The proposed Income Protection Insurance Scheme – a review

18 Jan, 2023

What is the proposed Income Protection Insurance Scheme?

In February 2022, the Government released a discussion document outlining the proposed scheme. 

The Tripartite Unemployment Insurance Working Group developed the scheme for the Future of Work Tripartite Forum, a partnership between the Government, Business New Zealand and the New Zealand Council of Trade Unions.

The proposed scheme is aimed to provide a steady income for those that lose their jobs either through redundancy or illness. It will be compulsory for all employees and will cover 80% of an individual’s wage (capped at $130,911) for six months (plus four weeks which the employer must cover) in the case of loss of employment. An individual must have contributed to the scheme for six months before the claim to be eligible.

The scheme will also provide training opportunities for people who can no longer work in the same role or who need to upskill to find work that will pay the same as the lost job. The government has said, “many people accept lower-paid jobs that don’t match their skill set because of the financial pressure to get back to work quickly”, and this scheme is designed to alleviate that pressure. Cover under the scheme can be increased to 12 months to allow this training, or rehabilitation, to occur. 

ACC will manage the scheme as it is aligned with the current ACC structure, which should provide the administration with economies of scale. 

The Government is proud of the support it provided to individuals and businesses through the COVID-19 pandemic and would like to be able to offer that same support, on an ongoing basis, to individuals who lose their jobs. 

How will the scheme be funded? 

The scheme is proposed to be funded in the same way as ACC, with an initial levy to both the employer and employee of 1.39% of gross earnings, which will be capped at $1,819.66 (or $130,911), the same cap that applies to the payment.  

Employers would also be liable for a mandatory, four-week payment for each employee that was either made redundant or was no longer able to work due to illness or disability. 

In real terms, with the median weekly wage being $1,189 (June 2022), the employee contribution would be $859.56 yearly. 

With the average number of employees per business being 4.4 (2021), this means the cost for a business would be $3,782.48 annually. The business could also be liable for four weeks of redundancy pay or $4,756 for each employee, totalling an additional $20,926.40.

What are the Positives of the scheme?

The positives of the scheme speak for themselves. Individuals will have financial security and peace of mind that, no matter what, they will continue to receive a reasonable sum of money for a minimum of six months in the event they can no longer work. According to the discussion document, the scheme goes “a long way to addressing the current inequity whereby a person who experiences an accident can receive much more support than a person with a non-accident-related health condition or disability, despite a similar loss of ability to work”. 

The continuity of finance not only positively affects individuals but also affects their families. For example, a parent’s redundancy in low-income households may mean a child has to leave school to help support the family. This will no longer be necessary. It also positively impacts businesses as people are still able to spend money. The scheme’s security could also mean that new industries, or start-up businesses, will not struggle as much to engage employees as the risk of being made redundant if the business, or industry fails, is mitigated. 

Currently, for many people with illnesses or disabilities, a sickness benefit is the only option. However, the supported living payment is income tested at well below the medium wage and pays a maximum of $640 for a family with children. The current proposal isn’t means tested so that it will support a vastly more significant number of people. 

Finally, and perhaps most significantly, the government’s proposed scheme includes redundancy cover. This is especially important in times of economic uncertainty like we are experiencing now, as many businesses will downsize or close entirely due to the financial downturn. Private Insurers can offer redundancy cover, but it can be comparatively expensive if included.

What are the Negatives of the scheme?

Nothing in life is ever perfect, and this scheme is no exception. Whilst the finer details have yet to be worked out or released, enough information is available to extrapolate some downfalls. 

Affordability is a big issue. The cost of living is skyrocketing, with inflation at levels not seen in over 30 years. People at the lower socioeconomic end of society face daily struggles to provide for their families. Losing a further 1.39% of their gross earnings may tip them over the edge into absolute poverty. 

Affordability for businesses is also an issue. Not only do they have to pay the levy, but they also have to find an additional budget for four weeks’ pay should they make an employee redundant. Given that redundancy is most often put in place during times of financial strife, this represents a high cost at a time when businesses can least afford it. 

The current estimate of the cost of the scheme is $3.54b, made up of $1.81b for displacement and $1.73b for health conditions and disability claims. Whilst employees are not able to recover this cost, businesses will clearly need to achieve this. The options are reducing costs (reducing staff numbers or hours and no wage/ salary increases) or passing on the cost of these levies to the end consumer. Any cost that is passed on is multiplied through the supply chain, further exasperating affordability. Some businesses may consider moving offshore to countries that offer employment costs or close their doors for good as their business is no longer viable. The government has already indicated it is aware that this additional cost is not able to be borne in the current economic climate, pushing back the implementation date for the scheme to 2024 and possibly 2025. 

There is also a growing body of evidence that suggests schemes like this increase the length of time it takes individuals to re-enter the workforce without a corresponding increase in pay, role or job satisfaction. 

Whilst the scheme will cover 80% of the wages of the vast majority of the (as of the year ended March 2021) 2.1 million people in employment in New Zealand, the 147,350 people who earn over the $130,000 threshold will receive a much smaller percentage of their salaries. This will include single-income families who, without any income splitting, will have only the equivalent of the median wage after tax. There is currently no allowance to opt out of the scheme if you have income protection insurance. 

Because the levy is not weighted by risk, the vast majority of businesses, and employees, will finance the current minority that is made redundant or unable to work through illness or disability. This has led some businesses to criticise the scheme

The levy is also subject to change. It is based on the current number of people who would qualify for assistance (100,000) and the forecasted costs to administer the scheme. Displacement makes up 1.42%, and health conditions and disability make up 1.36% of the 2.77% levy, but all these figures can change. This makes the levy an ever-moving target and creates uncertainty for businesses and employees when they forecast costs. 

The other consideration is the effect that this will have on the insurance market within New Zealand. Some of New Zealand’s largest insurers have already spoken out about the scheme, raising concerns about the combination of redundancy and health/ disability claims, increasing ‘fraudulent’ redundancies and encouraging businesses to pass on their financial redundancy responsibilities to taxpayers. There is also concern that the scheme will encourage individuals to opt out of existing income protection insurance and for employers to rescind insurance provided as part of salary packages. It is claimed that this will leave individuals less protected, as well as threaten the insurance market. There is potential for a new insurance market to open, offering a premium ‘top up’ option for the highest income earners. The Financial Services Federation (FSF) have also raised the question of whether the government will require an insurance licence to carry out this scheme, subject to all the legislation and regulation other insurers must comply with. Insurers are keen to be part of the conversation about the scheme and to play a part in its implementation, possibly getting a slice of the pie too.

Finally, the impact, and coverage, on self-employed people are still being determined, and there needs to be more clarity as to the effect on them. 

What happens now?

Legislation has been passed to enable ACC to carry out work to bring an income insurance scheme into operation, should it be established under subsequent legislation. Officially, cabinet is yet to decide if the scheme will be brought in. However, all signs point to this happening. Finance Minister Grant Robertson said, “Government remains committed to implementing an income insurance scheme by mid-2025” and hiring employees for the scheme already occurring. 

Whatever the outcome, it will ease many people’s minds to know they have the security of a steady income moving forward.