and that is to fund your own pension!” This represents a paradigm shift in employee benefits thought but is important to reflect not only changing work patterns but also increasing legislation and the requirement for increasing output and productivity required in today’s demanding work environment.

With only a 12 percent premium commission attaching to these healthcare benefits and juicy large indemnity commissions and fees attaching to pension benefits, it will come as no surprise that many advisers are not discussing this benefit (and other risk and healthcare benefits and services) with employers.

Put alongside the fact that many of the people advising staff and companies (pension, actuarial and benefit consultancies) have a vested interest in retaining ill health retirement benefits within final salary pension schemes, it is clear why the market is so underdeveloped!

My number one ‘immediate’ benefit
I would purchase a Group Income Protection (which is salary continuance for prolonged disability periods)/ Permanent health Insurance (PHI)/ Prolonged Disability Insurance/ Long Term Disability Insurance/ Salary Continuance During Disability Scheme- all of which are different names for the same thing!

I would define this benefit as an insurance to protect the employees from reliance on the State Incapacity Benefit, by paying them a pre-determined salary amount of up to 75 percent (less the long term incapacity benefit), after a deferred or waiting period of 13/ 26/ 52/ 104 weeks, when they are unable to carry out their own occupation (in most cases) for whatever reason.

The scheme objective is to keep the employee in service at no extra cost to the employer, which in turn complies with the Disability Discrimination Act (1995). In addition to the financial side, it also means that limited Private Medical Treatment costs can be paid for by the insurer without a P11D charge. Disability counseling or vocational rehabilitation services can be included by some carriers, and insurers will want to provide work reintegration strategies. Only six to seven percent of employees have this cover, for the reasons cited above, so it has a high impact value.

Why this and not a pension scheme benefit?
What is a pension but a deferred income? So why don’t more employers protect their employees’ income whilst at work? One could position Group Income Protection as an inverse retirement on that basis. And unlike pension schemes, GIP schemes are one to two percent of salary costs (payment to retirement date) whilst pension costs can be 15 percent or more. So why pay 15 percent for something that is going to benefit you in, say, 13 or 26 years whilst a GIP scheme can benefit you in, say, 13 or 26 weeks? It is a tenth of the cost and a more immediate benefit that can also protect an employee in retirement, where an employer protects the pension contribution.

After all, with state incapacity benefits starting at only £70 per week, often with no help with mortgage payments (maximum £100,000 is paid for- is this enough in today’s climate?) for up to nine months, the employee can genuinely lose everything should they become sick or disabled.

And then, of course, there are the other more traditional benefits – death and private medical insurance. An employee most needs these when they have had an accident, become sick, possibly with a disability and then may die. And so if the employer does not have a GIP scheme they may try to manage the employee out of the organisation and, if successful, the employee will lose these benefits.

What is the point of buying benefits that are withdrawn when needed most? Covering long-term absence under the death scheme and providing salary continuance to enable the employee to remain a member of the medical scheme are key dimensions that are often overlooked by employers.

Summary:
By its very nature this is a complex arena and whilst many employers will understand the sentiment of immediate rather than transferable being the optimum approach, we never start from a plain sheet of paper. So when advising employers and contractual entitlements, possible union antipathy and a reactionary, intransigent, old fashioned attitude may prevent employers from achieving this shift.

Indeed, when decision makers tend to be senior and therefore pensions-orientated and for younger employees the possibility of disability seems miles away (we are invincible before 40 I understand!) it is easy to see why this benefit has not been a priority for both advisers and customers.

But from an employee’s perspective, as well as an employer’s, I know that when a disability happens in the UK this is the most important benefit as employees can lose everything (house, lifestyle, health, colleagues, the workplace and its social networks) and employers can lose their ability to trade as their employer liability insurers pay out unlimited Disability Discrimination payments. And against that, pension provision and funding pales into insignificance!

Paul Avis, Employ-Mend Limited, The Drive House, Manor Farm, Kenn Moor Road, Kenn, Near Clevedon, North Somerset BS21 6TZ, Telephone Number: (01934) 875930, Fax: (01934) 875915, [email protected]

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