Andrea Bull: Hello, and welcome to this webinar on "Group therapy - avoiding problems and improving group risk provision". The presentation will last for about 25 to 30 minutes and hopefully we will have time for a couple of your questions at the end.
Firstly, some housekeeping points. The webinar player has a few simple controls. The most important are the volume adjustment and full screen option which you will find in the bottom right hand side of the player. There are also some tabs along the top which you can click on to access details of today's presenters and their expertise in relation to life assurance schemes and corporate healthcare trusts. You can also download a copy of today's slides. You can ask questions at any time, just click on the 'ask a question' tab, type in your question and click 'submit'. We will try to answer as many as we can in the time available. There is also a poll tab. Do not worry too much about that. We will just be doing some polls throughout the webinar which will automatically flash up on your screen and we would encourage you to participate in those. If for any reason you cannot see the current slide, just click on the slide tab and you will get back to it.
Okay, so over to today's speakers. We have Robert Smith and Kevin Gude.
Robert Smith: Hello. Thank you for joining us today. On our agenda we will be looking at the various group risk arrangements, what you should check to make sure they operate as expected, what has recently changed in the market for these fairly traditional products and what employers might want to consider for the future.
Group risk arrangements - what are they? First, we are going to look at life insurance cover for employees which is sometimes extended to dependants. We are going to look at income protection cover or, for older listeners, PHI. We are also going to look at critical illness cover and, finally, private medical expenses cover. Andrea has a question for you.
Andrea Bull: So, group life cover - how do you provide your benefits? Standalone registered scheme, registered pension scheme or non-registered excepted or relevant life scheme? So we have got a split there between standalone registered scheme and registered pension scheme. Then a smaller number with the non-registered excepted or relevant life scheme.
Robert Smith: I think this is about what we would have expected. It shows people know what is going on.
Kevin Gude: It is also a relief because we are going to be talking about excepted group life policies a little bit later on today and it is quite nice to know that there is already some use of those out there.
Hi, I'm Kevin. The first of our topics is the simple subject of life assurance schemes. Now, while the nature of the benefits they provide is pretty uncomplicated, they still need a certain amount of care in their operation. So, our first recommendation is to keep in mind the basic housekeeping questions set out or flagged when setting a scheme up and then throughout its lifetime.
Point one is to know where your scheme's documentation is and to keep it up to date.
Then you need to know who your trustees are at any given time and if that is ever lost track of, and it happens more than you would think, it can affect who takes out and holds the insurance policy and who the insurers are required to pay death benefits to. There are steps you can take that help protect against unrecorded changes of trustee in the future but, it is still much better to be confident now that the right person is responsible for receiving policy proceeds and paying out benefits.
Knowing what the liability is in any particular case is clearly very important too but so is knowing where that liability lies. If you have a single life assurance scheme, that is probably not such a tough question, but, if you are a larger employer, and have a number of legacy schemes running, or you have a pension scheme that provides lump sum cover to non-pensionable employees, it is surprising how mixed up the various arrangements can get. And that diffusion can introduce a risk of over or under-insuring certain employees.
Who is responsible for paying the premiums under those various arrangements is another detail to keep under review and, associated with that, who it is that checks the payments have been made.
Once those basic details are known you should be in a pretty good position, but there are other things that we suggest you consider too.
Each of the items on this next slide concern the practical issues that we have had to advise on. They also highlight how the provision of simple life cover can be influenced by organisational or wider employment-related factors.
Making sure that a scheme's rules are checked against the policy terms is one of those things that might seem blindingly obvious when it is written down but experience shows that it does not always happen.
Knowing who your eligible employees are and that they are described correctly in both the rules and the policy might also seem quite self-evident but, again, it gets overlooked sometimes along with which of those employees are affected by any cover limits that you might have in place.
Another detail to watch for is compliance with the insurer's 'actively at work' condition of cover. As the term suggests, it means an employee should be in active employment and able to perform all the duties of their normal job on the day that cover is due to start. If it is misreported, an insurer might refuse to meet their claim in respect of that employee. Similarly, where employees are absent for other reasons and benefits are expected to continue, it is always sensible to check that the necessary cover remains in place.
