The Independent View: Lessons for Clegg – we need to be more innovative on maternity and paternity pay

Nick Clegg in a London schoolLast week, Nick Clegg gave a speech at the launch of the Cityfathers, a network of working dads based in the Square Mile and Canary Wharf. In it, he focused in particular on changes to parental leave coming into force next year, which will allow couples to transfer a portion of their maternity leave entitlement to fathers after two weeks. While the Institute for Public Policy Research (IPPR) has argued that we should go further, creating a ‘use it or lose it’ block of leave for fathers, in general the Coalition’s move has been regarded as at least a first step in the right direction for parental leave policy.

But in related areas of government policy, the Coalition has been heading in the opposite direction. Statutory maternity and paternity pay were included in the 2013 welfare up-rating bill, with rises of only 1 per cent, significantly below inflation, for three years from 2013 to 2015. This means that parents will lose out to the tune of around £224 relative to what they would have received under the previous system of inflation-linked up-rating. Given that  we are already fairly low down the OECD rankings on paid parental leave, this move risks branding the UK as a society that does not place sufficient value on supporting parents during the vital first months of a child’s life.

But many of the Cityfathers listening to Nick Clegg yesterday will be largely unaffected by this decision. In the UK’s large corporate businesses, employees are highly likely to have access to more generous occupational maternity and paternity pay. New IPPR research, published last week, shows the extent of the problem; 76 per cent of employees in large workplaces (more than 249 staff) have access to occupational maternity pay, and 64 per cent paternity, against less than a quarter in micro firms (those with less than 10 staff). Clearly, increasing the proportion of small and medium-sized businesses that offer occupational benefits could do a lot to make up for the falling value of statutory pay, giving families more financial security

But what is it about small firms that holds them back from doing so? At its core, it is a question of cost. Small businesses operate on tighter margins, and face greater disruption when a member of staff goes on parental leave, being unable to reallocate employees from elsewhere in the firm. For many, further increases in these largely unpredictable costs are simply not feasible.

In our report, we argue that more can be done to turn the risk of offering higher levels of occupational benefits, such as maternity and paternity pay (as well as sick pay), into a more predictable cost. In Demark, businesses pay monthly premiums into large regional funds, based on their number of employees, which then pay out higher levels of occupational benefits when employees take parental leave. In the UK, a private market does exist for similar, ‘Group Risk’ insurance, but it is aimed very much at large corporates, with the premiums unaffordable for smaller businesses. This is mainly because of the administrative costs of dealing with a large number of small payments. If an intermediary body were able to pool the payments and risk of many small firms, it could have the potential to overcome this barrier.

Drawing on the lessons of the Danish system, our report calls for employer associations such as the Federation of Small Businesses to work with large insurers to assess the feasibility of setting up such a scheme in the UK. While a business-led approach is preferred, there are also actions the government could take, such as allowing small firms to write of the cost of payments into the scheme against corporation tax.

The inequality in access to occupational maternity and paternity pay, combined with the squeeze on statutory benefits, means many families face a real risk of sharply lower living standards, and even poverty, when their children are born. Against this challenge, the tweaks to parental leave coming in next year appear unambitious at best. Instead, we should be looking at innovative new solutions, such as adopting a Danish insurance model, which have the potential to have a real impact for families in the UK.

* Spencer Thompson is an Economic Analyst at the Institute for Public Policy Research.

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8 Comments

  • Eddie Sammon 29th Apr '14 - 11:36am

    I think a simpler solution based on taxpayer support for parental leave is better. I don’t see how asking small firms to start buying insurance products is going to be attractive to small firms.

    There is an argument that the taxpayer shouldn’t pay for any of it, but if we accept that they want to then this is preferable to putting all the burden onto the small firms.

  • So hang on: you want to encourage small firms to pay benefits they don’t pay because they are operating on a tight margin, by making them pay extra costs out of that already tight margin?

