General Insurance Article - Aon warns employers that the Budget changes could be costly

Aon Employee Benefits has said that the measures introduced in this year’s Budget could create significant and costly changes for employers, unless they take urgent action.

 The measures come into effect on 6 April, resulting from the Finance (No. 2) Bill 2017 which was published on the 20 March. It is likely all employers will be affected by at least one of the changes concerned. The measures include:

 Salary Sacrifice becoming known as Optional Remuneration Arrangements (‘OPRA’) which introduces the concept of Type A and Type B arrangements
 Excepted Group Life Assurance and Group Income Protection: HMRC confirmed the initial Bill had incorrectly exempted these benefits from the changes affecting OPRA, but this has been corrected in the revised Bill. Dual taxation is also a surprising possibility in event of a Group Income Protection (GIP) claim.
 State benefits reduction: the reduction in State benefit paid to a certain group of claimants could mean significant GIP insurance cost increases unless action is taken
 Other key impacts include Tax Free Childcare Vouchers, Money Purchase Annual Allowance, Pension Advice Allowances, LISA and State Bereavement Support

 Of particular importance to many employers is OPRA, which introduces the concept of Type A and Type B arrangements. Type A is effectively the same as the traditional method of salary sacrifice, giving up salary for a benefit. Type B, however, revolves around employees being offered a benefit or the cash alternative.

 Jeff Fox, principal - Online Benefits Technical Lead at Aon Employee Benefits: “The distinction introduced by the Type B arrangement is easy to overlook. In short, it is the flexibility or choice that is taxable, but creates complexity because choice may not be easily recorded. It could catch many cash-in-lieu arrangements including company cars and flexible benefits where the employer provides cover or funding for core benefits.”

 Group Life and Group Income Protection
 Employers will be relieved that Registered Group Life cover is not caught by the OPRA changes, by coming under the ‘registered pension scheme’ exemption. Excepted Group Life and Group Income Protection are impacted. Following much uncertainty, HMRC confirmed the initial draft legislation had incorrectly exempted these benefits from being unaffected, which has been corrected in the revised legislation. However, an additional implication for GIP under an OPRA is the possibility of dual taxation applying on a claim.

 Jeff Fox continued: “The situation is complicated as the benefits-in-kind (BIK) treatment depends upon how the benefit is funded. HMRC’s intention has been met with dismay by many, not only because of the short timescale to consider the implications, but also because of the surprising possibility of dual taxation arising in the event of a GIP claim. This is where the premium may be taxed upfront as a BIK while the benefit paid to the claimant via payroll is also taxed.”
 GIP is also impacted by the state benefit reduction paid to claimants in the state designated ‘Work Related Activity Group’ (WRAG). This group currently receives ‘Employment and Support Allowance (ESA) plus a Work Related Activity Component (WRAC)’ from the state, which will change to ESA only from 6 April.

 This change means potentially significant GIP insurance cost increases for employers unless action is taken. The changes impact GIP schemes which include an automatic ‘ESA + WRAC’ offset in the benefit design. As this is a common legacy benefit design for the majority of GIP schemes, depending on the insurer’s default stance, the GIP benefits insured may automatically increase to correspond with the reduced State benefit offset. This occurs where the offset applied by the insurer automatically changes to match the reduced State benefit, resulting in an increase in insured GIP benefits. As this is a default approach for the majority of insurers, many GIP schemes will experience an increase in insured benefits leading to cost increases.

 Jeff Fox, said: “Aon’s view is that in small to medium sized schemes, the proportionate cost increase may be particularly significant depending on the GIP benefit design and average salaries. This is because a large element of lower paid members means that a reduction in the automatic State benefit offset applied in the GIP benefit design would result in a considerable and proportionate increase in their overall insured benefit.

 The 6 of April is looming and employers need to be aware of the changes coming into effect. At an Aon seminar open to all employers, just 10% felt they were well briefed on the impacts of changes. In my view, all employers are likely to be impacted by at least one of the recent budgetary changes, and the scope of these measures are a great deal wider than many employers are fully aware- not least the impacts of OPRA and its Type A and Type B arrangements. Employers need to understand exactly how it impacts them, so they can make the best possible choices.”

 Catherine Stait, principal – Risk Benefits Technical Lead of Aon Employee Benefits, said: “When it comes to GIP and the state benefit reduction paid to those in the WRAG, if scheme design remains unchanged and refers to an automatic ESA + WRAC offset, employers may not only find significant increased insurance costs, but also the potential risk of employees asking for the money they expected from the state. This could arise where claimants receive less benefit from the state, particularly as a result of the forthcoming change and look to the employer to top up the difference where the GIP benefit design still references the previous higher automatic state offset. This is clearly an HR headache, and even if past Financial Ombudsman rulings have resulted in any such top-up being sought from the insurer, not the employer, this may not always be the case.”

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