And finally here, hanging off the end rather precariously, is the warning that corporate reorganisations can sometimes have an unexpected effect on life cover. Moving employees around group companies can involve a variety of contractual and organisational steps and its effect on life cover arrangements can sometimes be forgotten.
Now, none of the points described here ought to be complicated or time-consuming to address in advance. The thing is, if they are overlooked, any one of them has the potential to create uninsured risks that could, ultimately, fall back on the employer.
So, if there is anything here that sounds awkwardly familiar to you, let us know. So, if you have done all the things we have described here, you will probably have paid the right money over to the insurer and your scheme will be up and running. The next question you face is what happens when a death occurs and the insurer pays out? What do you do with the proceeds? I think there is probably another webinar on this topic all of its own but the points on these next two slides will give you a flavour of what to consider in the meantime.
First off, when faced with a death benefit claim, deciding on how the lump sum is to be distributed is more than just a formality. In most life assurance schemes, policies have a discretionary power to decide where to make the payment to but you should not assume that it is always the trustees that have that power. So, if you have any doubts, come and ask us.
Once the payer has been identified, they will need to identify who the relevant class of beneficiary is and who should be chosen from that class to be the actual beneficiary. Beneficiaries themselves will often differ depending on the deceased member's circumstances but there are some basic steps to follow which we can provide you with guidance on. The scheme's deed and rules should be of assistance here too but it will be for the trustees to investigate possible candidates by making enquiries and obtaining sight of documents like the member's will. The importance of having a robust procedure for the collection of adequate information and then giving that information proper consideration is something that we really cannot over-emphasise. Inadequate enquiries are a really good way of inviting a complaint from a disappointed potential beneficiary who has either been overlooked or not even identified. Those complaints can often end up in front of The Pensions Ombudsman but, even if they do not, they can still involve the trustees and the employer in a wasted time, unnecessary expense. And, if the complaint is successful and the benefit has already been paid out to someone else, the benefit could have to be paid out again from the employer's own pocket. So, care taken at that identification stage and long before a benefit is paid out from the scheme can provide you with valuable protection.
Trustees should not make a decision in haste. Tax laws provide them with two full years in which to complete the process before tax-free status of the lump sum changes so there is rarely a need to rush. When evaluating the information they have obtained, providing the process is sensible and their decision is reasonable, trustees do not need to seek perfection. But even if the ultimate decision is different to what another trustee board might decide given the facts, it would be unusual, if not impossible, I think, for The Pensions Ombudsman or for the courts to substitute their own interpretation. And the source of that information can be important too. It makes sense to seek details from the deceased's next of kin but personal lives are complicated things so the net really ought to be cast a little wider if possible. You have then got a much better chance of tracking down other potential dependants that the immediate family might, for whatever reason, want to be overlooked, for example, other dependent children.
Finally here, if there are any dependants, minor children, trustees will often need to consider how to make payments in respect of them. Benefits can sometimes be paid direct to the parent or guardian on their behalf although the trustees still need to be satisfied that they will deal with the funds in the child's interest. If the benefits are significant, a separate trust might then need to be set up.
Okay, let's move on to an area that we have seen developing recently. Now traditionally there were good tax-related reasons why lump sum cover tended to be packaged up within registered retirement benefits schemes but, where that happens payments in and out need to comply with HMRC's authorised payment benefit rules. To provide benefits outside of that framework, relevant life (RLPs) and excepted group life policies (EGLPs) can be used. Take up of those RLPs and EGLPs was aimed quite squarely at high earners in the beginning but the introduction of fixed protection and recent and future cuts to the lifetime allowance has started to make the provision of life assurance lump sums through those arrangements far more attractive to a broader range of employees with far more moderate earnings.
That recent spread in the use of EGLPs and RLPs has created a need to give closer consideration to their own limitations and how they interact with existing arrangements operated by the employer. That is because while the trusts that hold them can be relatively simple, the insurance policies themselves have to meet certain statutory rules in order for the schemes to benefit from beneficial tax treatment. One of those is that the range of beneficiaries is rather narrower than it would be for a registered scheme. Another slightly ambiguous one is that the use of the policy should not constitute tax avoidance. I have also mentioned the possible risk in relation to inheritance tax here. Unlike registered schemes, EGLPs and RLPs are treated as ordinary discretionary trusts meaning they can sometimes be subject to IHT if certain safeguards are not adopted.
