The recession has put the squeeze on some areas of employee benefits consultancy, but steps are being taken to meet employers’ changing requirements, says Sarah Coles
The past 18 months have not been an easy time for employee benefits consultants to win new business. Cash-strapped employers are often in no position to splash out on new benefits initiatives, so expensive projects have been shelved in favour of downsizing, cost-cutting and simple survival. Spending in various areas has also fallen dramatically due to the recession, making it harder for consultants to attract new business.
Duncan Howorth, chief executive of JLT Benefit Solutions and president of the Society of Pension Consultants, says: “The industry has been affected dramatically by the slowdown. There has been a focus on cost control and less discretionary spend for things like HR. The sector is feeling all of that.”
Flexible benefits projects
Martha How, head of reward at Hewitt Associates, explains some employers are putting bigger projects, such as introducing flexible benefits on hold. “A number of clients are very keen to introduce flex, but because they already have salary sacrifice for pensions, they cannot make substantial savings from flex, so those projects may have been delayed for a year,” she says.
Another blow for consultants is that, unlike a few years ago, less work is being generated by mergers and acquisitions, when employers would sometimes set up flex, for example, to aid the harmonisation process.
But employers still have an appetite for technology systems to administer benefits. Increased interest here has, in part, been encouraged by their procurement departments. However, the growing role of procurement in purchasing decisions can be a bone of contention for employee benefits consultants.
Role of procurement
“The presence and role of procurement departments in buying decisions is here to stay,” says How. “It can be a bit of a problem because consulting is quite a technical service and procurement people sometimes have no knowledge of HR and benefits. They do not understand why consultancy fees are so much more than the cost of technology. [It is like] they are comparing a leg of lamb from an organic butcher with lamb cutlets from a supermarket and they do not know about the differences.”
To harness employers’ demand for technology, some consultancies have entered into partnerships with providers that enable employers to buy consultancy services, benefits and technology systems from a single source. Most recently, Hewitt Associates teamed up with Benefex in September, while a similar arrangement was drawn up between Mercer and Staffcare in August.
Other consultancies, such as Watson Wyatt and JLT Online Benefits, provide their own lowercost online benefits offerings. For example, JLT Online Benefits launched its Benpal system in August, which enables employers to create a web-based benefits strategy.
Many technology and benefits providers and advisers, such as Thomsons Online Benefits, now also offer consultancy service. This has led to the debate over what criteria an organisation must meet to qualify as an employee benefits consultant. Certain measures can be used to distinguish between consultancies, providers and advisers. For instance, people who work for consultancy firms are likely to be highly qualified and some will be trained accountants, actuaries or lawyers, says Chris Noon, a partner at consultancy Hyman Robertson. He adds consultancies also tend to conduct and publish market research.
How a consultancy charges its clients is another factor to consider. “If an organisation is predominantly remunerated by commission, I would say it is more an adviser than consultancy,” explains Noon.
Although some areas of consultancy have lost business in the recession, there has been a flurry of activity in other areas. For instance, some employers are bringing in consultants to manage the risk of their defined benefit (DB) pension schemes. A survey of 120 companies conducted by Towers Perrin in October showed that 84% were considering de-risking their pension scheme in the next 18 months.
Marco Boschetti, a principal at Towers Perrin, explains: “There is a significant move to companies recognising DB pensions carry too much risk and are not suitable, so they are trying to change the design of the plan from a risk management perspective.”
Guidance on tax changes
Another area where employers are seeking guidance is the legislative and tax changes outlined in last April’s Budget report, which mainly affect high earners. These changes include restrictions on pension tax relief for employees earning more than £150,000 a year. For example, the 40% higher rate of tax relief will gradually taper down to the basic rate of 20% for those on more than £180,000. Boschetti says: “We have had 20 years of government interference, and the latest intervention was in the spring Budget of 2009, which makes pensions much less attractive for higher earners.”
Other measures outlined in the Budget Report, such as income tax hikes for higher earners, will also have an impact during the next 12 months. For example, employees who earn more than £150,000 a year will be taxed at a rate of 50% tax from April 2010.
Roger Breeden, a principal at Mercer, says: “We are very focused on tax changes in the next year or two and the effect on employers. They want to ensure top talent is rewarded correctly.”
Although the model of cheap administration aligned with expert consultancy is here to stay, whether it will continue through partnerships is another matter. There is talk of consultants developing their own in-house technology, and further consolidation seems likely.
The industry has already seen much consolidation. In June, Capita Hartshead acquired Gissings, and a major move on the horizon, expected early in the new year, is the merger between Watson Wyatt and Towers Perrin to form Towers Watson. The impact of this remains to be seen. Boschetti says: “In due course, it is going to have an impact, and we are expecting to emerge a bigger, successful business.”
How adds: “The next 12 months will bring a lot of change for [consultants]. After the Towers Perrin and Watson Wyatt merger, we will see some sort of market reaction. Some other existing alliances may formalise or they may continue to work with other partners.”
Focus on facts
What are employee benefits consultants?
Employee benefits consultants advise on a full range of benefits. They design, communicate, evaluate and deliver benefits packages covering everything from pensions to childcare vouchers.
What are the origins of employee benefits consultants?
Consultancies started in the US with pensions. From there, their remit grew to encompass health and welfare. Eventually, the trend of using employee benefits consultants spread to the UK. Many of the largest consultancy firms grew out of actuarial or accountancy practices, while others emerged from independent financial advisers (IFAs) and IT companies.
Where can employers get more information and advice on employee benefits consultants?
Employers can get information from the Association of Consulting Actuaries (www.aca.org.uk or call 020 3207 9380) and the International Employee Benefits Association (www.ieba.org.uk). Consultants may belong to bodies such as the Pensions Management Institute (www.pensions-pmi. org.uk or call 020 7247 1452) or the Society of Pensions Consultants (www.spc.uk.com or 020 7353 1688).
Nuts and bolts
What are the costs involved?
The costs depend on how big an organisation is, what it is doing and how it is doing it. A low-cost flexible benefits plan for 500 staff, which incorporates a salary sacrifice arrangement, can cost about £20,000, plus ongoing costs of up to £30 a head, depending on whether it is run on commissions or fees. However, the costs can be a lot higher than this, and a comprehensive overhaul of benefits, including a particularly large and thorny pensions project, can easily run into millions.
What are the legal implications?
Where benefits are contractual, whenever there is a change in terms or provision, employers will have legal considerations to take into account. Consultants are well versed in the complexities of the legalities surrounding benefits plans.
What are the tax issues?
There are a number of tax rules that affect different benefits. Consultants are knowledgeable about the rules on tax liability and can help ensure employers do not fall foul of them.
What is the annual spend on employee benefits consultants?
There is no central organisation dedicated to collecting such figures, and the private nature of many of the businesses means no are accounts available.
Which benefits consultants have the biggest market share?
The four largest consultancies in terms of turnover are Watson Wyatt, Towers Perrin, Hewitt Associates and Mercer, which each have an annual turnover of over £100 million. The next tier includes firms such as Aon Consulting and JLT Benefit Solutions, with turnovers closer to £100 million, then the likes of Capita Hartshead, Punter Southall, Hymans Robertson, and Bluefin Corporate Consulting with between £50 million and £100 million. Smaller consultancies include Enrich, and HSBC Actuaries and Consultants.
Which consultants increased their share the most over the past year?
There are no firm figures on consultancies’ market share. The impending merger between Towers Perrin and Watson Wyatt to form Towers Watson, which is expected in January, will be the biggest expansion in the market.