The pressure is on for employers to get the best value out of their group risk strategy, and there are several methods to keep costs under control, says Sam Barrett
Whatever the economic climate, employers want to get the most out of their group risk strategy.
But in the current environment, the pressure to obtain value for money is even greater. Peter Whittington, benefits director at JLT Online Benefits, says: “Clients are looking at every aspect of their benefits strategy to ensure they are getting value for money. This is generally a healthy exercise, provided it is not wholly run by procurement, which is usually charged with saving money regardless of service loss or product quality.”
Rebroking is one of the first cost-saving exercises that can be carried out and, with the market fiercely competitive, it is a way for employers to save significant amounts. The competition has been heightened by the arrival of Zurich Life into the group risk market, initially offering group life cover and group income protection. Nick Homer, group risk development manager at Zurich Corporate Risk, says: “It is definitely a buyer’s market. As we are looking to build our business, other players are keen to hold on to theirs, so prices remain sharp.”
Not surprisingly, many insurers are reporting an increase in the volume of midterm reviews, fuelled by cost-cutting exercises. Whittington says that as well as lower premiums, improved product terms can also be negotiated for employers. “We can negotiate a broad spectrum of enhanced specialist terms, including enhanced catastrophe cover for group life, nil-cost absence and claims management, and improved medical underwriting terms.”
If rebroking does not squeeze out sufficient savings, it might be time for a group risk benefit redesign. Chris Ford, director of group risk at Jelf Group, says: “Is it right to offer income protection until retirement? Few people now expect a job for life. If employers limit the benefit payment term to five years or less, they could reduce the premium by 30% or more.”
It is not just the length of payment term that can be pruned on income protection. To make further savings, employers could reduce the level of benefit or increase the deferred period. New-style schemes also allow them to pay a lump sum at the end of the payment term if the person is unlikely to return to work. Also, for life assurance, employers can reduce the sum assured, although the cost of cover generally means this does not generate huge savings.
But although there has been a lot of talk about restricting benefits, not many organisations have been brave enough to take that step, says Ford. “A few have reduced benefits, but generally, where a company cuts back, it tends to be for new joiners only,” he explains.
One of the reasons for this is the knock-on effect on the employment contract. Where promises are made on benefits, an employee consultation is required to make any changes.
“It is a difficult step to take, but employees are more receptive to this at the moment, especially when it is a case of taking a cut in benefits against losing a job,” says Homer.
Rather than cutting back, some employers are looking to make savings by shifting cover into flexible benefits schemes. Jamie Barnes, client services director at Enrich, explains: “Offering group risk through a flex scheme restricts benefit spend, both now and in the future. If the employer provides a core benefit and lets staff upgrade, then only a part of any premium increase is passed to the employer.”
Core benefits tend to be one- or two-times salary for life cover, plus group income protection providing a benefit level of 40% of salary, although many employers prefer to leave this benefit outside of flex.
As well as the cost benefits, flex schemes are well regarded by employees. Being able to select their own benefits means more people get a package they actually want.
Providing group risk benefits through flex can also have advantages from a legal perspective. Glenn Laming, sales director for group protection at Legal and General, says: “Providing cover until retirement is tricky with age discrimination legislation. It is discriminatory to stop providing cover at a set age and expensive to put it in place for older ages. If employers offer everyone the opportunity to have the same benefits through a flex scheme, then this provides an affordable option that might not be regarded as discriminatory.”
But the main downside of flex is the perceived initial cost of setting up a scheme, especially in the current market. However, Enrich’s Barnes says this is a bit of a red herring. “Technology has improved so much, this has forced costs down,” he says. “A 1,000-man scheme needn’t cost more than £20,000 to implement and if employers go down the salary sacrifice route, it could be cost neutral or even cost positive.”
