Providing the same benefits at a lower cost can simply be a case of making changes behind the scenes, says Tom Washington
How employers can save money:
– Employers are exploiting a competitive healthcare and group risk market to negotiate better premium pricing.
– Longer-term healthcare and group risk contracts are also becoming easier to obtain.
– For larger employers, switching from a fully insured private medical insurance scheme to a trust arrangement can prove more cost-efficient.
– Buying more than one product from a provider can lead to discounts.
– Switching to salary sacrifice pension arrangements can result in significant savings
In the theatre world, a good stagehand should not be seen. Dressed in black, their task is to work in the background, shifting props and scenery to ensure maximum enjoyment for the audience. A similar role must be performed by reward professionals who are asked to trim benefits spend, even in the best of times.
Although making changes to benefits to save money is often a necessity, today’s savvy workforce is likely to look upon any reduction in perks disapprovingly, and morale and engagement will suffer.
In September, Punch Taverns revealed how it had saved £1 million on its reward spend without cutting benefits by assessing, then changing, the processes behind some of its benefits. One key move was to switch its private medical insurance (PMI) scheme for 1,000 managers from an insured arrangement to a healthcare trust. It also amalgamated the contracts for pensions administration, and actuarial and investment advice for its biggest pension schemes, prompting the provider to give a discount for handling all three services.
As Punch Taverns has demonstrated, there are several areas employers are investigating to make the reward function as cost-efficient as possible. Steve Clements, a principal in Mercer’s health and benefits business, says many employers are experiencing great pressure on expenditure in the current economic climate. “A range of costreduction strategies is available for employee healthcare and other insured benefits, and can be implemented quickly with immediate savings,” he points out.
Employers, providers and brokers alike are currently giving a lot of consideration to going out to tender for healthcare and group risk benefits to obtain more favourable premium pricing. Adrian Norris, managing director of Buck Consultants’ health and productivity division, says: “Employers are looking for cost savings and they do not want to go through the hassle of going through any change, be it on the front end of benefits or behind the scenes. They want to do it by taking advantage of the most competitive market there has probably ever been.”
Because of increased competition in the market and an ailing economy, conducting a market review can result in savings of up to 25% on premiums for employers. The entry of Zurich Corporate Risk into the group risk market earlier this year has fuelled competition further, and Aegon’s exit from the market in June has left a feeding frenzy of providers fighting over its business.
The same goes for the corporate healthcare market. Elliott Hurst, senior consultant in Watson Wyatt’s healthcare and risk consulting division, says: “Employers do not want to change their excess, they do not want to change underwriting and they do not want to change their benefits, so the employee sees no difference in that sense.
“But what we are seeing is that the market is very competitive right now, and one or two providers are seeking to use the recession and employers’ appetite for cost savings to gain market share.”
Keen competition on cost has also seen employers rebroking annually instead of the usual biannual review to make the most of the soft market. Likewise, group risk and healthcare providers appear to be more inclined to agree to longer-term deals than before, with three-year deals becoming more common. This locks employers into a better relationship, particularly when it affects their bank balance.
But Paul White, head of risk benefits consulting at Aon Consulting, says employers should not delay in taking advantage of the current market conditions. Although insurers underwriting group risk policies in 2008 reduced their premium rates significantly, in some cases by more than 20%, or kept them static, White says there is evidence that the soft market is coming to an end.
For some employers, making the change from a fully-insured PMI scheme to a trust arrangement is a useful economy without changing the benefit itself. This is most prevalent among larger organisations that provide PMI to more than 1,000 employees. The claims fund is based on an employer’s estimated value of claims over a year, and if it does not pay out this amount, a trust can prove more cost-efficient than a fully-insured PMI scheme.
But Hurst says some large employers that have offered PMI through a trust or on a self-funded basis for a number of years are now looking at moving to long-term insured arrangements. “We are finding that sometimes an insurer is so keen for the business, it is writing the insured contract at a rate we project to be lower over the three years than it would have been if the client had remained self-insured,” he says.
By having a proactive health policy in place, employers may also be able to approach their provider and renegotiate the cost of their insurance. Ben Wells, senior consultant in human capital and communication at Buck Consultants, says he is seeing organisations leveraging effective wellness programmes to save money. “Wellness programmes can be pretty inexpensive to run, and can reduce claims on insurance and absenteeism as well,” he says. “Employers are gravitating towards these inexpensive tactics rather than just insuring people.”
