With a number of Defined Benefit pension schemes already struggling with funding, avoiding any extra, unplanned impact on finances is paramount. Using Group Income Protection as a way to help pension scheme members forced to retire early through ill-health can relieve the financial burden, while providing other benefits to both employer and employee.
Many Defined Benefit (DB) pension schemes allow payments to members who have to retire early because of ill-health, while others have done so at Trustees’ discretion. However, while this valuable feature is appreciated by members, it can add to the financial burden for those DB pension schemes already facing shortfalls.
Group Income Protection (GIP) is being increasingly used to support these commitments, and to manage the risk of scheme members retiring early because they’re unable to work1.
What is GIP?
Group Income Protection (GIP) can provide a regular replacement income if employees are unable to work due to illness or injury. Typically, GIP pays a percentage of their salary after they have been off work for the long term (such as 6 months, though the employer can choose other deferred or waiting periods).
Depending on the policy chosen, benefit is paid until the employee either returns to work, to State Pension Age, or another timescale chosen by the employer.
GIP can also provide access to a range of added value services such as vocational rehabilitation, an Employee Assistance Programme, and specialist support, among others.
GIP in the pensions space
As the pace of pensions change accelerates, we are increasingly seeing GIP used to solve the problem of disability risk within DB schemes, across a wide range of industries and situations2.
As well as the unplanned financial strain caused by retirement through ill-health, deciding entitlement can be uncomfortable for Trustees because of the risk of inconsistency in incapacity decisions.
GIP only pays claims that meet the ‘definition of incapacity’ or, more simply, the terms and conditions that the member’s injury or illness has to satisfy. Depending on the individual case, this is likely to look at their medical records, prognosis and job role. Trustees are relieved of the need to use their own judgement, but can still feel assured that members’ conditions have been rigorously – and fairly – addressed.
Using GIP to address the risk posed by early retirement through ill-health also supports the different objectives of all key pension stakeholders – Trustees, employers, pension scheme members and staff bodies.
How GIP supports DB pension Trustee objectives
The Pension Regulator lists the following requirements for Trustees3 – which are all areas where GIP can contribute:
- Act in line with the trust deed and rules - GIP can be used to support ill-health retirement commitments, whether explicit in scheme rules or implicit in discretionary decisions made by trustees.
- Act prudently, responsibly and honestly - GIP manages the risk of ‘hits’ to the pension scheme from unexpected ill-health retirements. The risk is passed to the insurer and the organisation pays a regular premium.
- Act in the best interests of your beneficiaries - GIP can insure active pension scheme members against the risk of being unable to work due to ill-health, and can provide access to a range of added value services, such as Employee Assistance Programmes.
- Act impartially - GIP delegates incapacity decisions to the insurer, who applies consistent and expert judgements – for example, Unum has 4 doctors, including 2 psychiatrists, and 22 Vocational Rehabilitation Consultants.
- Consider what powers you may have - Trustees usually have discretionary powers to decide who can receive a dependent’s pension or entitlement to ill-health retirement. Proactively managing disability risk can help trustees fulfil their duties.
Adopting GIP in DB pension schemes
In our experience, GIP is frequently adopted when the pension scheme is closed for future accrual. The employer usually initiates the change, which is often driven by cost-saving considerations, or because they want to harmonise employee benefits across the business.
During this time, Trustees have an enormous amount of work on their hands to ensure not only the best outcome for active members, but in making sure funding for future ill-health retirements stays on the radar.
However, the substantial cost saving the employer may achieve can free up the budget to ensure those retiring through ill-health are covered through GIP - a solution that our experience shows is supported by staff representatives.
Questions to ask yourself as a DB Trustee:
- What are the scheme commitments for ill-health early retirement? (whether explicit in scheme rules or implicit in historic decisions)
- Can the pension scheme cover unexpectedly high rates of retirement through ill-health and would volatility be an issue?
- If you are a scheme Trustee and also work in the organisation, how would you feel if you had to decide if a colleague you knew was entitled to ill-health retirement payment?
- Does the employer offer an Employee Assistance Programme, vocational rehabilitation, or access to specialist advice and support?
How Unum can help
We have considerable experience in solving the risk associated with employees forced to retire early because of ill-health, including where:
- Closure of the DB scheme for accrual resulted in difficulties funding future ill-health retirement
- Staff bodies demanded cost savings were used to fund the harmonisation of benefits in other employee groups – eg. all Direct Contribution pension scheme members
- Employers asked for ongoing pension contributions to be financed in the event of an ill-health retirement – meaning GIP not only funds the early retirement period, but also DC contributions to the pension pot, supporting full retirement after State Pension Age
- The company made a comparatively large acquisition, and TUPE DB pension rights presented a substantial ill-health retirement risk compared to the company’s balance sheet
We can help organisations looking to remove the risk associated with ill-health in DB pension schemes and meet the needs of all stakeholders, whether trustees, employers, members and staff bodies.
For more information how we can help, contact firstname.lastname@example.org.
Unum also offers Group Life, Critical Illness and Dental insurance.
1 Unum own data – NTM 500+ life schemes 2011-2015
2 Unum own data – Industries using GIP to solve DB issues – 2010 to Feb 2018
3 The Pensions Regulator (2018). Roles and responsibilities