Thought leaders 2010: The year ahead: What is the new vision for employee benefits?

This promises to be a big year for change in the benefits world, not least because of the general election, says Sam Barrett

After a year of sitting tight and waiting for the recession to end, change is set to be the main theme of 2010. Some changes are already known, for example the higher income tax rate for those earning more than £150,000 a year, but other developments are yet to be revealed.

Of the known events, the tax changes are likely to have the biggest impact this year. Jacqueline Otten, head of flex consulting at Towers Watson, says: “Although the changes will mainly hit high earners, this will affect thinking on benefits and reward. It could open up the concept of total reward much more, which will affect all employees.”

Pensions will be another major focus in 2010, both in view of the reduction in tax relief for higher earners being introduced in 2011 and as employers prepare for 2012’s pension reforms.

While the reduction in tax relief will push organisations to look at more imaginative ways to reward employees (see below), pension reform will mean major costs for employers. “There is a huge pension opt-out population, so employers need to start planning for the additional cost when we move to auto-enrolment,” says Otten.

Cost saving

Cost saving, whether to help fund future pension contributions or as a continuation of last year’s clampdown, will also pervade the employee benefits market. Duncan Brown, director of HR business development at the Institute for Employment Studies, expects to see more employers looking at how they can redesign benefit packages to save money.

“I expect there to be a big push on benefits integration to bring greater efficiency,” he says. “More employers will look at how they can put together international plans and take advantage of pooling arrangements.”

Cost cutting could extend further still as employers seek to equalise benefits, bringing generous legacy schemes into line with the main package – a trend that has already begun with the closure of defined benefit pension plans to existing, as well as new, members.

Another trend that will come to the fore in the employee benefits arena is openness about reward. Hannah Perera, a principal at Mercer, says: “A lot more attention is being paid to reward.”

This has been illustrated by the publication of MPs’ expenses and the BBC’s decision to publish quarterly details of the salaries and expenses of its top 100 executives. “This greater clarity about what is being rewarded and why is changing the reward landscape,” says Perera. “Organisations will have to be able to explain their reward strategies. This will bring about a reining in of excesses.”

More fairness

A knock-on effect of this is likely to be more fairness. As employees have a greater understanding of what their peers receive, there could be a narrowing of the gap between an organisation’s top and bottom earners.

Beyond the known changes in 2010, there are events on the horizon that will have unpredictable consequences. The election of a new government could bring significant change to the employee benefits arena, with the Conservatives promising an emergency budget within 50 days if they come to power. “Although the parties have been cautious about saying what they will do, there is potentially a lot they could do that would affect employee benefits, especially around pensions,” says Brown.

Tax cuts are unlikely, and most observers expect that, given the size of the UK’s deficit, the recent tax rises will remain and may even be increased. Matthew Hunnybun, partner in human resource services at PricewaterhouseCoopers, says: “I would not be surprised if there were further increases in national insurance.”

Pensions may be another target for government change, especially the 2012 proposals. Automatic enrolment will almost certainly stay, but if the Tories do take power, the finer details of the national employment savings trust (Nest) are likely to receive their own party political stamp.

DB schemes review

Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development, believes some of the more expensive defined benefit schemes may also be up for review. “Once the election is out of the way, there will be an opportunity for the government to address public sector pensions and make them more affordable,” he says. “This could potentially start with MPs’ pensions.”

As well as addressing its own spending, a new government might look at ways to encourage more saving in the UK. Ben Wells, senior consultant at Buck Consultants, says this could mean changes for employee benefits. “We might start to see more interesting tax advantages on savings, encouraging not just pension saving but short- and medium-term saving. An example of this might be a plan to help someone save for their mortgage deposit.”

The economy’s performance will also affect benefits, with many expecting the recession to transform into recovery at some point this year. Dr Ann Parkinson, academic fellow at Henley Business School, says: “Employers are cautiously optimistic about the economy, with many getting ready for the upturn. When the upturn does happen, it will be important to remember lessons from previous recessions and invest in employees and their development. Retaining key staff will be essential when the economy does start to pick up.”

Employees’ views may change

It is also possible that employees’ views will change on what they want from employment. Dr Clare Kelliher, reader in work and organisation at Cranfield School of Management, says it will be interesting to see how staff who have been on reduced hours or taking a sabbatical respond to coming back to work full-time.

“Flexible working has proved itself in tough times and it may be a way to think about employment and resourcing from both the employer’s and the employee’s perspective.”

Benefits such as flexible working and extra holiday had begun to gain momentum before the recession, and Buck Consultants’ Wells believes this will accelerate in 2010. “I have seen employers helping fund round-the-world trips, providing the employee pops into an overseas office while they are away,” he says. “There are also a few companies arranging sabbaticals within supplier firms so stronger relationships are built between the two organisations.”

