TLDR - Your absence or sick pay policy should match the design of your Group Income Protection Insurance scheme, particularly the deferred period and the payment term. Consultants should be asking to see your policy, and, if you’ve got a limited payment term, how you plan to deal with someone who’s still absent when the insurance stops paying.
Catchy title, I hope you’re saying. But what does it mean?
Group Income Protection – the GIP in the title – is an insurance policy that helps to support employees who are off long-term sick by providing them with a level of financial cover.
Occupational Sick Pay – that’s the OSP – is what the employer promises to pay an employee who’s off sick.
Simple, right? But they need to work together.
Now, I need to take you back to a magical time. Let’s call it the 80s.
It’s a perfect world of big hair, shoulder-padded suits, bright lycra exercise clothing, and music (ohh, the music).
Anyway, back then, a type of pension scheme called Defined Benefit (DB) was popular – even in the private sector. These schemes were pretty well funded before the dark times, and not only paid out generous pensions, but often had enough left over for something called Ill Health Early Retirement (IHER).
IHER was used to support someone who was off long-term sick and had been medically assessed as never likely to return to work before the age of 65. After a full assessment, a qualifying employee could receive an early pension from the fund, and their actual pension from 65.
So, I’m rocking along at 45, and I get a serious health issue that means I’ll never work again. They let me retire early, give me a watch, and a pension that pays me two-thirds of my salary until I die. Not a bad deal if you can get it, right?
Alas, the money for DB Pension schemes ran out after the 80s for the private sector. I’m not allowed to say why, as Pension part of my industry, CFOs/CEOs or politicians tend to get upset with my analysis.
But one by one, private employers started closing their Final Salary schemes as they became “unaffordable” and replaced them with Defined Contribution (DC) schemes.
As DB schemes vanished, with no funding to support it, IHER went with them. Benefit consultants had to find new ways to help employees who might become seriously ill before 65.
The answer, for those who wanted one, was Group Income Protection. The new DC pension scheme would still handle the heavy lifting of the employer’s pension payments, while a GIP policy would provide financial support until 65.
Typically, someone would need to be continuously absent for six months before they would be eligible to claim GIP (called the deferred period), close to the 28 weeks of SSP, but easier for insurance actuaries to calculate. It would usually pay 75% of the basic annual salary, less state deductions, as a benefit to successful claimants (this is called the Benefit Basis). Successful claims could be paid to 65 (this is called the cease age).
In those heady 80s years, employers’ OSP policies often promised half or full pay for six months, followed by GIP-level payments – if the claim was accepted, and remained valid – until 65.
The important thing to note is that in these legendary times, the OSP directly complemented and fed into the GIP cover. The company covered the first six months, and then the insurer took over. Perfect. No gaps.
Like an ice-cold rain shower during a nap on a warm beach, let’s now return to the harsh reality of life in 2025.
Over the last 35 years, all hell has broken loose. OSPs have been sliced like salami. What was once a straightforward promise – six months full pay, followed by a lower level until retirement age – has turned into a Wild West of almost random approaches:
- Payment level and lengths based on years of service.
- Payment level and lengths based on grade.
- A mix of these.
Take this as an example of a modern OSP:
- Staff Grade 1-3 with less than two years’ service receive four weeks’ full pay during absence.
- Staff Grade 1-3 with more than two years’ service receive three months’ full pay.
- Staff Grade 4 receive six months’ full pay.
That’s three different OSPs for one employer.
But if the employer has an OSP like this, how does it work with a GIP scheme that still has a 26-week deferred period?
An employee needs to be continuously absent for 26 weeks before making a claim. So, for staff in Grades 1-3, that means several months without pay before the GIP benefit kicks in.
The other issue is what happens to an absent employee when your GIP scheme has a limited payment term? Many employers have moved away from paying claims to State Pension Age and now cap payments at two, three or five years (or limited term).
If your OSP was designed at a time when the expectation was to insure long-term absence to retirement, the real question is – are you comfortable telling an employee who’s been off work for two or more years that their financial support is ending?
This isn’t a moral judgement. Most private businesses in the UK don’t have a GIP scheme at all – or any other long-term absence support. So if you have one in any form, you’re already way ahead of the pack.
From a practical and cultural perspective, it’s an important conversation to have when deciding about limited payment terms. The cost savings may look good now, but the hard yards often show up a few years down the line.
So, if you’re an employer reading this, I’d ask you to consider three quick questions:
- Do you have an absence policy?
- Does it clearly set out the support you provide to employees for short, medium and long-term absence?
- If you have a Group Income Protection Insurance scheme, does it reflect your policy, both in terms of your cultural approach to absence and its design, especially around the deferred period and any limited payment terms?
If you’re comfortable with the answers, you’re probably in a good place.
I’m Andrew Supple, a Partner at EBC LLP who specialises in employee wellbeing and occasionally likes to dabble in Group Protection and Healthcare schemes when he’s got nothing more mischievous to do.
Andrew Supple, Partner
