Pensions and insurance procurement must not be hurried

Pensions and insurance are key elements of most benefits packages, and procurement requires adequate time and great care, says Sam Barrett

A benefits package speaks volumes about a business. It can help to motivate staff, demonstrate an employer’s commitment to customers and competitors, and attract the best recruits. Because of this, the procurement process must be right, particularly for key elements of reward such as pension and insurance perks.

The first step is to establish exactly what benefits an organisation requires in these areas. Mark McLeod, manager of advice policy at advisory firm Towry Law, says: “A staff survey is a good starting point. This can highlight the perks staff would value, which can make the benefits spend more effective.”

This can ramp up the value of a benefits spend, but it is also important to take into consideration the perks offered by other organisations in the sector, so employers can remain competitive, as well as looking at the demographics of their workforce. For example, if staff are young and single, life assurance is unlikely to have much appeal. Similarly, there is little point in introducing group income protection that pays until retirement if most staff spend only a couple of years working for the organisation.

An employer’s growth plans can also affect its choice of benefits. “Employers do not want to change benefits every year or two, so consider how the business is going to grow over the next five years or so,” says McLeod. “For example, if it intends to grow significantly, then it might want to make sure any benefits can be flexed in the future.”

Who should be involved?

At this stage, it is also sensible to determine who should be involved in the process. Ian Luck, director of employee benefits at Smith and Williamson Financial Services, says: “A blend of HR and finance is best. Finance will set the budget, but because it will not necessarily understand the limitations of some of the cheaper products, it is also good to have HR involved to ensure benefits suit the organisation’s needs.”

Once employers have established the benefits they require, they need to select the right providers. Cheryl Brennan, manager of the risk department at consultancy Enrich, says: “Put together a formal invitation to tender asking questions about their experience and expertise. If employers do not do this, providers will only send them a quote, which will not be enough to enable them to make an informed choice.”

Although cost can play a major part in determining which provider to choose, it should not be the primary factor. Karena Woodall, a consultant with pensions consultancy Mattioli Woods, says service is the most important consideration. “There is not a lot between the group pension providers in terms of charges and fund choice, but service varies greatly. If an employer picks a provider with poor service, this can create additional work for them.”

Some employers take this even further and ask for details of a client the provider has lost. They can also carry out their own research on a provider’s service. For example, they can check whether any complaints have been lodged with the Financial Services Authority. “This can give a feel for what it would be like as a customer,” says Enrich’s Brennan.

Find the best deal

Employers must also allow enough time to arrange the best cover. This enables them to research providers, and can help them find a better deal. Mike Blake, compliance director at PMI Health Group, says: “You get hard markets in general insurance, but this does not really happen in employee benefits. The market is so competitive, there is always someone who wants the business enough to offer a better deal.”

Blake suggests allowing at least three months for big contracts. “You can get guaranteed prices around two months before renewal, so factor this in,” he adds.

Employers may also want to consider ongoing service as part of a procurement exercise. Service level agreements, which stipulate timeframes for matters such as responses to queries, claims processing and renewal quotations, are becoming more common and some providers and intermediaries will automatically offer one if employers work with them. For example, group risk industry body Group Risk Development (Grid) has introduced minimum service standards for its members.

Service level agreements

“Providers should have their own service standards and if they cannot provide details, there should be a big question mark over their service,” says Brennan. “But although large organisations might find it easy to get service level agreements with providers, this is not always the case with smaller ones.”

To overcome this obstacle, providers such as Enrich have negotiated service levels with all the providers they deal with, so smaller clients can take advantage of this agreement rather than set up their own.

Financial penalties also feature in some service level agreements. For example, medical insurer WPA pays £25 to an employer if it fails to pay a properly presented claim within seven days.

“We are pushing for financial penalties to be incorporated into service level agreements,” says Brennan. “This can make a big difference to the service that is delivered.”

All this might seem a lot to consider, but employers that take the right steps will find their procurement of pensions and insurance perks will result in a package that gives the right messages about their business†

Do it yourself or get advice?

Although employers can purchase benefits themselves, there are many arguments in favour of using an adviser to do so.

For a start, they could get a better deal. Mike Blake, compliance director at PMI Health Group, says: “Some providers will only deal through advisers, but even where they deal direct, [employers] can often get better terms and prices through an adviser because of the buying power and influence it has.”

As well as offering access to the best deals, an adviser can use its experience to ensure an employer has the right mix of perks. Mark McLeod, manager of advice policy at Towry Law, says: “If [employers] go directly to a provider, they will not get advice. Providers will give employers what they ask for, whether or not it is right for the organisation. An adviser will make sure their benefits match their needs.”

Advisers can also help employers to promote their benefits package. This could involve putting together marketing literature for staff, and some will also offer seminars and one-to-one sessions to ensure that employees understand the value of the package.

Commission or fee?

However, employers will pay for such services. This can either be through commission, which is paid by the provider, or as a fee, which can be set according to the time spent on a case, or a fixed fee based on the project the adviser is undertaking.

If employers opt for the commission-based approach, they need to understand the implications. For example, a commission-based group pension plan will have a higher annual management charge than one that is fee-based. This means the cost of the advice is met by employees, who will feel the effect of the higher charge through a slightly reduced pension pot.

Ian Luck, director of employee benefits at Smith and Williamson Financial Services, says: “It is horses for courses. Ask the adviser how it is remunerated. Many offer both fees and commission, although more and more are going fees only.”

Case study: Perks advice adds up for Defaqto

Giving employees access to quality benefits is important for financial information specialist Defaqto. But although it offered a good range of flexible benefits through an online service, finance director Alastair Brown was not happy.

“Employees did not really understand the entire benefits offering,” he says. “Take-up was poor and the level of administration required to deal with employees’ questions was horrific.”

To tackle this, Brown approached a number of benefits providers and consultants to discuss Defaqto’s requirements before choosing independent financial adviser Foster Denovo.

The first step was to carry out a benchmarking survey comparing Defaqto’s benefits with those offered by similar-sized organisations. Taking account of those results, Foster Denovo, Brown and a representative sample of employees agreed a summary benefits package promoting healthy living, protection and saving for the future.

Full market review

Armed with this information, a full market review was conducted and a set of recommendations drawn up on levels of provision, providers and costs.

“We wanted providers that had good service as well as competitive pricing,” says Brown.

Once products were selected and implemented, presentations and one-to-one meetings were set up to introduce the benefits to employees. These include critical illness cover and life assurance, private medical, dental and travel insurances and a monthly gym subsidy, as well as a contributory pension scheme including a full salary sacrifice offering.

“Employees have a much better understanding of the benefits they have got,” says Brown. “More take up different benefits and many have increased their level of contribution to their pension. This greater understanding is also good news for our HR department as there are fewer questions to deal with and much less administration.”

Read more articles from Special report 2009: benefits procurement