Summer Budget: Impact on health and group risk benefits
Unusually, George Osborne’s Summer 2015 Budget included announcements which will have notable impacts on the design or financing of all three of the major health and group risk benefits provided by employers, namely PMI, GIP schemes and GLA policies. In this article, Jamie Winter examines these announcements and considers how programmes may need to change to accommodate them.
It is unusual for all three of the main health and group risk benefits to be caught by the Budget, but that is the case here and we consider the main impacts below.
Private medical insurance and Insurance Premium Tax
The proposed increase in IPT from 6% to 9.5% from November 2015, although mooted in the past, was a surprise which will particularly impact PMI schemes. The previous IPT increase from 5% to 6% was effected in January 2011 and we cannot discount further increases in the rate of IPT in future years, potentially into double digits.
The PMI provider markets are understandably outraged because IPT applies to fully insured medical expenses plans but not to trust-based arrangements. This Budget announcement is therefore likely to accelerate the move to trust-based schemes for larger employers, and despite rumours to the contrary in recent years, there appears to be no imminent proposal to legislate against employer-funded medical benefits being funded using tax-efficient trust vehicles.
In any event, it is smaller employers who will face the real issues here. Because of their size and claims volatility, a trust-based solution is often not a viable option, so they have traditionally relied on the insurance markets. Even so, in recent years we have seen innovations from insurers – high corporate deductible plans, scheme agreements, master trusts and trusts offering 100% aggregate stop-loss – all of which can mitigate the cost of IPT and may therefore be viable alternatives for some employers.
Be prepared for increased excesses, imposed benefit restrictions, alternate scheme funding designs and even the withdrawal of some schemes altogether.
Medical inflation has, of course, been an issue in PMI for many years, and this combined with the IPT increase will force employers to look very closely at their PMI schemes. Be prepared for increased excesses, imposed benefit restrictions, alternate scheme funding designs and even the withdrawal of some schemes altogether.
Group income protection and State Incapacity Benefit provision
Historically, almost everyone who fell ill for a long period received a generous State Incapacity Benefit, and so it made sense to build a fixed offset into the GIP scheme design to allow for these State payments.
However, a significant tightening in State provision became apparent when the Employment and Support Allowance (ESA) was introduced in 2008. ESA is far less generous and more difficult to qualify for, so the fixed offset in GIP schemes started to look inappropriate. ESA will also ultimately roll into Universal Credit, which will result in even more restrictions.
Many GIP schemes are applying a fixed deduction which most State claimants have no hope of achieving, thereby effectively invalidating the traditional design.
The Summer Budget has now reduced State payments further by entirely removing an element of ESA for new claimants. This means that many GIP schemes are applying a fixed deduction which most State claimants have no hope of achieving, thereby effectively invalidating the traditional design.
One of the leading UK GIP insurers Unum notes that two-thirds of its GIP schemes still include a fixed offset within their design. For Towers Watson clients the proportion is 40% and dropping, but clearly there are still plenty of employers who will need to consider scheme redesigns as a result of Government restrictions.
Group life assurance and the lifetime allowance
When the LTA was introduced in 2006 it was set at £1.5m, as this approximated to the capitalised value of the Earnings Cap, then £105,600. Nine years later, the Summer Budget has confirmed a reduction in the LTA to £1m from April 2016.
Registered GLA benefits are subject to the LTA, so the latest reduction means that more employees are going to be caught by it, both immediately and over time. Some will take advantage of the latest transitional protection offered by HMRC so that they can protect the tax efficiency of their cover. However, for most forms of transitional protection the individual cannot then join a new, registered arrangement without invalidating the protection. So, a protected individual must notify their current and all future employers of the protection so that it is not invalidated by accident (auto-enrolment, anyone?).
This issue equally applies to registered GLA schemes, so employers not only have to grapple with protected members but also with ‘normal’ employees with GLA lump sums above £1m – not difficult to exceed given the growth in opportunities for members to flex up their GLA benefits.
As a result of all this, non-registered (excepted) GLA schemes have grown in popularity since 2006. Initially these were applied to above-LTA benefits and protected members only, but recently employers are increasingly comfortable with providing excepted GLA cover for all employees. This removes all of the cover from the registered environment and therefore all of the LTA and protection issues fall away.
The fiscal tightening within the Budget means that employers will need to redesign their health and group risk programmes so that they remain appropriate for employees in the future.
The excepted approach requires careful ongoing management to ensure tax efficiency is maintained, but it is increasingly regarded as a better option than trying to accommodate complex circumstances within registered schemes, and so we expect excepted policies to grow further in popularity over time.
The Summer Budget has actually not brought anything brand new to the table in relation to any of these benefits, but the fiscal tightening within the Budget means that employers will need to redesign their health and group risk programmes so that they remain appropriate for employees into the future.
This article was supplied by Jamie Winter, Senior Consultant, Towers Watson.
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