Welfare reform: the financial impact on employers

Additional legislation on benefits in the Welfare Reform Bill could have direct and indirect cost implications for your firm – Robin Hames examines how.

The Welfare Reform Bill received Royal Assent on 3 May 2007. In common with its many predecessors, this government is determined to try to control its welfare budget. There are currently 3.1 million people who have been on benefits for over 12 months; accordingly, the reform programme’s principle aim is to reduce the number of people claiming and increase employment levels from the current 74.6 per cent.

In order to help people back into work, as well as reduce the number of people moving onto benefits, the reforms are a combination of a stricter benefits-qualification regime and greater emphasis on both supporting employee well-being and rehabilitating those off sick.

These changes have a number of implications, not only on the qualification for, and level of, benefit employees could expect to receive from the state, but also potentially on law firms as well. Finance directors may not be surprised to learn that these additional layers of legislation may well have direct and indirect cost implications for their organisations.

Changes to state incapacity benefits

The existing state incapacity benefits and Income Support will be replaced by an Employment and Support Allowance (ESA) paid in two phases: assessment and main.

The ESA will comprise two elements: a contributory benefit (composed of a basic allowance, a work-related activity component and a support component) and an income related (means tested) component. The contributory element is effectively a replacement for state incapacity benefits and the means-tested element will replace Income Support.

‘Pathways to Work’ process

In addition to changing the value of the benefit, the ‘Pathways to Work’ process will also be reformed to determine eligibility through a number of practices that include:

A personal capability assessment which determines whether a benefit entitlement exists. The points scoring system already in place has been tightened such that, in future, it will become harder to qualify for benefit;
A mandatory work-focused interview that will be held eight weeks after a claim for ESA is made. In some circumstances this requirement will be waived, for example due to the nature or severity of the illness; and,
A screening tool at the initial work-focused interview designed to establish who is required to undergo more work-focused interviews. Where appropriate, failure to participate in the work-focused interviews will result in a reduction in the benefit payable.

The explicit cost impact for firms

The temptation may be to shrug one’s shoulders and wonder how such changes could affect institutions such as law firms. However, these reforms could well have direct repercussions on costs for a significant number.

Based on our survey of the legal sector conducted last year, approximately two-thirds of law firms offer a Group Income Protection (GIP) scheme for employees. These schemes are also referred to as Permanent Health Insurance (PHI) arrangements.

The reforms will potentially have an immediate consequence for this majority of law firms, depending on how the scheme benefit is designed. There are two significant reasons for this: the reforms are likely to result in fewer successful claimants and a lower level of state benefit for those who do pass the new vetting process.

Many GIP schemes are designed to take some account of the level of state benefits paid to a claimant; therefore changes to state provisions directly affect the level of actual benefits being provided and underwritten. How such account is taken could be very important in future.

In addition, the terms and conditions for eligibility to receive benefits from the firm’s scheme will be highly significant. If there is enough of a disparity between the state and the scheme’s criteria, firms could be left providing a benefit to long-term absentees who are not receiving any (or lower than expected) state benefits. If the state-benefit offset is lower than expected, or indeed non-existent, then this will also affect the deemed level of insured cover required and commensurately the cost of providing the benefit.

If they are not reviewed, the changes in both the eligibility for and levels of state benefit could lead to a direct increase in the necessary insured provision and ultimately in the cost of the scheme.

While insurers are likely to offer some straightforward redesign solutions to take into account the changes, these could trigger unforeseen cost consequences due to the fact that the required level of insurance to be provided may increase.

There are a number of alternatives which can be implemented to offer employees a valuable benefit within a budgeted cost. It is essential for a firm’s finance and HR directors, alongside their advisers, to evaluate the cost implications of a variety of solutions to determine which represent the best value for employer and employee alike. These alternatives could include changes to deferral and payment periods, eligibility criteria, the nature of state benefit offsets plus a host of other possible innovations and combinations.

The underlying implications for employers

The success of welfare reform will be judged in a number of ways, and achieving an employment rate of 80 per cent of the working population will be one indicator. The government states that achieving this will require:

A reduction of 1 million in the number of Incapacity Benefit claimants;
300,000 more lone parents in employment;
One million ‘older’ people in employment.

If successful, the number of people dependant upon benefits, and therefore the overall value of benefits paid, should in theory reduce.

In addition to the government and the individual themselves, employers are expected to play a key role in supporting this policy through initiatives such as the ‘Jobs Pledge’, which forms part of the Local Employment Partnerships initiative. The objective of this initiative is, over the next three years, to provide job opportunities for 250,000 people currently claiming benefits. Clearly any existing diversity projects need to bear this Whitehall aspiration in mind.

The emphasis will not lie solely with recruiting from this population. There will be a growing expectation that employers will actively participate in the drive to reduce the number of individuals seeking support from the state in future.

The government is not alone in suffering from the costs of long-term absenteeism; and certainly sees a cohesive strategy with a focus on early intervention – involving itself, employers and insurers – as a beneficial and desirable outcome to this legislation. Accordingly, firms may wish to further develop their absence management processes in order to demonstrate commitment to meeting their responsibilities. Now might well be an appropriate time to measure how effective – in terms of return on investment – any existing health and medical expenditure is in respect of existing employees.

Annual survey reports carried out by the Chartered Institute of Personnel and Development generally demonstrate that less than 50 per cent of the organisations surveyed monitor the total costs of absence, which can include:

Occupational sick pay;
Statutory sick pay;
Cost of replacement labour;
Overtime costs;
Cost of reduced performance;
Increased administration.

Stress is the main reason for long-term absence for non-manual employees, and while many law firms have responded to this issue with well-being strategies and access to counselling services, such strategies are by no means universal.

In summary

Long-term absenteeism is an issue for the government and employers alike. With increasing pressure on the public purse, the welfare reform agenda is likely to remain a fiscal priority for the occupants of Downing Street.

These reforms should not be viewed in isolation, however, but seen in their wider context; a context that most definitely assumes employer participation. As has been the case with a number of legislative reforms, firms can expect to be called upon to assist the government in achieving its ends. Initially, a degree of intellectual capital may well be offered; however financial support is unlikely to be substantive.

An immediate issue for firms providing employees with an income protection scheme is to instigate a review of the benefits and criteria basis. If they do not, renewal time might deliver an unexpected shock.

A longer-term strategy should also include the best means to formalise any well-being programmes and to consider how these might improve the firm’s profile to government and insurance providers alike.

An emphasis on early intervention with a more personalised, flexible and responsive approach to delivering support which is right for the individual should help employers demonstrate their commitment to the cause.

Robin Hames is a consultant at PIFC Consulting. He can be contacted at robin.hames@pifc.com