No two employees are alike, with family commitments, lifestyle requirements and personal taste making it unlikely all staff will appreciate the same benefits.
Flexible benefits schemes address this, allowing employers to offer a range of benefits that employees can pick and choose from to suit their needs and staff to vary the level of cover they require under specific options such as group risk benefits.
Glenn Laming, group protection sales director at Legal & General, says: “Employees can tailor their benefits package according to their requirements as well as being able to take advantage of cheaper premiums and simpler underwriting than if they had bought the products individually.”
This has a number of advantages for employers. Simon Bailey, head of marketing for employee benefits at Aegon Scottish Equitable, says: “An employer can get much more value for money from a flex scheme. Benefits are more visible and appreciated, which will result in improved staff morale and retention, as well as helping with recruitment.”
While appearing to be more generous, employers can actually achieve savings in terms of future cost control. “It’s similar to the shift from defined benefit to defined contribution pensions. As employees typically receive a percentage of their salary to spend on benefits, this amount is manageable. Any risk associated with the rising cost of benefits is passed to the employee,” says Laming.
Putting group risk benefits into flex schemes is fairly straightforward. Group life cover and critical illness insurance are the easiest to include within flex. Typically, life cover is included as a multiple of salary, while critical illness insurance is available in multiples of £20,000 or £25,000.
Although an employee is often given the option to leave critical illness insurance out of their benefits choices, many employers will insist on staff taking a minimum level of life assurance. “If you give employees the choice, they might not spend it on life assurance. By including a minimum of one times salary, employers can ensure they have some cover,” says Laming.
Tight controls are often put in place to reduce the risk of selection against the insurer, where an employee may, for example, take out £100,000 of critical illness insurance in response to a fear they could have cancer. Dan Lamb, head of group risk at Jelf Corporate Consultancy, says: “Although an employee can take out as much cover as they like when they join the scheme or when it is introduced, they can only change this at renewal or if they experience a lifestyle event, such as marriage or the birth of a child. At these points, they will only be able to increase cover by one step, although they will be able to reduce it as much as they like.”
Group income protection, however, is more difficult to include within flex. Bailey explains: “It is more of an employer benefit as you will often be insuring a contractual promise to provide some form of income during ill health. Because of this, it is the least common of the group risk benefits to be included in a flex scheme, with some employers running it alongside the scheme. But we are beginning to see an increase in employers including it within flex.”
Where it is included, insurers insist on a level of core benefit, with options to increase this. David Matthews, flex practice manager at Bupa Group Risk, says: “I wouldn’t recommend more than a couple of steps as it can cause confusion. The options need to be easy to understand or staff won’t take them.”
For example, employers could provide 40% of income as the core benefit, giving employees the option to increase to 75% of income through flex. “You could also have a limited-term product giving two years of benefit with an option to extend this,” he adds.
Pricing perks Employers also need to consider whether the group income protection options they offer are appropriate for their employees. For instance, if a workforce is low-paid, it might not be appropriate to offer cover of 75% of salary as employees’ income may be reduced when state benefits are taken into account.
Whichever group risk benefit is included, pricing in a flex plan works slightly differently to that for a one-size-fits-all scheme. While core benefits will be costed on a unit price in the same way as more traditional schemes, because of the risk of selection against the insurer, any top-up the employee adds will be priced according to their age. Generally this will be in five-year age bands, which helps to keep communications simple.
“Top-ups would be more expensive than if [employers] put a traditional scheme in place because the employee is selecting the additional benefit but they will still be cheaper than if the employee bought the product on an individual basis,” says Matthews.
The size of a scheme will also have a significant bearing on how competitively priced it can be. Lamb says that employers need to have at least 250 employees within their flex scheme before they can begin to get preferential rates. “It is a numbers game. Only a few insurers are prepared to quote for schemes with fewer than 250 members so there isn’t the competition on price,” he says.
Although a flex scheme may seem the perfect solution to an employer’s requirements, take-up remains low. According to Swiss Re’s Group Watch 2008 report, just 3% of group life (£31 million out of £910.8 million in-force premiums) and 4% of group income protection (£22.5 million out of £614 million) policies were written in flex schemes. For critical illness insurance the figure was much higher at 47%, but this is because few employers regard it as a benefit they want to fund, so its growth has been mainly through flex.
There are also potential pitfalls that have slowed the growth of group risk perks’ inclusion in flex. Wojciech Dochan, head of commercial marketing at Unum, says: “You need to explain the benefits properly. Income protection isn’t that well understood and it can be easily overlooked, especially when there are other more recognisable benefits, such as extra holiday, on offer.”
Welfare reform legislation, due to come into effect next month, may help concentrate employees’ minds on their finances should they go on long-term sick leave, and increase their awareness of income protection. However, it is prudent to fully communicate the benefits to bring them to life.
Employers should also bear in mind that flex isn’t right for every organisation. “If you don’t already have employee engagement, then a flexible benefits scheme won’t make a big difference. Similarly, if you have a low take-up then you can lose some of the competitive edge of bulk buying,” explains Bailey.
But industry predictions suggest more employers will look to offer group risk perks through flex schemes. Colin Micklewright, head of income protection business development at Canada Life, says: “Welfare reform will make employers take a fresh look at employee benefits, especially group income protection. Rather than adding in group income protection at between 1% and 2% of payroll, I expect they will go halfway and put some benefits in a flex scheme.”
Lamb also expects to see more group risk benefits appearing in flex schemes. “When a flex scheme is set up it is common to restrict the benefits to ones that are easily understood. Group risk benefits might be added later, once employees are used to flexing their benefits,” he explains EB Offering group risk perks through a flexible benefits schemePros • The ability to tailor benefits to individual requirements means staff often appreciate flex more than traditional schemes, so benefitting recruitment and retention. • Benefits are often communicated more than if they were automatically awarded, which can increase their perceived value. • With benefits often based on a percentage of salary, employers can have greater control over future costs. • Cheaper premiums and simpler underwriting than individual products mean employees appreciate the benefits offered through flex.
Cons • Risk of over-complication if there are too many benefits, too many options or a lack of communication. • Involves additional parties, such as software providers, meaning there could be a larger administration burden. • There can be extra costs, for instance, employee research and software platforms, associated with introducing such a scheme. • A flex scheme requires at least 250 members to achieve competitive pricing on group risk products. Smaller employers might find it prohibitively expensive to set up this sort of plan.
How to offer flexibility around group risk Benefit Default Options Life assurance Four-times salary Flex cover from nothing or one- times salary to 10 times or more Critical illness insurance No cover Cover is usually bought in multiples of £20k or £25k up to £100k or more Income protection 40% of salary paid • Increase salary percentage to 75% for two years • Increase payment term to three or five years