Think carefully before sacrificing employee benefits for short-term savings

Looking at the benefits budget from an outsider's perspective, it's relatively easy to see a large number and assume it can be trimmed without your employees really caring - or even noticing.

So if the finance department is applying the pressure, and you fear the money you spend isn't being appreciated anyway, is the answer simply to cut benefits?

It might seem like a solution but in fact cutting benefit spend can have its own cost implications, both directly and indirectly.  Cutting risk or healthcare cover, for example, can result in increased liabilities; the most obvious examples being where an employee benefit clearly delivers value not only to the employee but also to the employer.

For instance, an employer offers employees private healthcare, where a key advantage is the ability for individuals to be treated where and when they want, as opposed to waiting for NHS treatment. If the employer removes the plan, or introduces a requirement that cover is only available where the NHS waiting list exceeds a specified period of time, they save money. However, the employee may then have a prolonged wait for treatment where either they are not attending work, or their ability to work is impaired. The employer will be faced with increased absence costs and/or reduced productivity.

Some benefits also fulfil, or help to fulfil, employer risk mitigation - for instance, provision of a relatively cheap Employee Assistance Programme. If this were to be removed, costs would reduce, but the employer may have an increased exposure to claims for failure to fulfil their ‘duty of care' to employees.

A third example relates to long-term disability insurance. While such cover provides an income to employees who are unable to perform their occupation, insurers have a financial incentive to encourage recovery and return to work. Increasingly insurers are offering additional services to ensure prompt access to care and implement return-to- work programmes. If they fail to take up these services, the employer would potentially be faced with prolonged absence and/or the costs of managing a return to work themselves. 

The following case study illustrates the dilemma facing companies whose benefits are not being valued by their employees: abandon or improve?

A company offered private medical insurance (PMI) cover to its 600 UK employees as part of its flex programme. However, the design of the PMI scheme made it unattractive to the majority of the company's mainly young, healthy workforce, and take-up was very low.  Staff had the option to sell the benefit for a cash return and were doing so in increasing numbers. This created a vicious circle whereby the ‘risk' increased as employees selected out of the benefit, increasing the cost and thus further reducing membership and increasing premiums.

Realising it had a fundamental problem with the scheme, the employer had two choices: to abandon the scheme altogether or to radically overhaul it. The first option may have looked appealing in the short term: taking out the cost of a PMI scheme (typically ranging from £400-£600 per employee) would have made a positive impact on the benefits budget. However, the company was committed to offering PMI for several reasons: they actively wanted their employees to have access to private treatment to ensure a swift return to work; and they recognised the negative impact that removing the benefit would have. They instead decided to revamp the scheme design, removing the incentive for employees to opt out and offering useable PMI provision attractive to all employees.

This overhaul saw take-up leap from 44% in 2009 to 95% in 2010, dramatically increasing ROI on the company's benefit spend. At the same time, the company retained a benefit that actively improves absence levels and - as a result - productivity.  

Would simply scrapping the benefit have been as successful?  In terms of short-term bottom line, yes - but in terms of sickness absence, employee goodwill and the costs associated with retention and recruitment, almost certainly not.

If you sense you are not getting value for money from your benefits spend, first consider investing in a communications campaign rather than reactively slashing the benefits you provide. It may be that a relatively simple and inexpensive programme of employee communications can dramatically increase awareness and appreciation of benefits. If this is not enough, consider a re-design of your benefits programme, or those elements of it that need attention (making sure you first ask exactly what your employees want; the findings may surprise you).  Doing this, rather than reducing your benefits programme, could be key to re-engaging your employees with it.

Employers clearly have a choice when faced with under-appreciated or under-performing benefits. With an upturn promised, will those companies that have sacrificed benefits for short-term savings be reinstating them in order to offer competitive benefits packages?  Only time will tell - and only you can say whether, for your company, it's a risk worth taking.

Paul White is head of risk benefits consulting at Aon Consulting