Legal & General ill health retirement policy
L&G has designed a group risk insurance product to cover private sector pension schemes for the extra costs they incur if one of their members becomes ill or disabled and takes ill health early retirement. Such events can happen quite often – the insurer estimates that a 200 member scheme could expect to have one such ill health early retirement every four years.
Taking an ill-health pension triggers an immediate increase to the pension scheme’s liabilities. In turn, that feeds straight through to the employer’s balance sheet. L&G’s solution effectively enables larger employers to now insure against the risk. The policy pays an immediate cash lump sum into the pension scheme to cover the extra cost. L&G says that a typical claim can be up to ten times the employee’s annual salary. So, someone on £30,000 a year could generate a liability to the pension scheme of £300,000.
The plan is targeted at defined benefit (DB) pension schemes that have at least 100 active members. We’ve called the plan ‘ill health retirement policy’, although at the end of March 2015, when this review was written, we could not find out its actual name or other than bare details, so do check exactly what is and isn’t covered.
Comment: Not that many years ago finance directors (FDs) loved DB (defined benefit) pension schemes. Pretty much every year they delivered almost embarrassing surpluses and even allowed firms to take contribution holidays. But then the landscape changed, interest rates fell and DB schemes became a funding nightmare for many finance directors. Now, if an unexpectedly high number of ill-health early retirements occur, the FD’s careful calculations can quickly become way out. L&G’s solution offers a way to crystallise the risk, by passing it on to L&G in return for paying an insurance premium.
DB schemes are now a relatively small market, but this plan offers a useful alternative as FDs struggle with how best to manage their DB schemes going forward.
Plus points: A straightforward insurance option to protect larger employers against the cost of ill-health pensions; The concept is already proven, with L&G currently covering 100,000 workers in the public sector in this way; For employers, they can replace uncertainty with certainty and crystallise the cost in the form of a regular insurance premium.
Not so plus points: The DB market is specialised, relatively small and getting smaller; This plan only helps larger schemes; It adds costs especially if fewer than expected workers retire early in this way.
Website: http://www.legalandgeneral.com.
Rating (max 10): Innovation: 9. Overall: 8. Gold
Tags: Other; L&G