As well as the usual periodic charges that can arise on and after ten years there is a rather less well-known risk that where a trust is set up and an incoming member is terminally ill when they are admitted, that IHT can arise in their case too. Now, this may be a relatively rare event but if EGLPs are made available to a wider number of employees, it is something that needs to be kept in mind and on which we can provide advice as part of the setting up process.
Is it time for another poll Andrea?
Andrea Bull: It is. Right, here we go. The second poll for the day. So, what is your main current concern in relation to group life cover? Is it the impact on individual employees of fixed protection, the effect of the decreasing lifetime allowance on benefit provision, or having to manage lots of legacy schemes? So, if you could please give your answers then we will show you what they were in just a moment. So, we have 59% saying the effect of the decreasing lifetime allowance on benefit provision, 27% having to manage lots of legacy schemes and 13% the impact on individual employees of fixed protection.
Kevin Gude: Okay, well again, it is not a huge shock. What is surprising is just how skewed towards the lifetime allowance element that response is.
Robert Smith: Which will lead presumably to more interest in excepted group life policies or relevant life policies. Which I think is inevitable in any event.
Kevin Gude: Thank you very much. I'm just going to close this half of our session by suggesting a few things to consider for the future and you will have seen a number of third party life assurance master trusts grow over the past year or so, set up by insurers, designed to offer access to traditional registered trust arrangements but as an independent trustee makes the decisions, the sponsoring employer is released from responsibility for running its own trust.
They seem to suit some employers very well but there are others who still prefer to retain greater say over how their life cover benefits are organised. With them in mind, we have developed our own streamlined approach to the consolidation of employers' legacy life cover arrangements using an internal master trust structure for both registered and EGLPs cover. The idea there is that by bringing everything together under a single umbrella arrangement, the employer can then benefit from cost and admin inefficiencies both in the day to day operation of the trust and in the decisions of the trustees when a death claim is made. It also lends itself well to the onward delegation of the trustees' decision making powers to a single, centralised discretionary committee if that is what the employer prefers.
That wraps up this part of the session. What I would like to do now is to hand over to Robert to talk through checks, changes and action points in relation to group income protection, critical illness and medical benefits.
Robert Smith: Thank you, Kevin.
The first thing I think to look at is the fact that these types of cover are rather different to group life schemes in one major respect. They are employer operated so they do not involve trusts or trustees. So they are firmly centred in the contract of employment.
It is particularly important to compare rules and policy terms with these types of cover. Life cover is fairly binary – to put it brutally, the member has either died or he has not. If you are looking at income protection, it depends on a range of possibilities regarding ability to work at the member's own or any occupation. If we look at critical illness, that very much depends on a range of medical conditions and their severity, so there is much more variability as to whether the conditions for benefit are met and certainly if you have changed your insurance company recently, it is vital to ensure that the cover matches the rules.
As with group life, it is also necessary to look at cover for absentees, actively at work conditions, free cover limits, whether your claims are made on time. Otherwise there may be a problem with the insurance.
Again, we need to look at the effect on the contract of employment because the benefits are part of it so employment law applies. So particular care is needed if, for example, a member's contract of employment is to be terminated either during a waiting period for group income protection or when the benefit is in payment because this could actually affect future payments and therefore give rise to a loss.
Another area to look at is age discrimination. We have now got flexible retirement ages and very few people know when they are actually going to retire and this can lead to difficulties in obtaining cover or obtaining cover at reasonable cost if you are trying to cover all your employees regardless of the age at which they might cease to work for you.
Is there double cover? Particularly if you have a defined benefit pension scheme this may occur. You can compare what a member might get under an income protection scheme with what might be available from the pension scheme as an ill-health early retirement benefit. If we are looking at critical illness cover, again, there may be full commutation of pension benefits on serious ill health under the pension scheme. The reverse of this, of course, is, is there is enough cover, particularly where DB schemes are being closed. There may not be ill-health early retirement commutation or survivors benefits and, in those cases, income protection and possibly critical illness can be crucial.