Although capacity is less of an issue now than in previous recessions, there could still be a talent war as the economy picks up. Hunnybun says this will make reward packages even more important. “If the package and conditions are not right, it will be hard to retain employees,” he adds. “Anyone who felt stressed during the recession will be looking to move as soon as the economy picks up.”


A number of tax changes will come into play in 2010, with further changes being introduced in April 2011. These include:

  • 50% income tax rate for people earning over £150,000 a year.
  • Reduction in the income tax personal allowance by £1 for every £2 of income above £100,000.
  • Forestalling rules (introduced in the Budget 2009 and extended in December 2009) to prevent people with income of £130,000 or more from making increased contributions to their pensions before the new rules take effect in April 2011.
  • 1% increase in national insurance rates, taking Class 1 to 12%, Class 4 to 9% and Class 1 employer rate to 13.8%.
  • Tapered reduction in the level of pension tax relief from 40% to 20% for employees earning more than £150,000 a year.


The shift away from defined benefit (DB) pensions will continue apace in 2010, especially after high-profile scheme closures by the likes of Barclays, IBM and Vodafone. Neil Carberry, head of employment and pensions policy at the Confederation of British Industry, says: “Defined benefit pensions are no longer affordable and more will move to close.”

On the positive side, he expects to see more innovation around defined contribution schemes. “Before the recession, employer contributions were rising, which may continue when the UK starts to recover,” he says. “We might also see larger schemes developing, which would really help to push charges down.”

As well as looking ahead to the national employment savings trust (Nest), there may also be a need to address the reduction in pensions tax relief for higher earners. Unapproved tax-efficient schemes are a possible replacement but Ben Wells, senior consultant at Buck Consultants, says employers are also seeking more creative solutions.

“Instead of a pension, †the employer might fund a post-retirement medical insurance scheme or a holiday fund. They are being creative – it is not just about the money.”


It could be crunch time for medical insurance in 2010. With medical inflation running at about 10% and further financial pressures coming from expensive cancer claims, more and more employers will find themselves re-evaluating this benefit.

Colin Bullen, head of health and risk benefits at Hewitt Associates, says: “Employers will be examining why they have medical insurance in place. For many, it was introduced to keep staff at work, not as an out-and-out perk. It has to be a business benefit and we may see insurers designing schemes that tackle absence more head-on.”

But although medical insurance may be up for review, health and wellbeing initiatives are likely to become more commonplace. Bullen says: “Case studies have been mounting up to demonstrate the value of looking after employee health, and with stress becoming such a major issue in the workplace, more companies are introducing some form of health and wellbeing benefit.”

Also, the National Institute for Health and Clinical Excellence (Nice) published guidance on improving mental wellbeing in the workplace at the tail end of 2009 and, with financial savings being made apparent, its recommendations are likely to be taken up this year.


After a year of pay freezes, UK plc is unlikely to see significant pay rises in 2010. According to Mercer’s Planning for 2010 snapshot survey, published last December, 70% of companies reported a reduction in payroll costs in 2009, by an average of 11%. In 2010, although more than half of employers expect to freeze pay again, the average reported pay increase is about 3%.

Bonuses will continue to feature as employers appreciate the ability to reward staff without having to increase ongoing salary costs. But because of the furore surrounding bankers’ bonuses, such rewards are likely to be in revised formats.

Hannah Perera, a principal at Mercer, says: “Organisations are reviewing performance measures rather than the bonus architecture. They are looking at what is being rewarded and they do not want to encourage the wrong behaviours, for instance risk-taking.”

Bonuses will also be regarded as a reward for performance above and †beyond the norm, rather than an entitlement. Ann Parkinson, academic fellow at Henley Business School, expects bonuses to be more long-term and retrospective. “Employers will want to know not just that their staff have brought in business, but that it is good business,” she says.


After years of being a soft market, rates are set to harden in 2010, pushing up the cost of benefits. Colin Bullen, head of health and risk benefits at Hewitt Associates, says: “It has been a very aggressive market where you could just about get the price you wanted for group life and income protection. This is not sustainable and we will see rate increases over the course of the year. If you are considering reviewing group risk benefits, do it as soon as you can.”

Higher rates are likely to bring about another shift. Group income protection policies have traditionally been written to retirement age, but recent product development has introduced shorter benefit terms, of anything from two to five years. Richard Strachan, senior consultant at Aon, says this is beginning to feed through to schemes. “It is more difficult for existing schemes to switch to a shorter benefit period because it requires a fundamental change in terms and conditions, but we are seeing new schemes go for shorter periods. We also expect to see more income protection go into flex schemes, allowing employees to pay to increase cover if required.”

Greater clarity is also expected as the 2009 Equality Bill becomes law. Although this looks to outlaw any form of age discrimination, it does exclude areas of financial services where risk plays a greater part and it is hoped this will bring clarity about when a policy can stop paying.

Read more articles from Thought leaders: The year ahead