The `perks of the job’ once formed their own holy trinity – car, bonus and pension. But as a nationwide skills shortage makes it harder for companies to recruit and retain the right staff, employers are having to take a more flexible and creative approach to benefits.
Flexible benefits schemes first appeared in the US but now they are becoming increasingly widespread in this country, according to a survey by accountants Arthur Andersen. The firm published a report last year showing that over one in 10 companies has a flexible benefits scheme. And over a quarter of companies were planning to introduce one within two years.
The rapid expansion of flexible schemes is easy to explain, according to Nick Lomas, marketing manager of UNUM, one of the insurance companies benefiting from this growth. “The workplace is changing so people are no longer guaranteed jobs for life,” he says. “If an employer takes out a group benefits scheme they can offer benefits that they might not normally be able to. They can retain and recruit employees and stay competitive as employers.”
The key attraction for employers is that they can offer their staff a variety of benefits ranging from voluntary pension schemes to critical illness cover. The benefits offered can be tailored to attract and retain the sort of employees that the company needs.
As Sue Sneddon, technical manager of Guardian Employee Benefits, says: “The value of a benefit to a young, single employee with no dependents is different from an employer’s viewpoint.”
An employer could, for example, take out a policy targeted at employees in a certain age group or a particular category of the workforce. A married employee with children might like insurance to provide for their family in case of critical illness, disability or death.
This is one popular way of attracting applicants to jobs in areas where there are skill shortages, such as information technology and financial services. It is also a way of keeping them once they are in the job.
Highly flexible schemes can be tailored to meet the exact needs of employees – some even provide benefits that can be reviewed periodically to match the employee’s .changing circumstances. As the needs of both employer and employee change over time, benefits can be added to or taken away from the menu.
There are also a number of Limited Benefits Schemes on offer from insurance companies that cover employees for fixed terms of two, three or five years. This allows the employer to offer flexibility within a more rigid framework.
Whatever the frequency, flexibility is the key. The facility to review employee benefits can be extremely attractive, says Peter Fenner, marketing consultant at Swiss Life. “Under certain arrangements the level of cover can be reviewed annually or every two years. This is important after events like the birth of a child or if an employee gets married,” he comments.
A change in circumstances may lead an employee who has no pension scheme, for example, to reconsider contributing to a pension. They can choose, if they wish, to pay towards policies such as the voluntary pension scheme. The employer sets up and organises the scheme usually with the assistance of a broker. The employer does not have to pay in any contributions as long as the employee’s contributions are voluntary as well.
This sort of scheme is useful for staff wishing to pay towards their own pension directly from their salary.
This type of pension scheme can be offered as a standalone or as part of the employer’s wider flexible benefit arrangements. Other potential benefits include: long term disability, life, critical illness, personal accident, different group pensions, defined benefits schemes, money purchase plans and income protection. Again, the employer can choose a scheme that offers cover in just one area or opt for a more flexible multi-policy approach.
“Each benefit has its own merits and these depend on a number of factors including: the size of the company, what it does, where it is located, the mortality rates of the region, the number of employees and the experience the employees have had in the past,” says Swiss Life’s Fenner.
The type of group insurance available for a Warrington-based company with 10 staff, operating a non-smoking policy would be very different to a London-based IT firm that has a staff of 60 and does not operate a non-smoking policy, he said.
Certain packages, such as group critical illness cover, are becoming more popular. UNUM sold three times more critical illness insurance policies in 1997 than it did the previous year.
This is one of the newer policies following on from individual critical illness cover and has become increasingly popular since its introduction in the early 1990s. This type of policy covers people in case of major illnesses such as cancer, heart disease, motor neurone disease, multiple sclerosis and Parkinson’s disease.
Another popular option with employers is group income protection. Some insurance companies now offer bereavement counselling and medical information services on top of the usual benefits for ill health.
Major insurance companies are taking a flexible approach to the market. Legal & General introduced a unique employee benefits policy in 1991. “It is a hybrid income protection and critical illness cover that pays a monthly income to those incapable of work,” says Rebecca White, group risk marketing manager at Legal & General.
This policy offers a one off payment of £30,000 or a payment linked to the employee’s salary – the employer can chose between these two options when the policy is first taken out. Ill employees can only legally be paid four times their salary.
Payment usually begins after the employee has been absent from work for more than the six-month statutory sick pay period.
Group pensions schemes are also becoming a popular feature in flexible benefit schemes. The scheme can be based on a group of individual contracts or a group contract for categories of staff. Business in the group personal pensions market will triple by 2002, according to research published last year by researchers Datamonitor. The report, entitled Corporate Pensions and Employee Benefits, showed that the market has experienced an annual growth rate of 30% since 1991.