It is worth remembering that these sorts of cover are very tax-efficient, there is no benefit in kind charge on the employee but there is a corporation tax deduction for the employer. But there is more flexibility available in these - the options of limiting or tailoring the benefits to meet specific needs of a particular employment. At the moment, there is no self-insured alternative for these types of cover although I suppose a larger employer might be able to use a captive insurance company to do this and then front it into the UK.
As we have said, there have been changes, not particularly in the cover itself but from flexible retirement ages, discrimination and also the way in which insurers sometimes look at particularly group income protection, rehabilitation or a cash settlement is often favoured instead of paying a benefit right up to normal retirement age. Here, of course, there might be a link to the private medical cover that the employer is offering and one recent innovation is the provision of specific rehabilitation benefits under income protection policies. So this is not at the discretion of the insurer, it is actually a right that can be enforced. So, again, it is worth looking at who is bearing the cost of this and is it more efficient to cover it through an income protection policy or actually to take it away from that and deal with it through medical insurance.
Andrea Bull: We have our last poll for you now, which I will show you in just a moment. Okay, here it is. Group private medical cover – how do you provide your benefit? So, cash benefits only, fully insured arrangement, insured cost plus arrangement or healthcare trust?
We have got 68% fully insured arrangement, then the next biggest is healthcare trust, 18%, and then a smaller number for the cash benefits only and the insured cost plus arrangement.
Robert Smith: That's very interesting, and is probably what we would have expected from a mixed audience.
For the final section I am going to go through group private medical benefits. Actually, now we are here, ignoring cash schemes, there are two main types of cover. There is the traditional insured arrangement which is either fully insured or a cost plus basis, and there is also healthcare trusts where there is no primary insurance, so effectively the employer is self-assuring its liabilities but probably with the aid of stop loss cover.
So, what should we be looking at? Well for all schemes, no matter what type, documentation should be up to date. The idea here is to make sure that all the cover is properly defined, that there is certainty, that there is proper communications with members so they know what they are entitled to and avoiding challenges.
It is worth pointing out that you should not also cover tax-exempt benefits within a taxable scheme. The cost of an annual check-up provided by the employer is not a benefit in kind so certainly needs to be dealt with outside of these sorts of arrangements.
Looking specifically at healthcare trusts, it is extremely important to make sure that their provisions are not in breach of the current HMRC requirements. These are the ones that ensure that the benefit in kind charge on the employee is on his proportionate share of the claims fund and not on the cost of the individual treatment that he might receive. And I think that, as a rule of thumb, if your scheme is probably more than five years old, it may be worth checking to make sure that these requirements are still being met.
It is very easy for the trustees of a healthcare trust to delegate everything to a third party administrator but very important to remember that they retain the ultimate liability for the trust and they are responsible to the members. So they need to be aware of what they are doing. There needs to be some governance imposed. Trustees should make sure that they are controlling the administration and also looking for complaints, seeing what is happening and ultimately making sure that the scheme operates as it is intended.
Another thing we are seeing quite a lot of recently is surpluses arising in schemes. If there are significant funds that are carried forward year on year, this needs to be addressed. It is inefficient, it gives rise to problems and it can very easily be avoided.
So, what has been changing in this area? Costs should never be the deciding factor when looking at whether to go insured or under a trust but, with IPT about to increase to 9.5%, there are clearly financial attractions for any insured scheme on a cost plus basis where effectively the employer is already taking on some of the risk. There is now more targeted and more effective coverage available, particularly under trusts. You may not want to provide a wide range of benefits for all your employees because this can be expensive in terms of cost and also the tax liability. We are seeing much more now of limits on covers, we are seeing tiers of benefit, different benefit structures for employees and their dependants and, of course, bringing these things within flexible options become much more attractive.
One point which we have been looking at is where the partners of a partnership or the members of a limited liability partnership have set up a trust for their employees. There is a technical point on inheritance tax here which has meant that this has been pretty much a no-go area if you wanted to bring the partners and the members themselves into the scheme with their employees. But we think this may be capable of resolution as a practical matter and therefore I would not rule out the possibility of a single trust based arrangement for partnerships.
