Feature – Getting valuable advice when choosing benefits

In summary
How can employers be sure they are getting the best deal when shopping for a new employee benefits package? How attractive the offer is to staff is important, as is the cost, but we look at how organisations can make sure they are getting the best benefits deal possible.
Case study- Morgan McKinley.

Article in full
Increasingly, employers are recognising the importance of developing strategies that will attract, motivate and retain the best talent. But when it comes to buying in the various products and services that make up their employee benefits packages, how can they be sure they are getting the best deal?

Employee benefits are expensive, with costs ranging from around 10% of salary in lean organisations to as much as 50% for high earners in the more generous of firms. Yet, employers rarely get a good return on investment from their benefits plans. Reasons for this vary, but it may be because benefits are not cost-effective, employees fail to appreciate the value of their package or because it is out of line with employee needs.

Research by Mercer Human Resource Consulting has revealed that employees generally do not understand the full range of benefits available and usually underestimate their value by around 20%. Benefits must also be in line with the market. David Wreford, principal consultant at Mercer Human Resource Consulting, says:” The more organisations know about what their competitors offer, the better they can aim for the market position set out in the benefits strategy. Providing an unnecessarily rich benefits package relative to the competition can be as costly as the excess employee turnover resulting from a comparatively poor package.”

Employers are under constant pressure to enhance employee rewards as cost efficiently as possible. Many have found the best way to achieve this is by employing the services of a benefits consultant, someone who can not only advise on the most suitable products, but will also get the best deal. John Dean, managing director of Gissings Advisory Service, an employee benefits consultancy, says: “One of the biggest problems for employers is understanding the market as a whole. In terms of getting the best deal, it is just as important to know which provider has the most efficient administration system, or which has just lost a major contract and is therefore more likely to be offering special deals, as it is to know the product costs. An HR manager is unlikely to be aware of this.”

The question is, does an employer appoint one consultant to source the company’s entire benefits provision, or several who are all specialists in their own field, such as pensions, or medical insurance. Mark Cooper, head of employee benefits at PKF Financial Planning, advocates the former. He explains: “Some employers split pensions consultancy from non-pension benefits, but a good quality consultant should have the expertise to source all their requirements, and more importantly should be able to broker a better deal on all products.”

This is in contrast to the growing number of independent financial advisors (IFAs) moving into the benefits marketplace, many of which only deal with products that they have specialist knowledge of, such as pensions and insurance. Tom McPhail, head of pensions research at IFA firm Hargreaves Lansdown, says: “Finding a service provider with expert knowledge of the various products and systems, as well as the resources to implement an in-house platform that can manage all these systems is akin to finding the Holy Grail. We have looked at expanding our services into other areas, such as flexible benefits, but decided it isn’t worth our while. We will continue to focus instead on providing the best group life insurance, medical cover and pensions for our clients.”

Darrell Parsons, employee benefits director at John Scott & Partners, a firm of IFAs, has been surprised by the number of employers which set up benefit schemes but don’t review them. He says: “The market is changing all the time, some providers are leaving the market and new ones are coming in. By having a reliable independent adviser with a good overview of what is happening in the financial marketplace, employers can review their benefits and ensure they always have the best deal.”

Consultants and IFAs tend to know which providers can offer a good deal if an employer buys a range of products from a single source, or when it is better to source individual products from different providers.

One of the biggest growth areas is in flexible benefits. These are implemented for a variety of reasons, including greater cost control. A well-designed scheme allows employees access to additional benefits paid for by the employer, and increases the range of benefits on offer without increasing the company’s cost base. Flexible benefits can appear to be the ideal solution for employers, but they can be a costly mistake.

“Flexible benefits work very well in a change situation, for example, after a merger or acquisition, or perhaps where the company has had a poor relationship with its employees,” says Mercers’ Wreford. “It can be expensive to implement and administer, and unless you have a sound reason for doing it, flexible benefits would not be cost effective.”

Good deals can be tracked down on some products without the need for an intermediary. However the same rule applies; the buyer must know who they are purchasing for. Andrea Born, head of House of Fraser Business Incentives, a provider of business-to-business vouchers for employee benefits schemes, says: “What appeals to a 25-year-old single man may not be as attractive to a 45-year-old-woman with a family. The person doing the buying must ensure that the voucher supplier’s profile fits in perfectly with the company purchasing the vouchers.”

Ultimately, as the task of attracting and retaining talented staff becomes harder, the costs inevitably rise. The real challenge for employers is how to develop the best benefits package within the contraints of the available budget and ensure it is communicated effectively to staff. The best deals are those that produce the most effective benefits strategy, and are more than likely underpinned by expert advice.

There are four keyquestions that employers should ask themselves:

• Are benefits delivered in a way that matches business strategy? Organisations need to audit the messages they communicate about the values and behaviours that they consider to be important against the ways in which benefit entitlements are determined and increased.

• Are benefits aligned with the market?
The best way for a firm to increase the accuracy of its market data is to extend its sources of information. Propriety benefits surveys, HR peer group, entry and exit interviews, and benefit periodicals all have a part to play in building up a clear and changing picture of the latest trends in market provision.

• Are costs controlled effectively?
Cost control can simply mean establishing terms around the provision of certain benefits to control the risks. For instance, petty private medical insurance claims can be contained through the introduction of an excess.

• Do employees value what they receive?
This requires good communication and targeted benefit promotion, for example through total reward statements that clearly illustrate the monetary value of each element of the package.

Source: Mercer Human Resource Consulting

Case study
London-based financial services recruitment company Morgan McKinley realised that its benefits provision, which comprised a pension scheme, private medical insurance and income protection, was not engaging employees.

The company has 95 staff, with an average age of 27. When finance director Philip Holt joined the firm in March, one of his first tasks was to come up with a benefits package that was more appealing to them. “Uptake of the existing schemes had been low. Pensions were simply not seen as a priority by the staff and the company felt it wasn’t getting the most out of its investment,” he says.

Holt worked with business advisers PKF which put him in touch with Motivano, a provider of benefits services, including voluntary benefits. Now Morgan McKinley is about to launch phase one, starting with a voluntary plan through which staff can access a variety of discounts from 160 suppliers.

Phase two will see staff provided with a total reward statement, while phase three will be the launch of a flexible benefits plan, which will include a range of benefits sourced by PKF, which will also provide independent financial advice for every employee. Holt says working with one independent advisor made the process easier and the end result more effective.

“The staff are very upbeat about the changes. Our remuneration package, including salary, bonus and commission is at the top end of the market.”