    Why on Earth would any small business take up this insurance by choice? It doesn’t seem to offer any advantage to them over the alternative of simply not paying maternity/paternity benefits, and it would be a significant cost.

    Is the plan to compel businesses to take out this insurance? That will simply add to the burden and lead to more of them going bankrupt, which is mad at a time when the government is supposed to be encouraging the growth of small and medium businesses.

    In short: this idea seems to make no economic sense whatsoever!

  • Eddie Sammon 29th Apr '14 - 11:40am

    The idea that individual insurance policies aren’t economically viable because of the “administrative costs of dealing with a large number of small payments” isn’t true because how does life insurance work? We don’t need a big collective scheme.

  • Eddie Sammon 29th Apr '14 - 12:25pm

    The problem with collective insurance (we had the same idea with annuities) is that it makes the lowest risk individuals fund the highest risk and therefore the only people who want it are the high risk individuals.

    Inevitably, the only way to entice the lower risk individuals into the pot is through taxpayer guarantees. It is, effectively, a socialist scheme.

    Best wishes

  • The problem with this scheme in particular is that the risk is very, very high: chances are that if an enterprise has more than one or two employees, then at some point one of them is going to have a child and so cause massive disruption to the business (especially if paternity benefits are taken into account, so you can’t guard against the risk by not hiring women of childbearing age).

    When the risk is so close to one, ‘insurance’ isn’t really the appropriate model: what you’re doing is not pooling risk with others on the assumption that only a subset of you will have to claim, but rather you’re just saving up for a rainy day you know will probably come.

    So if I buy house insurance, for example, I and thousands of other people pay in far less than our houses are actually worth, on the assumption that we will not all have to claim. This means for each one of us it is a good investment.

    With this system, however, in order for the insurer to have enough to pay out, each person who takes out insurance must pay in as much as it will cost them, because they are almost guaranteed to claim.

    So it’s not really an insurance scheme so much as a savings account: putting away a little every month in order that, when it is needed (when a staff member is inconsiderate enough to become a parent and claim their benefits) the money is there.

    However, the starting assumption of this was that the business’s margins are so tight that it doesn’t have spare money to pay the benefits. And if it doesn’t have spare money to pay the benefits, then it certainly doesn’t have spare money to pay into this ‘savings account’ every month, against the day that it needs to pay the benefits out!

    Therefore actually taking out this insurance would be a boneheadedly stupid move for any small business. There is no economic case for them to do so when the option is there instead to not supplement the statutory pay.

    In the Danish system, is participation in these ‘regional funds’ compulsory? I bet it is, because that it the only way this completely, utterly, staggeringly insane suggestion could ever be made to work.

  • Hi Spencer,
    I’m not sure the Danish system is the right solution but you’re absolutely right to point out the problem. Unless your company provides generous maternity/paternity pay its not affordable for most families to have parents taking long periods of time out of work. It seems deeply unfair to penalise these people, I think the best solution would be to increase the level of pay using the existing system

  • Malcolm Todd 30th Apr '14 - 11:58am

    “In Demark, businesses pay monthly premiums into large regional funds, based on their number of employees, which then pay out higher levels of occupational benefits when employees take parental leave. ”

    In what way would this be preferable to a tax-based system, where businesses pay into central funds based on the number (and pay rates) of their employees, which then pay out to employees when they take parental leave? If your insurance model is voluntary, then as others have pointed out above, there is no reason to suppose that cash-strapped businesses will take it up; if it is not voluntary, then it is a tax by another name, and almost certainly less efficient than the National Insurance (i.e. tax-funded, pay as you go) scheme.

  • Tony Rowan-Wicks 30th Apr '14 - 6:04pm

    Well done those of you who read what Nick has done. I am so out of the frame of what Nick has done, and so out of what I think Lib Dems should do next. What I know is that Nick never listens to what Lib Dems say, he has his own agenda and will see it to the end in 2015. So, goodbye Nick, thanks for trying – but you do not connect to us and we are not listening [even] to your party politicals. Someday we will return.

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