So, a few suggestions that you might like to look at when considering private medical cover. A recent innovation, healthcare master trusts for suitably sized cost plus schemes. These can result in IPT savings but there is a provider that effectively takes over the role of the trustee and therefore coordinates and controls what goes on so this reduces the employer and trustee involvement at company level. Again, we said that it may be possible to limit cover under trust but also it may be possible to widen it if it is more efficient to bring in other things. Now, healthcare trusts have been going for quite a time now and are probably fairly mainstream so they may be ripe for development. There are some definite limitations, however, imposed by HMRC but these themselves are based on a fairly narrow view of what was necessary some time ago and we think there is the definite potential opportunity here to widen trusts. There are some unanswered questions which I think the industry will need to take forward but I do not think these are closed off by any means.
Finally, wellbeing is something which is being offered by way of programmes to many employees these days and I think that is probably a good place to start when looking to see how you can integrate what you have already got with these sorts of programmes.
That is all I am going to say on this. I am going to pass back to Kevin now for some action points.
Kevin Gude: Thank you.
I would just like to sum things up with some general action points for you to take away.
You will have picked up our emphasis on knowing what benefits are meant to be provided and then making sure that there is sufficient cover in place. It sounds like an obvious one, and it is, but it can still get overlooked sometimes.
There is a widespread expectation now that governance standards in all fields ought to be reviewed and improved where possible. Sharing that responsibility between the employer and the trustees seem to us to be sensible where possible but coordination and expert advice is needed to make it work properly.
Streamlining of benefit structures is keeping us rather busy at the moment too and we have seen how the efficiencies that that process can bring are very easily transferable to other employers' risk benefit arrangements. If you have concerns about how your own arrangements are complicated by legacy schemes or policies, come and speak with us because it is a problem that can be solved.
An associated part of that solution could be the integration or consolidation of those various arrangements and this is an area that your benefit consultant would be well placed to help you with but, again, the legal process that backs it up is something that we have already had plenty of opportunity to perfect.
Finally, there is the other less traditional but effective options we have already described here. The use of excepted group life arrangements outside of the registered life assurance scheme environment and company funded healthcare trusts as an alternative to standard insured medical cover. Each has its part to play in the modernisation of group risk benefit provision and the employer's search for balance between its own costs and the benefits awarded to its employees.
There is more of this to come but we hope that this session today has provided you with some useful points that you can apply to your own arrangements and encourage you to ask other questions about how potential problems might be avoided in the future.
Andrea Bull: So that was it-thanks very much Robert and Kevin. We have reached the end of our time but I do not know if you just want to pick up one question maybe?
Robert Smith: What I would say is we have answered quite a few of these questions I think during the talk. If you put your name and address in, we will certainly come back to you with our views.
Andrea Bull: Great then-so it just leaves me to thank our speakers, thanks very much Kevin and Robert.
Robert Smith/Kevin Gude: Thank you.
Andrea Bull: Just to remind everyone out there that we do have some downloads available, so the slides and more information on the speakers' experience. Also we will be putting a recording of this webinar on our website and will let you know when that is available. And then, finally, we would really welcome some feedback from you so I am putting a feedback questionnaire on the screen now.
Thanks very much everyone.
Webinar follow up Q&As
Expected Group Life Policies (EGLPs)
We received a number of questions from participants who asked to hear more about the specific "tax avoidance" prohibition that applies to EGLPs and how to ensure that the arrangement is set up so as not to contravene that provision.
To recap, the relevant statutory rule states simply that the policy must meet the condition that 'tax avoidance is not the main purpose, or one of the main purposes' of the arrangement. 'Tax avoidance purpose' in this context is described in separate legislation as 'any purpose that consists in securing a tax advantage (whether for the holder of the policy or any other person)' and utilises the broad meaning of 'tax advantage' provided by another Act.
Compliance with this requirement is a common source of concern for employers who are considering the Relevant Life Policies (RLP)/ EGLPs option but is, as a reflection of its objective, a matter on which HMRC has issued little guidance in connection with RLPs/ EGLPs. We agree that the 'tax avoidance' term is ambiguous, but from HMRC's general commentary, it seems reasonably clear to us that if deployed for the purpose for which they are designed, the use of neither form of policy should be construed as avoidance. Instead, both are products for which the conditions and the tax treatment are provided for expressly in statute, so can be regarded as a legitimate application of tax legislation rather than vehicles designed to exploit that legislation to gain a tax advantage.