It also showed that executive pensions are being overshadowed by group personal pensions.
“In an individual group pension, each member has his or her own pot of money and if they change employment they can take the pot with them because the pension is theirs,” said Pam Lane, senior pensions product manager at Friends Provident.
The employer is responsible for paying the money from the employees’ salary into the pension and they are given the opportunity to sponsor it themselves. The benefits of schemes like this are numerous. There are tax advantages for employees – who can apply for tax relief on the money they pay into the scheme from their salary – and the employers’ contributions also qualify for tax relief.
Schemes run by employers also make things easier for employees who would not necessarily go out searching for a competitive pension. This sort of scheme is usually quite straightforward for the employer as well because contribution rates are normally based on a percentage of the payroll.
Costs of providing flexible benefits obviously vary depending on the scheme. The cost of a group disability package at UNUM, for example, is around 1.5% of the payroll costs per year. “If the payroll costs per year are £200,000 then the cost of a group long term disability protection plan will cost between £2,000-£3,000. This will typically cover an employer with office workers who wants to be able to pay three quarters of someone’s salary if they are ill and cannot return to work after six months,” says Lomas.
When the payment is needed because of illness, the employee will be secure knowing that they will have an income from the insurance company. Their financial security will not come under threat. In case of critical illness like multiple sclerosis, stroke or any other lifestyle changing illness, if the employee opts to take a lump sum payment rather than a regular income of three-quarters of their salary that the insurance company pays out, then this money will become very important.
That money could be used to move home or make their existing home more accommodating. It could also be used to pay off a mortgage or clear any other debts.
This sort of scheme has many benefits for the employer as well. Payment by insurance companies to critically ill employees or those who have had an accident helps employers to fulfil the moral obligation they have towards their staff in case of illness or accident. The scheme also spares the company from assessing the illness or disability claims of employees as this is taken care of by a third party.
The employer is also able to offer consistency through employee benefits. If they manage a large company with different branches or even a small company, it would be difficult to explain to one sick member of staff that they will not receive the same treatment as another ill colleague because the company cannot afford it.
An additional benefit that employers can pass on to employees comes from the simple buying clout that they have in the market. All employees will reap the rewards if their employer buys benefit schemes in bulk. This is particularly true of group pensions. Colin Fitzgerald, UK Broker Sales Manager at Generali, the employee benefits specialist, said: “Pensions have to be flexible, clean and up front in charging. Insurance companies have to play with the charges to get a good deal.”
Employers can get good deals if they take out multiple cover through the same insurance company. Guardian Employee Benefits has a strategy that depends on the wishes of the employer. If the employer wants to provide a more flexible cover there is a 5% discount on the cost if two or more policies are taken out at the same time, says Sneddon. The wishes of every employer will be different depending on what they want for their staff.
Employee benefits are an area where brokers can offer a valuable service. On a company wide level, the employer will need advice on the relevant insurance packages available and the most appropriate employee benefits to offer. On the individual level, each employee who takes part in the scheme will need advice on which benefits to select from the wide range on offer.
This also allows the broker or advisor to be in contact with an individual at a time when they are thinking about long term financial planning – so there could be spin-off opportunities to discuss areas such as home or motor insurance.
This shift towards flexible benefits is having an important impact on the marketplace. Companies are recognising the growth in the industry while others like Generali have re-thought their position in the UK. The company normally offers pensions to multi-national companies throughout the world but its focus is altering.
“Over the last five years we’ve thought about our position in the UK. We are now re-launching in the life area to meet the needs of UK intermediaries and we are designing our policies for multi-nationals setting up in the UK,” says Fitzgerald.
This reflects the wider view that some of the insurance companies share that smaller businesses are better targets for employee benefits and health insurance policies. Lomas says: “Only a quarter of companies have any type of disability insurance for their staff and this is mainly directed at managers. Some 10% of the working population is covered, but not the remainder.”
Small companies are particularly vulnerable if a member of staff becomes ill or has a serious accident. They are more likely to depend on the skill of that member of staff because the company is small. It may be a family run business too, so an employer would have to be able to face the remaining employees if he or she has not done the right thing by a sick employee.
If a small business owner suddenly finds they have to pay out a sum of money or a monthly income to an absent employee after the six-month statutory period, it will become very important to have a policy that covers their employee. Both parties will find it a financial struggle otherwise.
“Small companies are potentially the most exposed. If they lose a member of staff this could be quite devastating,” says Lomas. Insurance for staff in the form of flexible benefits is a must for employers.