This year the health and benefits industry will operate within a context of heightened cost-cutting and consumer-driven healthcare and benefits options that put the employee in charge when it comes to choice and control, according to a report from Mercer.

The consultancy has marked out six main areas that companies should focus on in 2012 when organising their health and benefits offerings.

Most businesses faced a "stop-start recovery" in 2011 due to an unstable economy and volatile markets. This left many organisations questioning the feasibility of maintaining their health benefits schemes against a backdrop of rapidly mounting healthcare costs as well as a rising tide of government regulation and legislation.

Client research on the top 2012 HR issues carried out by Mercer found 45% of employers consider managing the cost of employee benefit programmes as the biggest challenge of 2012, with a considerable 84% stating that it was one of their top three priorities in the coming year.

Mercer predicts six key trends in the health and benefits market in 2012:

1. Continued growth in the flexible benefits market:

This is a market which has been experiencing significant growth, and will continue to do so in 2012 as providing flexible benefits gives employees the ability to 'pick and choose' which benefit options best suit their needs. Employers make significant savings by not spending money on benefits which are not being utilised by their workforce.

2. A shaking up of corporate benefit provision in light of an ageing workforce:

With the default retirement age (DRA) phased out, employees now have the choice to work longer should they choose to do so. The frequency of major illnesses typically escalates with age and could significantly increase expenditure of risk and health benefits - some benefits, such as private medical cover may even become uninsurable for older employees. In 2012, companies need to start rethinking their operating benefit structures to reflect the requirements of an increasingly ageing workforce.

3. A hardening of the group risk benefits market:

This year will see insurers continuing to increase their rates after experiencing several years of falling premiums. This trend can be attributed to several factors including low yields from investment income, subsidiaries having to generate profit for their parent company, and the focus on reserves in the build-up to financial 'stress tests' such as the Solvency II Directive.

The requirement of employers to automatically enrol their 'eligible' employees into a qualifying pension scheme in October of this year will have an impact on group risk benefits that are linked to pension scheme membership such as some Group Death in Service and Income Protection schemes. The imminent increase in membership of these schemes as a result of auto-enrolment will be yet another reason for insurers to raise their rates.

Importantly, many employers continue to recognise that group risk benefits as part their benefits offering are highly valued by employees and help to retain talent and motivate the workforce.

4. Increasing awareness of role of wellness programmes and absence management programmes:

In 2012, employers should look at benefits such as gym membership, private medical cover, targeted health screening and lifestyle coaching as a way to reduce employee absenteeism, lower health-related costs and enhance productivity.

Sickness absence in the UK is a significant hindrance to productivity and competitiveness and a major cost to companies every year. Stress is, for the first time, the most common cause of long-term sickness absence. Supporting the health of employees through wellness initiatives can result in improved fitness, reduced levels of stress and enhanced confidence at work.

5. Managing the build-up to auto-enrolment:

There will be much to do in the coming year for those organisations that want to get their pension benefits in good order as part of their preparation for auto-enrolment. Mercer believes that there are three immediate areas of focus for companies:

• Strategy - Defining the right strategy for a company's future pensions arrangements will be a key step to 2012 action planning. Companies will need to think about what changes they need to make to existing members' arrangements as well as those who choose to opt-out. Priority must also be given to putting in place record monitoring processes for compliance regulations.

• Provider capability - With so many changes in the pensions arena now on the horizon, 2012 will be an opportunity to also review the competitiveness of the current contract and your provider's future service proposition to you and your members. There are also further regulatory changes coming in from 2013 that may fundamentally affect the relationship and remuneration and service agreements between many clients and their advisers.

• Communication - It is vital that employees are engaged effectively with their benefits programmes. There may, for example, be the need for a formal 'consultation process' rather than just an informal 'communication programme'. Certainly, auto-enrolment will be a complex development for all involved so putting the time in to determine the most appropriate strategy, messages and mediums to be adopted to successfully communicate any changes to be made to the benefit arrangements, will be time well spent. The client research carried out by Mercer suggests that employers are becoming increasingly aware that the perceived value of pensions and benefits programmes can be improved by greater communication and education with 73% of employers citing it as one of their top three challenges in 2012.

6. Growing demand for alternative benefits:

According to UK data in Mercer's What's Working survey, traditional benefits score low as a driver of motivation and engagement. More intrinsic elements of reward such as having a sensible work-life balance scored much higher. There is an evident enthusiasm for a change in benefit provision, particularly amongst younger employees, and this provides an opportunity for employers to better engage their staff, and once again, reduce costs. In 2012 employers should look at alternative benefits such as student debt loans and holiday savings options, over traditional benefits.

Naomi Saragoussi, principal in Mercer's health and benefits business, said: "At the start of 2012, we see the new benefits landscape emerging, and it should come as no surprise that this year the focus is on cutting costs. A 'do more with less' attitude will certainly characterise the coming months.

"The challenge of reining in costs while still offering attractive benefits will mean that employers must explore more resourceful and creative ways to manage financial expenditure and ensure best value for money. There is a growing trend towards employee wellbeing initiatives, increased employer-employee cost sharing and a move towards employees deciding how they want their benefits to be shaped."