Alison Coleman asks if not knowing the actual cost of perks, including fees and commissions, can cause human resources to flounder
Case Study: T & F Informa
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As the employee benefits market continues to mature, an increasingly diverse range of flexible and cost-effective schemes and products has become available to employers looking to choose the right scheme for their organisation.
However, one area where many employers are still in the dark is in understanding the actual cost of the benefits, including the fees and commission they pay to intermediaries. John Bryant, benefits director at Risk and Reward Group, says: “It isn’t a case of employers not being cost conscious; they just physically do not know how much things [are likely to] cost.”
He believes this is down to poor internal communication. “HR makes the decisions about which benefits to buy, and finance pays for them, often without the two departments ever communicating or sharing information on this key issue.”
The problem is more pronounced in large companies, where silo culture is still evident. Michael Whitfield, managing director of Thomson’s Online Benefits, says: “In our experience, the smaller companies have a much better grasp of the costs of their benefits. But it is surprising how unaware many of the larger employers are of what they are paying. So much responsibility has been shifted onto the HR function in recent years, they simply lack the time and resources to analyse the various fees and premium costs associated with benefit procurement.”
However, with new rules on the disclosure of broker fees introduced at the start of this year, assessing and comparing these costs should be straightforward. Under the new regulations, governed by the Financial Services Authority (FSA), financial advisers must provide an upfront indication of the costs of their services.
If the firm offers a fee option, it will set out its rates and charging basis (for example, whether these comprise hourly rates, flat fees or any other method). If the firm offers a commission option it must include tables showing the maximum commission that it will take for the sale of a product within specified product groups. It will also include the average rate of commission charged for each product group by firms across the market as a whole, so that consumers can compare this with the firm’s maximum.
FSA communications officer, Robin Gordon Walker, explains: “The aim is to provide consumers with information that gives them a better understanding that the cost of advice can vary between firms. We want consumers to be clear about the amount of commission being paid so they can have confidence that the financial advice they get is not being influenced by the level of commission.”
But many brokers believe the new ruling will have little impact on the way bosses go about buying their benefits. Tim Gillingham, head of employee benefits at intermediaries John Scott and Partners, says: “We have always been fee-based and our charges have always been made available to our clients up front. Most of the major providers have been doing the same for years. What does need to happen is for employers to have a better understanding of the fees or commission and what level of service they relate to, and then compare costs with other providers.”
Whether it is a lack of understanding or a lack of time, there seems little excuse for employers who are not clued up about the cost of their benefits. Marco Bannerman, head of corporate sales at Bupa, says: “In a regulated market, employers can and should ask their intermediaries if there is a fee or commission payable and whether or not that fee or commission is separate from the subscription cost of the product.
“As well as asking their intermediary to conduct market reviews on a regular basis, employers should review which intermediary they are going to use, selecting the intermediary with the skills best suited for the role. This process would normally highlight any associated fees or commissions payable.”
When it comes to re-brokering their group life insurance and other benefits, many employers which don’t have a company benefits adviser choose the path of least resistance and stick with what they know and are familiar with.
Bupa actively encourages employers to conduct thorough market reviews, which requires some investment of their time, but always proves worthwhile.
The market review could involve asking providers to respond to an invitation to tender, which focuses on key areas such as the quality of claims management, the ability to purchase and the quality of member service, as well as price. Employers should also conduct a detailed site visit, to enable them to see the environment people are working in and get a sense of the culture of the operation at work.
“When employers use a more scientific approach to purchasing they will learn far more about their potential benefits provider and thus be able to make an informed decision based on what’s important to them,” adds Bannerman.
But there are other ways of making the process of cost analysis and cost comparison easier, inevitably involving the use of technology. Some providers of online benefit schemes offer web technology to simplify the administration of employee benefits and highlight all the costs, including all intermediary charges.
The software used in this type of scheme aggregates all the data supplied by the various providers, including fees and commission charges, and pools them in a central database. From there, HR, finance, and all other functions within the company can see their total remuneration spending.
Paul Watson, chief executive of 4th Contact, says: “Businesses today are quite dynamic in terms of the number of staff leavers, joiners and career changers, and this will obviously impact on their premiums. With a system like ours, they have immediate access to their current costs and can quite easily output this data and present it to other potential providers. Brokers need to be remunerated but customers need to know exactly what it is being paid and what they are getting for their money.”
New FSA regulations
In January, the Financial Services Authority (FSA) took on responsibility for regulating general insurance and protection insurance sales, advice and administration. Employers are not affected by the FSA’s new regulations because advisers have always been obliged to spell out costs on group products. So the new regulations simply bring individual products more into line of those of group products. As with the corporate market, the move aims to benefit individual consumers, enabling them to shop around more easily and to make an informed choice about taking out an insurance policy suitable to their needs.
Under the new regime:
- Consumers receive clear pre-sale information in a policy summary.
- The quality of advised sales will be improved and maintained. Only a suitable policy can be recommended and customers receive a suitability statement so that they can check the adviser’s recommendation.
- The likelihood of consumers buying unwanted or inadequate cover will be reduced.
- An adequate notice of renewal will be given to enable retail customers to shop around and find alternative cover if their insurer is not willing to renew.
- Standards will be set for fair and prompt handling of claims
Case Study: T & F Informa
Business information firm T&F Informa, has used IT to improve the admin and communication of its flexible benefits system, and establish a clear view of the costs.
Last year, the company implemented an online flexible benefits system, provided by 4th Contact, for its 1,200 UK staff. As well as improving access to its benefits and total reward information, the online system has enabled the HR team to reduce administration and cut costs.
Keith Brownlie, group HR director, says: “Our benefits were being looked after by different people, so if an employee had any queries, they’d inevitably have to ask a number of different HR people to get the answers they needed. Benefits cost the company a lot of money.
“Now they are online, we can go to the market, get better deals, see what the fees are and purchase in bulk to get economies of scale. All in all, we’ve experienced major financial savings on the back of implementing the flexible benefits programme.”
T&F Informa has grown significantly through mergers and acquisitions, creating an environment where employees have a hugely diverse range of benefits and pay schemes, and a complicated system of costing.