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UP to Speed - The Employment Equality (Age) Regulations 2006Guidance Note 4 for Advisers - Group Critical Illness (GCI) policies.

Guidance Note 4.

This guidance note is the fourth in a series to help advisers understand the background to important new 'age discrimination' legislation, and tohelp them work with and guide their clients so that they are prepared in good time to comply with the new Regulations by 1 October 2006. This guidance note looks in more detail at the impact the Regulations will haveon GCI policies, and the relevant challenges and opportunities facing advisers.

The statements in this document do not constitute advice. Employers need to consider their circumstances and should obtain independent legal advice as appropriate to guide actions and decisions.

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1. What are the opportunities for advisers?

We believe that the Regulations provide a number of important opportunities:

1. A topical theme to contact your existing clients, to facilitate a review of their group risk policies and other employee benefit arrangements. Many GCI policies have been established with a terminal age of 60 (often to coincide with the employer's retirement age) and, unless any of the limited permitted exemptions apply, the terminal age may need to be changed to 65 in order to ensure consistency with the new statute-defined default retirement age. This of course assumes that the client is not intentionally self-insuring past the current policy terminal age. In this case, the changes offer an opportunity for discussion and an objective review of cost.
2. You will be able to demonstrate value to clients by promoting a detailed understanding of the Regulations. Your clients will need to obtain appropriate advice and support to help them comply with these in good time for 1 October 2006 and they will undoubtedly be looking to you for assistance.
3. Because this is a statutory change, your clients will need to take advice from their employment lawyers. This presents a valuable opportunity for advisers to work with their clients' legal advisers and developnew professional relationships.
4. Whether your advice and services are remunerated by fees, commissions, or a mixture of both, the Regulations provide a bona-fide opportunity to help further develop business. In addition to direct work on policy changes, your clients may need additional assistance with regard to other related matters such as employee communications.
5. The Regulations will also provide an effective springboard to help advisers open a dialogue with prospective new clients and to potentially develop new business enquiries.

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2. When should I start to talk to my clients about the new Regulations?

There are a number of reasons why we believe that you should be acting immediately:

1. Clients will need time to fully understand the implications to their business of the new Regulations, and to seek appropriate legal and financial risk-planning advice.
2. Delay can provide opportunities for competitors to approach your clients.
3. You may miss out on some of the opportunities highlighted overleaf.
4. All group risk providers, including Unum, will need time to process, underwrite, and administer group policy changes. You may also need to allow sufficient time for your clients to consider the costs involved in extending cover to a later age. This may leave some clients exposed to a potential breach of the Regulations if their policies have not been adequately amended in time, although of course they may decide to self-insure part or all of the additional risk.

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3. Will there be additional costs to member employees?

GCI policies will normally be treated as a taxable benefit for P11D purposes, unless the employer has made special arrangements whereby the employer meets the P11D tax charge directly (although such arrangements with HMRC tend to be reserved for larger policies). An increase in policy cost would therefore normally give rise to an additional tax liability for policy members. The arrangement will normally be treated as a taxable benefit in kind for employees which will reduce their personal tax coding, or it will be assessable to tax under Schedule D self-assessment rules for Partners.

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4. Are there any special provisions in the Regulation that apply to Partnerships?

In respect of partners covered under a GCI policy, you should be aware that although Partnerships still fall within the new Regulations, the retirement exception definition of 'employee' does not extend to partners. So in the case of partners, expulsion from a partnership based on age at any time (even over age 65) will constitute age discrimination unless objectively justified.

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5. One of my clients has a GCI policy providing different benefits linked to age - how will this be affected by the Regulations?

Your client will need to take legal advice to ascertain whether they qualify for any of the exemptions permitted under the Regulations. However, generally speaking we would expect that most employers in this position will need to consider equalising benefits for all ages. If the policy eligibility reflects length of service, this is permitted provided the length of service requirement does not exceed 5 years. If the length of service requirement exceeds 5 years, then the employer will need to objectively justify this to obtain an exemption under the Regulations.

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6. I'm concerned that some of my clients may be disadvantaged because of underwriting requirements and 'selection against the insurer' issues - what is Unum's position here?

There is no doubt that the new Regulations will pose challenges for group risk providers.

Our GCI policy incorporates a pre-existing conditions exclusion (PECE) which will apply to existing and new members. The PECE will apply up to an Automatic Entry Limit (AEL) of £150,000 per member. Any member who requires benefit above the AEL will be subject to medical underwriting. Full details of our PECE and how it operates is contained in our GCI Technical Guide which is available on our website.