An opportunity that employers often miss is reducing the cost of benefits by purchasing more than one product from a single provider, because discounts may be offered for multi-line provisions. “Some employers are taking the opportunity to harmonise benefits by reducing their number of providers and therefore the management time they have to spend on them,” says Wells. “If employers are able to bundle all the benefits under one provider, they are able to get much more advantageous deals.”
Norris says joining up healthcare benefits up behind the scenes will also result in a better service for staff. “It is smarter to have all these things in one place – occupational health, employee assistance programme, group income protection, PMI, absence management – and getting them all to work together, so [the service] is more efficient,” he says. “Employers can then get providers to work with each another, which means a more efficient pass-off from one product line to another when the employee needs different types of support.”
This can also be done with pension schemes, which, along with healthcare and group risk benefits, represent a big cost for employers. Because of the sensitive nature of pensions, any changes must be well thought out and, more importantly, legal. But there are ways to cut costs without necessarily reducing the benefits or, as in many cases with defined benefit plans, closing the scheme altogether.
Many employers have realised the advantages of switching to a salary sacrifice arrangement for pension contributions. By doing so, the organisation makes national insurance (NI) savings of 12.8% on the part of the employee’s salary being sacrificed, while the employee sees a reduction in the portion of salary on which tax and NI contributions are usually payable.
It seems the economic downturn has been the catalyst for employers implementing these arrangements as a priority. Some organisations put the NI savings they make back into employees’ pension pots, but the savings can also be used to pay for costs such as legal fees, or to fund another benefit for staff, such as life assurance.
Another lingering cost burden is deferred active pension members, whose benefits will generally cost between £50 and £100 a year when they are no longer contributing to the success of the organisation, according to pensions provider Xafinity. This legacy problem is likely to accelerate because of increasing staff turnover, the growing popularity of salary sacrifice arrangements, which often prevent refunds of contributions for short service leavers, and the introduction of auto enrolment in 2012.
James Biggs, associate director at Jelf Employee Benefits, cites the example of one employer with 130 staff which was spending far too much time and money on just such issues. “We found three other small closed schemes and the HR team were pulling their hair out because deferred members were constantly calling up with questions,” he says.
“Winding these schemes up properly allowed the employer to get rid of some of the legacy, while streamlining its time and [financial] spend on it.”
In these uncertain times, employers are exploring every opportunity to cut costs. But despite the attractive savings on offer through various methods of tinkering, they must not lose sight of the organisation’s longterm needs, which means preserving its standard of benefits.
Fleet changes can drive down costs:
For most employers, company cars are not part of their core activity, so may not be a priority area for applying management time and resources. Instead, the temptation can be to simply make sweeping cuts to fleet size or expenditure, but this can be avoided by applying fleet management techniques around policy, funding and driver use.
Phil Peace, director of sales at Hitachi Capital Vehicles, says company car policies should be reviewed annually. “Cars with more efficient carbon dioxide ratings may have come onto the market, or there may be more competitive contract terms available since the policy was first devised, so a comprehensive review could help to reduce overall monthly outlay,” he explains.
Employers should also regularly review the way in which cars are funded. Peace adds: “On leased vehicles, the fleet supplier should be proactively reviewing contract terms and conditions to ensure the fleet is at its most cost-effective. Leasing deals are typically offered on a three-year basis, but if cars are low mileage, it might be worth considering an extension to four years.
“Spreading the leasing cost over a longer term reduces the monthly rental and provides greater flexibility than tying the business in to a new three-year deal.”
Case Study: Kellogg’s snaps up better deal
In September, Kellogg’s switched its private medical insurance (PMI) from a healthcare trust arrangement to a fullyinsured scheme to improve its cost-effectiveness and the service for employees.
The food manufacturer, which employs 2,000 staff in the UK, carried out a market review to see the cost impact of a trust compared with fully-insured schemes. As a result, it terminated its existing deal with Medisure in favour of Aviva providing insurance and PMI Health Group as front-line facilitator of the claims process.
Sandy Wilson, former interim European reward director at Kellogg’s, says the competitiveness of the insurance market enabled the company to obtain favourable premium levels.
“We wanted to create a long-term relationship with an insurer where we were both comfortable about the risk profile we are building up over a two- or three-year period,” he explains. “Insurers are currently more open to negotiate around the level of premium and are also comfortable with longterm relationships.”
Click here for more articles on employee benefits administration