Flexible benefits are often cited as the panacea for cost control - and while it may not be the right route for everyone, flex is certainly an effective means of cost containment. By enabling employees to pick and choose their own benefits, employers win on two counts:
- By allocating a ‘flex fund' for employees to spend on benefits, employers protect themselves from increasing benefit costs. With a set fund and a choice of benefits to select from, the employees must bear the costs of any increases in premiums or benefit provision year-on-year
- People will naturally place a higher worth on benefits they have chosen for themselves. By enabling employees to pick benefits tailored to their lifestyle, their perceived value of the benefits provided increases - meaning brownie points for the employer at no additional cost
Often talked of in the same breath as flex, salary sacrifice is another avenue for the cost-savvy benefits team. With potential employer National Insurance Contribution (NIC) savings of 12.8% on the amount of the employee's gross salary that is sacrificed, salary sacrifice can prove a cost-efficient way to offer a wide range of benefits. Although there are occasional rumours that the Government will remove the NIC incentives around salary Sacrifice arrangements, these have, to date, proved unfounded. Indeed, the recent changes to the higher-rate tax relief on pension contributions for people on an annual salary of £130,000-£150,000 have impacted employees but the Government has not (yet) taken the opportunity to spread the pain to the employer. With employer National Insurance costs to rise further in coming years with - a rise in April 2011 to 13.8% is already set - the savings employers can make are likely only to increase in the future.
When it comes to insured benefits, these can often be provided at a lower cost than employers imagine. Insurance rates are currently very soft: Aon experience evidences that insurers continue to value portfolio size above profitability and are willing in many cases to quote close to or even below the expected claims cost.
Aon's annual survey of insurers' views suggests that for many employee benefit lines (private healthcare, life assurance, and disability programmes) this position is expected to continue well into 2010, making benefits such as group risk and life assurance better value than they have previously been.
Where employers have a benefit promise they should clearly look to take advantage of competitive insurance markets. However, employers also need to recognise that the competitiveness of the market will undoubtedly change at some point - commentators have been saying for many years that, for instance, life assurance in the UK is too cheap. With this in mind, employers need to understand the true cost of benefits through risk modelling, and should use prudent risk mitigation to positively influence risk benefits pricing.
Any employer considering how broad a range of benefits to offer should look not only at the cost of benefit provision but the - often less visible - cost of not providing certain benefits. Private healthcare, for example, comes at a clear bottom line cost. Less frequently documented is the cost of absence/reduced productivity while sick employees wait for appointments within the NHS system. Similarly, an Employee Assistance Programme (an independent telephone or online advice service) can be relatively cheap to offer to employees but, without it, a company may open themselves to potentially costly claims for failure to fulfil their ‘duty of care' to employees.
The impact on employee retention should also be considered by any company scrutinising the cost of their benefit provision. A high staff turnover rate means high recruitment and training costs, as well as the ‘hidden' costs incurred from lost productivity, either while roles are vacant or while new employees find their feet. Benchmarking your benefits to ensure they compare favourably with your competitors', or to other local employers', can be useful in making sure your reward package matches up.
Of course, providing any benefits will mean a cost to the employer. Providing a comprehensive benefits programme need not, though, cost as much as you might imagine - and the potential costs of failing to offer a competitive benefits package can be significant. The choice is yours...
Paul White is head of risk benefits consulting, Aon Consulting