It is nevertheless prudent for the test to be considered afresh when a new policy is obtained, or the terms of cover are altered by the insurer or employer.
Addressing other questions we received on the same point, we don't consider the current growth in the use of EGLPs to be excessive. They are, for the time being, a legitimate means of ensuring that the dependants of employees who are caught by the lifetime allowance can continue to benefit from death benefits that are free of that restriction. However, the practice of using EGLPs as a full replacement for registered life assurance schemes for employees who are not affected is something that should be considered carefully.
Might Treasury choose to withdraw the favoured tax treatment that EGLPs enjoy, when they see their popularity increase? We cannot predict how Treasury might react in the future, but for the time being, that statutory permission holds good and for as long as it is available, EGLPs and RLPs remain an option for employers that they might want to consider as part of their wider risk benefit planning.
Life assurance scheme documents
Will the insurer have life assurance scheme documentation? Will they hold the documents? Whose responsibility is it to manage policy documents?
Most insurers have their own suite of model documents which they can provide to clients, to be reviewed by their own legal adviser and modified or adopted. Alternatively, employers can adopt their own bespoke governing trust documentation, as they prefer. Our experience is that most insurers are happy to proceed either way, but it is apparent that they do not wish to have technical responsibility for those documents, or hold them once they are executed. Original deeds should instead be held by the trustees, employers, or their advisers. The insurer will remain responsible for the wording in the policy and will replace it at renewal or amend it by way of periodic endorsements, but the trustees are responsible for safeguarding the trust assets, including the policy document.
We have encountered problems in the past with some of those policies not complying with the statutory rules on policy provisions, but wording is now much better. It pays to have the policy reviewed before it is adopted though, as not all insurers are the same.
Separate life assurance scheme accounts
Should there be seperate accounts to receive benefit payments from an insurer?
We recommend that life assurance scheme trustees set up their own bank account for the holding of policy proceeds from time to time, and advise against payments being made to the employer. In the past, insurers were sometimes willing to pay direct to beneficiaries at the direction of the trustees, but this is now less common.
Death benefits
How long do trustees usually take to pay death benefits?
There is no ideal time by which to reach a conclusion. We always recommend that trustees take as long as they need to explore the deceased member's circumstances and identify their potential beneficiaries and dependants before reaching a decision on how to distribute death benefits. The two-year limitation set by HMRC is to be borne in mind, as is the trustees' default option in the event that they are unable to reach a reasonable decision within that two-year period. Unfortunately, many trustees do not have sufficient guidance at the right time, or are placed under pressure (by the deceased's family or estate, or by their own wish to act efficiently) to distribute the policy proceeds before they have made sensible checks.
What if an employer or employee doesn't agree with a decision to decline a claim?
The employer can always challenge the insurer's decision under the terms of the contract of insurance.
For income protection, although there is no direct link between the insurer and the member, the Financial Ombudsman Service will take claims from the member and most insurers accept its jurisdiction.
In the case of death claims, the member's beneficiaries or the executors will bring any claim against the trustees of the arrangement. Since they will be the policyholder, it will be up to them to reject the claim or to pursue the insurer under the contract of insurance.
In some cases, the rules of a group scheme will limited the amount of benefit to whatever is paid out by the insurance company to avoid an uninsured liability arising.
Other matters
How can we be safe against age discrimination? Is the state pension age a possible target date?
Apart from the statutory exemption, any discrimination on age grounds may be justifiable as a proportionate means of achieving a legitimate aim. This is a complex area which requires careful consideration in each case.
Are there specific policies to protect against ill health early retirement?
We haven't seen any, but you could ask your benefit consultant if the market holds any. If it is a material risk that you were concerned about, an insurer might be willing to create the cover to provide protection
The rehabilitation potential is just as attractive as an income provision for income protection?
Perhaps. It depends on the individual case, but as it is not strictly a legal issue, it is a detail that can best be considered by the benefit consultant.
What would you consider to be a suitably-sized scheme in order to consider cost-plus PMI schemes?
It is really a question of the employer's financial ability to meet claims rather than the size of the workforce. It is usually the case that cost-plus would be capped by an element of what is, effectively, stop-loss insurance cover, as is the case with healthcare trusts. Again, it is detail that your benefit consultant is going to be best placed to provide you with a view on.