Claims Cost Caution Ahead of Pension Reform
Article, Insurance Day – March 2012
Insurance / Legal / Liability / Casualty
Amanda Fyffe and Caroline Bedford discuss how pension reforms could affect the complexity of claims.
People are frequently under-prepared financially for retirement and the UK’s pension reforms will attempt to address this via the introduction of workplace pensions. From October 2012, all employers will be obligated to provide employees with a workplace pension. The changes will be phased in during a four-year period but, inevitably, the outcome will be an additional cost to employers in terms of contributions and administration costs. Employees, although eligible to opt out, will also have to make a minimum contribution. While they will be entitled to tax relief on contributions made, depending on the structure of their remuneration package, this could also result in increased financial pressures for employees.
But what does all this mean in terms of claims arising from personal injury and fatal accident incidents? There will almost certainly be a rise in the number of pension claims being brought. Indeed, some insurers/lawyers are already seeing pension claims being made in anticipation of the forthcoming reforms. In preparing or reviewing such claims, there will be various issues to consider and particular care will need to be taken during the four-year start-up phase to ensure claims are not overstated. In the first year (to September 30, 2013), only employers with 1,250 employees or more will have to start a work-place scheme and throughout this first year there is a further sliding scale to determine the month in which employers will need to enrol their employees. From November 2013, there are further phasing-in criteria and by February 2016 even the smallest employers will need to have enrolled their employees. As well as the timing of enrollment, the minimum employer/employee contribution rates are also being introduced on a sliding scale; starting at 1% for employers and employees alike, increasing to 3% for employers and 5% for employees by October 2017, resulting in variable contributions each year. Further issues to consider include:
i) Which calculation methodology to adopt – a pension projection approach versus the more straightforward contributions approach; and
ii) Whether an employer’s contributions are made in addition to an employee’s salary or whether future salaries will be compromised owing to the employer contributions, potentially affecting any loss of earnings claim. Invariably, the calculation of lost pension benefits from workplace pensions is likely to be a very intricate process in the early years. However, once through the phasing-in stage calculations should become more straightforward – until the next round of reforms, anyway.
As appeared in Insurance Day, March 2012.