Tough times ahead in the employee benefits industry
Peter Crush, October 23, 2009
The Labour Party's proposed scrapping of childcare tax breaks has come as a heavy blow to employers already feeling the pain of having to do a lot more with less. Peter Crush reports.
Just when benefits commentators thought things could not get much worse, the Labour Party's conference bombshell - announcing the withdrawal of childcare vouchers from well-off 'middle-income' earners from 2011 - categorically proved that if it can, it most certainly will. The year that started with the British Chambers of Commerce urging bosses to stop offering childcare vouchers (because of the cost of offering them while mothers are on maternity leave) is now ending with the very real possibility that the end of NIC-saving childcare vouchers as employees know them is nigh. Depending on how quickly legislation is pushed through before next year's general election, a Tory government could end up inheriting legislation it may not make a priority to renounce (although at its conference last month, the Party promised it would not cut the voucher tax break).
Details on who may lose out are still sketchy but, according to Paul Bartlett, head of reward and benefits at Grassroots, it will be between 600,000 and 700,000 employees who could benefit from vouchers - double the 250,000 lower-income families Gordon Brown says will receive 10 hours of free childcare per week in return.
Debate has raged about just how many staff actually make use of this niche benefit. But while only 5%-6% of all workers are eligible for it at any one time, take-up is 50%; 96% of all employee benefits schemes offer childcare vouchers and, for employers like software virus prevention company Symantec, the uncertainty this creates couldn't be more real. It needs highly skilled staff, and retaining them after maternity leave is now a serious concern for Claudia Terry, its senior compensation and benefits manager.
"The loss of care voucher tax-breaks for returning parents would have a massive impact on us," she says. "Eighty per cent of our staff are in the high tax band, so this is a hugely disappointing piece of news. We would have to work out some way of still offering childcare, as many of our staff don't just use their vouchers for young children, but also use them to pay for after-school clubs."
Replacing vouchers with something new would burden Symantec with additional, unwanted costs (currently it benefits from the NI savings that vouchers provide). But in many ways Symantec reflects the plight of many companies trying to maintain benefits provision - it spends $60 million a year on them in the UK alone - in what has been a very difficult trading year.
"Controlling costs has been incredibly important to us this past year," says Terry. She has recently added voluntary benefits for staff - including money-off vouchers with local businesses, specifically because they can be added with very little extra cost. "We're having to work hard to keep our benefits costs the same each year, because we're actually growing our headcount. One of the measures we've taken is to move our benefits broker from a UK one to a global provider. This has helped us achieve a 28% per-capita saving on our health insurance, allowing us overall to secure a 0% premium rise next year."
Any saving is better than nothing for the company that has a company-wide take-up of childcare vouchers of 15% - representing 180 employees who use this benefit and gain a £1,200 a year saving in childcare costs. "The past nine months has been difficult," admits Terry. "The Government seems to want to take the easy way to save some money now, but our philosophy is about looking for sustainable benefits for the future. Scrapping childcare doesn't seem to have been thought through."
Relatively few benefits announcements by companies reveal the 'on-hold' state many employers are in. Save for a few big-name deals (such as Kellogg's signing up PMI Health Group's nurse-led claims reduction service), the sector has, says Bartlett, "just about held up, but it will be a slow return to normal". NorthgateArinso's director of consultancy, Dan Wilson, is more upbeat, saying he is noticing more employers wanting to experiment with flexible benefits. But he warns employers still need to be wise about who they target: "The whole agenda this year has been about cost savings," he says. "Giving the illusion of providing more, by making more of what you have got is why we're seeing in a swing towards total rewards statements. However, if companies are to take advantage of the upturn, they need to improve their targeting. Flexible benefits still has extremely low take-up among the under-25s. On the other hand, only 50% of companies currently offer pension contributions via salary sacrifice."
Rising PMI costs continue to blight the health-related part of the industry but, according to Katherine Moxam, director at Group Risk Development, HR directors would be well advised to consider group risk as an increasingly cost-effective solution to PMI (see below), which offers very similar cover for much less money.
If giving clients more for their money is the priority, there are encouraging signs benefits providers want to stay ahead of the curve. This month, health cashplans provider HSF is beefing up what it offers, by adding health plan personal accident benefits to its entry-level £1 per month service (previously staff would only get it if they were on the £3 a month tariff).Group risk advice is also being added to entry-level policies (again, it used to only kick in at the £3 per month rate). HSF health plan's deputy CEO, Stephen Duff, says: "It's been a tough year for businesses, so we're having to approach things differently. We want to make it more attractive to firms to offer this benefit to staff, because once they are on it, many staff (about 50% of them), actually upgrade with their own money to higher levels of cover."
Duff says cashplan providers' premiums have not risen for "years", and most operate on a claims ratio of 80% of income - a level HSF health plan is not yet at, giving it the latitude to add more cover to its cheapest plans.
If childcare vouchers do receive the chop, any cost savings for other benefits elsewhere will be gratefully received by companies still under the cosh. The signs of recovery may well be appearing, but benefits spend is still tightly under review. More for less will still be the mantra for 2010.
SCRAPPING VOUCHERS: THE REACTIONS
- Maria Miller, shadow families minister:
"Gordon Brown promised last year that he would provide free childcare for all two-year-olds. He's now going back on his word by providing childcare for only some families with two-year-olds and he will pay for that by taking support from other families who benefit from employer-supported childcare. It shows this Government has run out of ideas and it has run out of money. The prime minister is breaking his promise to thousands of hard-working families."
- Simon Moore, managing director, Computershare Voucher Services:
"Working parents, already struggling under heavy financial pressures, could be dealt a devastating blow if tax-efficient vouchers are scrapped. In fact we are shocked any such move is even being considered. What the prime minister should be doing is expanding the voucher model into other communities that sorely need the tax-saving they provide, such as the elder care market, where families are struggling to fund the care of older relatives in nursing homes across the UK. While in power, Labour has really missed a trick in the wider applications and benefits that the vouchers system, as a closed-loop system, can offer."
GROUP INCOME PROTECTION COULD IMPROVE THE COST-EFFECTIVENESS OF CORPORATE PMI
Katherine Moxam, director at Group Risk Development, says:
"Private medical insurance (PMI) - which allows staff (and often their dependants) to get private medical treatment for acute medical conditions - is increasingly expensive. But because its main purpose is to keep valuable employees in the workplace or to get them back to work quickly, in this respect, corporate PMI operates in the same space as group income protection (GIP), where the emphasis has evolved into a retention and vocational rehabilitation service.
"GIP and PMI now frequently offer the same added-value services (such as absence management, employee assistance programmes, GP helplines, online health assessments etc). But, since GIP isn't exposed to the massive inflation PMI experiences, it makes sense to reappraise how these benefits could be operated more economically together.
"GIP cover can generally be provided for around 1% of payroll.Under a GIP policy, employers offer staff access to insured protection cover if illness or injury prevents them from working for a prolonged period. Policies also help protect a business by covering the contractual promise to continue salary in these circumstances.
"The GIP market is extremely competitive. Providers are also taking innovative approaches to managing absence (some to the extent of funding treatment). So there's definitely scope to see if PMI can dovetail more appropriately with an existing GIP policy or consider whether introducing a scheme would increase cost efficiencies. Options could include using PMI to meet 'back to work' treatment claims for employees only - releasing a significant saving - and using GIP to sweep up other elements of vocational rehabilitation. Alternatively employers could negotiate with the GIP provider to avoid overlap with their PMI cover."