The Welfare Reform Act was passed in 2007 and will come into force on 27 October 2008.

Purpose of the Act

Rather than continue to focus on what an employee's on-going incapacity means they cannot do, the Government hopes that the measures introduced by the Act will:

• keep more people in work when they fall sick or become disabled;
• get more people off benefits and back to work; and
• provide greater assistance and support to those that need it.

So what?

The Act includes the introduction of a new Employment and Support Allowance (ESA) that will replace the current Long-Term State Incapacity Benefit (LTSIB).

Whereas LTSIB is currently paid at a set level of £84.50pw for all eligible individuals after 52 weeks of absence, the benefit level paid to individuals eligible for ESA will vary dependent on their situation and ability to work, and will be payable after 41 weeks.

In summary, the following benefit amounts will apply from October 2008:

• First 28 weeks of absence: Statutory sick pay will still be payable at a rate of £75.40pw
• Weeks 29 to 41 of absence (the assessment period): during this 13-week period, while individual claimants are being assessed on their eligibility for the ESA, they will receive a basic allowance equal to the jobseekers allowance, ie £47.95pw for those aged under 25 and £60.50pw for those aged 25 or over.
• Weeks 42 onwards of absence: following the assessment period, this basic allowance will increase for eligible claimants as follows:
  
  
  • Those assessed as being capable of some work-related activity will be entitled to an additional Work Related Activity Component (WRAC) that will increase their ESA to £84.50pw , i.e., an exact match to the current single person's state long-term incapacity benefit (LTSIB). However, to remain eligible for this ESA and avoid a cut in benefits, these claimants must take part in ongoing work-focused interviews with a view to returning to long-term employment.
  • Those assessed as not being capable of any work-related activity will instead be entitled to an additional Support Component (SC) that will increase their ESA to £89.50pw. This may be further increased to £102.10pw for those with restricted capital and income.

This will change the state benefits payable to employees suffering from long-term disability and so could affect any long-term sick pay arrangements you currently have in place, particularly if they include an insured group income protection (IP) policy.

What are insurers doing on IP policies?

Insurers are beginning to introduce a number of options for employers to consider, including:

• The LTSIB offset can be removed from the insured benefit basis - e.g., instead of insuring 75% of salary less LTSIB, a straightforward 75% of salary would be insured.
• Amending the insured benefit basis to include an ESA offset, rather than an LTSIB offset.
• Increasing the maximum benefit insurable from 75% of salary less LTSIB to say 75% or 80% of salary.
• Offering a 41-week deferred period.

It is important to note however, that any such policy changes are going to have an impact on the insurance premiums payable, i.e., where the benefits insured increase, so will the premiums.

Similarly, any 'Net Pay' or 'Fully Integrated' arrangements, where benefits equate to a percentage of pay from all sources including state benefits, could see an increase in premiums as the state provision reduces.

What next ?

If you would like to discuss the implications of the Welfare Reform Act on your long-term sick pay arrangements and your options going forward, please contact either:

Darren Dopson
01372 733844

OR

Marena Mieras
01372 733782