A cheaper way to shift the cost of group risk benefits to employees is by providing them on a voluntary basis, allowing staff to decide whether they want to pay for the perk. Barnes says this does not always work so well for group risk benefits, but as larger insurers such as Unum look at this as an option, it could become more common. “I could imagine a situation where an employer paid for two years’ income protection benefit and the employee had the option to increase cover on a voluntary basis,” he adds.
Unum is already active in this market through a scheme marketed by Personal Group.
Through this plan, the employer determines the benefit and employees can decide whether they want to pay for cover. As well as selecting the deferred period, which could be anything from eight weeks to 41 weeks, employers can also pick a benefit payment term of between two and five years.
Caroline Jordan, head of sales at Personal Group, says demand has been strong. “Traditionally, business comes from organisations that provide income protection to senior management but would like to offer something to the rest of the workforce,” she says. “This year, though, we are getting business from companies that have removed their group income protection scheme or restructured their sick pay schemes.”
Another area of group risk benefit design that may be worth looking at is added-value benefits. Over the past few years, insurers have added an arsenal of benefits to their plans, including employee assistance programmes, health and wellbeing programmes and the second-opinion service Best Doctors. But Ford is not convinced of their value. “In the current climate, the main focus is on price. You can point to extras, but ultimately it is down to the price of cover.”
Where the situation might be slightly different is if the added benefits can be used as part of the employer’s strategy to tackle absence. “If employers can integrate healthcare benefits, they can get much better results,” says Ford.
For example, if an employer has a sickness absence management system, this could direct staff to other benefits, such as the free employee assistance programme included with the life assurance, or the physiotherapy provided as part of the early intervention benefit on group income protection.
Homer says Zurich will step in to provide rehabilitation as early as the first week of absence if this averts a long-term income protection claim. “The trouble is, companies are not always aware this is an option.
Building triggers into an employer’s absence management system could help them get more value from their other benefits. It might seem like they are spending more, but it will pay dividends on sickness absence.”
So employers that look at all aspects of a group risk strategy will reap the rewards.
Communication is the key:
Ensuring employees understand the benefits they receive can significantly enhance their perceived value. Jamie Barnes, client services director at Enrich, says: “Employees understand benefits like private medical insurance, but it is much more of a struggle for group risk benefits. These are not so easy to understand.” Total reward statements can go a long way to explain the monetary value of group risk benefits. By listing the cost of each perk, employees will appreciate how much they are worth. But although this might highlight the cost of the benefits, it does not necessarily explain why an employee should appreciate having them. Glenn Laming, sales director for group protection at Legal and General, recommends flagging them up alongside the rules on sickness absence. “Telling an employee that services such as counselling and rehabilitation are in place to help them if they are off sick is very positive and will give them a much better understanding of the benefits on offer,” he says.
Case study: IPC Media
Consumer magazine publisher IPC Media employs more than 2,000 people in locations around the UK. The firm’s sick pay arrangements vary depending on length of service and, although income protection is available to some employees, not all staff receive this cover. Reward manager Shireen Sivalingam explains: “We wanted to offer employees income protection so they would have peace of mind that their income was protected if they suffered longterm illness or incapacity.”
The company introduced a voluntary group income protection scheme in January, provided by Personal Group. It covers policyholders for up to 75% of their salary, minus state benefits, for up to three years or until they return to work. On top of this, if they are unable to return to work after three years, they will receive a lump-sum payment equivalent to a year’s benefit. Although employees pick up the cost of cover themselves, there are pricing advantages.
“Because the scheme incorporates limited underwriting, employees can usually get cover at cheaper rates than those quoted elsewhere, typically about 30% to 40% lower,” says Sivalingam. Also, because the scheme is set up through salary sacrifice, staff benefit from savings on tax and national insurance. A communications strategy was designed to encourage as many employees as possible to take out cover.
This involved a presentation for line managers to outline the benefits of the plan so they would be able to answer questions from their staff, followed by workshops at IPC’s main sites for all staff, where they could find out more, ask questions, obtain quotes and sign up to the scheme. So far, 310 of the 1,900 employees eligible for cover have signed up.