Death in service provision review needed – Aon

Written by Marek Handzel

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, according to Aon.

An Aon survey of 1,162 clients has shown that, to date, just under half of employers with 100 or more employees have made an active assessment of the death in service implications, following changes in legislation.

The consultancy firm is urging companies to address the issue, saying that the consequences of not doing so are considerable. These include: employees who have taken pension protection losing their protected status; new hires losing their protected status on joining an organisation; high-earning employees having some, or all, of a lump sum life assurance benefit payout taxed at a rate of 55 per cent; and schemes being incorrectly documented with insurers, leading to delays in claim payouts or even uninsured liabilities.

Aon Employee Benefits principal Mark Witte said that it was understandable if the life assurance issues had yet to reach the top of the agenda for employers, given the barrage of recent pension changes.

“However, we firmly believe that the time has now come for them to review the situation as more of their employees may now fall foul of the latest changes if actions are not taken,” he said.

“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, 46 per cent are using Excepted Life Assurance policies as part of their benefits strategy, although there were considerable differences in how this approach was executed.”

Aon’s research also found that when action was taken, employees with Pension Protection were identified as one group to move into the Excepted arena more than 50 per cent of the time. But a greater number rely on a fixed level of life assurance cover to act as a threshold, either in conjunction with this, or as an outright alternative.

In addition, where a threshold based on a level of insurance cover was in place, over a third of the time, this referred to a figure of £500,000, half the new LTA.
Fully Excepted cover had been taken up by less than 4 per cent of all employers responding to the survey.

“There remains no definitive, default – and 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 buried by the seemingly dominant pension agenda. In the absence of categorical guidance from HMRC, it is essential that employers fully consider the issues and the insurance options available, before agreeing on an approach that fits in with their over-arching reward principles,” added Witte.

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