The PECE will apply to all members when a revised benefit terminal age is selected. We will normally be able to provide a maximum terminal age of 70 together with a maximum entry age of 70 next birthday.

We are committed to offering as much flexibility under your clients' Unum GCI policies as is reasonably possible, to help them comply with the Regulations. There are bound to be some difficult cases, and wewill give these individual consideration.

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7. What key themes should I be looking for when reviewing my clients' GCI policies?

A good starting point is always to ask your client for sight of their typical contracts of employment - and there may be more than one. All formal legal advice should of course be left to your clients' legal advisers, but an informal review could for example highlight the Company's normal retirement age and whether this is consistent within each type of contract. There may also be specific reference to employee benefits, and you may be able to identify anomalies between the employment contracts and the benefits in place. For example, the employment contract may refer to a GCI policy covering employees to age 65, whereas the policy in place has a terminal age of 60. Alternatively, there may be reference to eligibility requirements.

When reviewing the GCI policy itself, the following themes will need to be examined:

Whether there are any minimum entry age levels - age discrimination works both ways!
Are benefits only available for part of the workforce (e.g. senior grade or older employees)?
Are there reduced benefits for any section of the workforce (e.g. younger employees only receive benefits based on 2 x salary, whereassenior employees may receive benefits based on 4 x salary)?
Is there any length of service criteria which is over 5 yrs?

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8. Are there any special features of GCI policies that could cause difficulties under the Regulations?

With GCI there can be certain conditions and illnesses that are restricted by an internal age qualification condition. For example, some contracts will not provide any cover for diabetes once the member attains age 55. Alternatively, some may impose different terms once a member reaches a certain age (e.g. our GCI policy imposes a different definition of permanent total disability from age 60). Such age-related criteria could cause an employer to be in breach of the Regulations. To avoid this, the employer may need to consider promising employees non-age restricted benefits. If such a promise is made over and above the insured cover available, the employer will be liable for any difference and will effectively be self-assuring part of the risk. This may be a particularly onerous route because the employer will be assuming all responsibility for claims management and employee communications in respect of any self-insured element and this is unlikely to be a viable proposition for most employers. We would therefore strongly urge any employer who is considering such a route to take specialist legal advice.

Alternatively, employers may need to review alternative solutions. These may include the need to review alternative products and policy wordings, or to restrict cover by excluding the condition to which an internal age restriction attaches. Any changes may have associated employment law consequences and employers will therefore need to gain appropriate advice and support from independent legal advisers as well as taking financial advice from you.

We are acutely aware of the difficulties that internal age conditions can present to employers once the new Regulations come into effect. We are therefore currently reviewing our stance on age-related criteria within our normal policy wording to ascertain whether it may be feasible for such criteria to be removed.

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9. Will any of my clients be able to retain a terminal age of less than 65 under their GCI policies if they wish to do so?

As stated previously, for most employers the Regulations will be imposing a default retirement age of 65 for all employees. For any employer to retain a retirement age below 65, the following requirements will have to be satisfied in order to claim an exemption:

Objective justification.
Legitimate aim.
Proportionality.

These have already been covered in our Guidance Note 1 for Advisers which explains these requirements in detail.

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10. How should my clients communicate any changes to their GCI policy to employees?

Although this is entirely a matter for each employer to consider, good employee communications are an important component of any successful employee benefit offering. This is a theme that may require joint input from you and your client's employment lawyers. It may also depend on the type and number of other benefits in place. Communications could range from a simple e-mail or letter, to employee seminars and an update to any employee benefit booklets adopted. Whichever route is selected, it is important that the message is straightforward, clear and accurate so that employees understand the changes and how this will affect them.

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About Unum.

Unum is the UK's leading provider of group income protection insurance, with over 35 years of experience. Our critical illness and life insurance products enable our customers to purchase complementary protection solutions that together make a comprehensive protection package.

Our income protection customers benefit from our expertise in the specialist areas of disability, rehabilitation and return-to-work. We enable individuals to protect their incomes, ensuring their financial security if they are unable to work because of illness or injury. For employers, we safeguard one of their most valuable resources by helping employees return to work following long-term absence.

At the end of 2006, Unum protected over 2 million lives through almost 18,600 schemes. During 2006 we paid total benefit claims of £285 million – of which more than £191 million related to income protection claims.

Our US parent company, Unum Group, traces its history back to 1848 and is today the market leader of group and individual income protection insurance in the United States. Premium income for Unum Group and its subsidiaries exceeded $7.9 billion in the year ended 31 December 2006. Total assets were $52.8 billion at 31 December 2006.

For more information visit http://www.unum.co.uk.

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