In business, as in life, there are things you can control, and things you can’t. Throughout 2019, external issues have conspired to affect SME businesses, in a game of two halves. The first half saw increases to workplace auto-enrolment schemes minimum contributions, on top of changes to personal tax allowances and national minimum wage rates. In the second half, we’ve already seen a new Prime Minister, a new Chancellor and a new Brexit strategy. It continues to be an uncertain and potentially difficult time for many SMEs, and one in which the focus should ideally be on what they can control, not what they can’t. And that’s where reviewing group life cover – or ‘death-in- service’ insurance – can help.
Before we consider group life Master Trusts, let’s cover the situation where the employee death benefits are provided through arrangements linked to a company’s pension scheme. To provide context, Registered Group Life (RGL) schemes can be governed by pension scheme rules (or the employer can elect to use standalone Group Life trust and rules), while Excepted Group Life Policies (EGLPs) cannot. The latter are governed by separate standalone Group Life trust and rules. Issues for employers can arise when they act as trustees to the pension scheme, or where they are trustees of a standalone Group Life scheme. So, let’s consider what happens when an employee dies in service.
Nomination issues with employee death benefits
When employees join death-in-service benefits schemes, they nominate who will benefit on their death. Employers will provide guidance to employees at the start and then at retirement but can often neglect to send ongoing reminders to employees about the need to review these nominations. This can lead to problems if the employee dies and the nominated person or persons can’t be located, or if a potential beneficiary is deceased. Following that, there could be a dispute over the payment. In short, things can get messy.
SMEs are often unlikely to have to time or resources to liaise extensively with their insurer at the same time as tracking down and identifying potential beneficiaries. And when the person is identified, there are the calculations required to determine the benefits for Registered Group Life (RGL) schemes as a percentage of the deceased’s Standard Lifetime Allowance. There can even be probate and other legal issues connected with the nominated person, an area in which SMEs could find themselves seeking and paying for legal counsel.
Group Life Master Trusts: simple, faster solutions
The good news is that group life Master Trust arrangements can effectively outsource the issues outlined here. They are designed for multiple employers, delivered under a single trust arrangement and governed by an external independent trustee company, so there’s no need for the employer to establish a standalone trust. This route can provide a more affordable and simplified process, allowing SMEs the opportunity to provide life cover for employees which uses fewer resources to set up and manage. They also have the peace of mind that the trust is run and managed correctly in accordance with scheme rules and regulatory and legal requirements. However, although group life Master Trusts are generally simpler than other arrangements, there are still complexities in terms of responsibilities and obligations of the trustees.
We previously outlined that many employers lack the in-house expertise and the resources to deal with the potential issues that arise from dealing with the unexpected death of a valuable employee and the legal ramifications of paying beneficiaries. For a group Master Trust, all an employer does is agree to participate in the trust and abide by its rules. It will then be conducted in line with the scheme rules and regulatory requirements, and any complex and time-consuming legal issues will be taken care of.
To sum up, group life Master Trust arrangements offer an efficient and simple process for SMEs to provide their employees with life cover and can reduce the time and cost of setting it up and managing it in the future. With more employees signed up to company pension schemes thanks to automatic enrolment, increasing numbers will expect death-in-service benefits as part of the package. The message is simple: with your financial adviser, review your life cover arrangements and weigh up if a standalone group life cover Master Trust arrangement is more appropriate for your business needs. In 2019’s uncertain economic climate, it’s something that SMEs have a degree of control over.
Mark Jarred, Aviva Group Protection Product Manager, has spent 14 of his 31 years in the company specialising in Group Protection. He helps develop Group Protection products and provides technical guidance for Group Life business.