Aon plc has said that the latest changes to the Lifetime Allowance (LTA) and the availability of another round of pension protection should be the cue for employers to address the impact on death in service benefits. An Aon survey of 1,162 clients showed that, to date, just under half of employers with 100 or more employees have made an active assessment of the death in service implications of this latest legislation.
The growth in DC pension pots, the higher level of lump sum assurance cover on offer and the latest reductions to both the LTA and the Annual Allowance have meant that concerns around this issue are no longer just for very high earners. These latest changes should in theory have been the prompt for employers to address the issue, or at least to re-visit their past decisions – some of which may date back to A-Day in 2006.
The potential problems from not dealing with the issue – or dealing with it incorrectly – are considerable:
- Employees who have taken Pension Protection can lose their protected status
- New hires lose their protected status on joining an organisation
- High earning employees (and their nominated beneficiaries) having some or all of a lump sum life assurance benefit pay out taxed at a rate of 55%
- Schemes being incorrectly documented with insurers, leading to delays in claim pay-outs or even uninsured liabilities
Richard Strachan, Scottish Regional Director at Aon Employee Benefits, said: “From speaking to businesses across a number of sectors we know that many have not yet considered how their pension and life assurance arrangements can impact upon each other. Many are also not aware of the potentially very serious implications if their arrangements are not structured in a manner most suited to the demographics of their own workforce.
“Our survey made two things clear in particular; most companies – irrespective of size – have not taken action, and where they have, there is significant divergence in the approaches they have adopted. Among large employers (which from a Scottish perspective includes those operating in the Financial Services and Oil & Gas sectors), 46% are using Excepted Life Assurance policies as part of their benefits strategy, although there were considerable differences in how this approach was executed.”
Key findings of the survey include:
- In all organisations surveyed, less than 25% of respondents had taken steps to address these issues, with inaction being especially high among smaller (sub-100 lives) employers.
- The number of employers taking action is higher for the larger organisations – but still only 46%
- When action is taken, employees with Pension Protection are identified as one group to move into the excepted arena more than 50% of the time. But a greater number rely on fixed level of life assurance cover to act as a threshold, either in conjunction with this or as an outright alternative
- Where a threshold based on a level of insurance cover is in place, over a third of the time this refers to a figure of £500,000, half the new LTA
- The next most common selection criteria for excepted benefits are those based on grade of employee, usually singling out executives or board directors.
- Fully excepted cover has been taken up by less than 4% of all employers responding to the survey and when adopted, this has more commonly been with the smaller employers, suggesting continuing caution towards this approach.
Mark Witte, Principal at Aon Employee Benefits, said: “While we have seen some Oil & Gas companies wishing to adopt a ‘one size fits all’ approach via the use of an Excepted Policy, there are of course pros and cons to all courses of action, with there being no definitive, default – or correct – course of action for employers to take on this issue. But given the implications of inaction, this is an issue that cannot continue to be ignored by employers as the consequences for inaction are severe. It is therefore essential that employers fully consider these issues, the impact upon their own business, the insurance options available, so that they may agree on an approach that fits in with their over-arching reward principles”