GUEST COLUMNIST – KATRINA SHANKS
To gauge the impact of the Government’s proposed Income Protection Scheme, Financial Advice NZ held a webinar where advisers discussed the potential impact of the scheme on the industry. Katrina Shanks says some common themes emerged from the debate…
The Government’s proposed income protection scheme has been in the news a lot recently, as the consultation process ended on 26 April. Before making our submission, we took time to understand how our board and members felt about the proposal.
During a recent ‘Bring in the Experts’ webinar, we sat with some of our advisers to understand what the potential impact could be for clients, adviser businesses, providers, and New Zealand at large. You can watch a recording of the webinar in the Member Area of financialadvice.nz.
From these discussions, some common themes emerged. I think it’s important we continue to raise our concerns, which not only do come from a place of expertise, but also stem from a genuine desire for New Zealanders to get the financial protection they need and deserve.
The overarching question we tried to answer was: Is there a problem? And if there is a problem, is a Government-led, compulsory and broad income protection scheme the solution to it?
From principles to application
With this insurance protection scheme, the Government aims to provide workers left without a job, due to sickness or redundancy, with a financial cushion covering 80% of their wages or salary for six months.
The ACC-run scheme would be universal across all workers, compulsory, and funded by levies on wages and salaries, with workers and employers each paying an estimated 1.39%.
The MBIE says the proposal will help more than 100,000 Kiwis a year get back on their feet, giving them the time and financial security to find a good job, rehabilitate or retrain.
While at a principle level there might be a potential protection gap to fill, especially with very few private insurers offering redundancy cover, the feedback that we have received is that a number of key points need to be ironed out, hopefully tapping into the expertise and skill of the financial services industry.
With a suggested roll-out date of 2023, it’s important that we get the scheme right rather than the scheme running, to avoid having to fix unintended consequences in due course. Or of course a re-think of the issue and a different solution be provided to solve the problem.
The proposed scheme through an expert lens
When it comes to insurance, as any adviser knows, ‘one size doesn’t fit all’. It’s only by considering people’s unique, individual circumstances that you can provide a financial safety net that’s really tailored to clients’ needs and goals.
With this in mind, here are some points that advisers raised in our surveys.
- Redundancy and sickness/accident benefits should be kept separate: Most advisers surveyed agree that redundancy and sickness are two very different scenarios, which cannot be priced in together.
Also, the scheme applies to all workers, regardless of their industry or medical history. This means it doesn’t take into account the diverse likelihood of claiming depending on the sector, or each individual’s circumstances. - The redundancy benefit could be up for abuse: Many experts believe the redundancy benefit, as proposed, may be prone to abuse and ‘moral hazards’, potentially disincentivising people from looking for another job.
- Costs and fairness: The estimated number of Kiwis who could benefit from this scheme is 100,000 a year. However, the cost is spread across all workers and employers, which raises questions about the impact on employees and businesses – especially in times of high inflation and lower-than-ever unemployment rates.
Some industry experts also worry the scheme may turn out to be more expensive than expected, with the whole workforce potentially having to cover those extra costs. - No opt-in/opt-out: The proposed scheme is compulsory with no opt-in/opt-out option. How would this impact Kiwis who already have their own private insurance, or businesses who offer group insurance to their employees?
Would they be paying twice, and even decide to cancel their private cover, thus losing tailored, comprehensive protection?
These are just some of the points that we feel compelled to raise, on behalf of the financial advice sector. Which brings us to the next question: if the income protection scheme, as it has been designed, is not a ‘silver bullet’, how can we make it better and more helpful?
Food for thought
In any conversations with clients, advisers take the time to talk through their circumstances and understand their most likely risks, what’s worth covering and to which extent. If we think of New Zealand as a client, before finding any solutions, we must first understand the problem we’re trying to solve.
To me, one of the most pressing issues is Kiwis’ underinsurance. Data has been showing time and time again that many New Zealanders’ lack financial resilience, and this is affecting their personal and financial well-being alike.
In principle, the income protection scheme could help relieve some of the symptoms, but as it has been designed, it’s unlikely to be the cure.
Once again, it comes down to education. We know, for example, that one of the reasons Kiwis don’t take out private insurance is because they think ACC and the public healthcare system have them covered for any scenario.
This is not the case, and that’s also why this income protection scheme is being proposed. Our concern is that, without extensive education on the new scheme and how it works, some Kiwis may actually miss out on more flexible types of protection offered by the private sector.
In a way, we already have a good example of how this scheme could be set up – and that’s KiwiSaver. The Government-led scheme allows members to opt out, for example if they prefer investing their money in other financial tools.
Also, while the Government set it up, KiwiSaver is run by private providers who have the skillset, expertise, scale, and industry knowledge to do it properly. So, why not consider a similar format for this income protection scheme?
Once clear rules have been discussed and established, we believe there would be merit in a collaboration between the private and public sectors.
There may also be alternative levers to pull; for example, changing employment law to include a redundancy provision, or introducing “step changes” to the existing welfare benefits (as opposed to creating another universal insurance scheme).
These are just some ideas that might be worth exploring. What we know is that the income protection scheme would be a big change, and as such, it requires ‘big picture’ thinking. That’s why we’ll continue to raise our hands and offer our insights. At the end of the day, we all want the same thing: for Kiwis to be protected, and look to the future with confidence.