Macro economic indicators and the impact on employee benefits

Macro-economic indicators, changes in the labour market and personal debt levels, can all influence the perks offered to staff, says Victoria Furness

Case study: Robert Gordon University

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When the Bank of England unexpectedly raised interest rates from 4.5% to 4.75% in August, most people will have wondered what effect it would have on their mortgage repayments or savings accounts. Very few are likely to have questioned the impact of the 0.25% rise on their pay, pensions and benefits package.

But, pay and reward are just as likely to be affected by macro-economic factors – such as interest rates, inflation and levels of unemployment – and changes in the labour market as personal debt levels.

Opinions vary widely in the industry about exactly how much influence economic indicators and labour market trends have on benefits. Indeed, given the recent period of economic stability in the UK – with prices, the cost of borrowing and unemployment all remaining at relatively low levels – benefits managers who are new to the profession might never have experienced the effect of economic instability on pay and reward structures.

Andy Lister, head of employee benefits at benefits consultancy Grass Roots, says: “In the present time, you might not be found out or have any ticking bomb issues.”

However, Mark Edelsten, principal at Mercer Human Resource Consulting, is concerned that organisations do not examine labour market statistics in detail. “People do not know where to start,” he says, highlighting the disparity in pay across the UK as one of the labour trends organisations often ignore.

“Statistics show that rates of unemployment and wages rates in the UK are very regional. [But] typically many large employers override this and have one main rate for roles across the UK, with perhaps a few differences. This can lead to distortions in the labour market,” he explains.

Looking at the UK’s economic climate, interest rates are still low with the increase in August representing the first in two years. And although the Bank of England did not increase interest rates the following month it is expected to do so again by the end of the year. This is partly in response to rising UK inflation, which increased to 2.5% in August. Although still low, inflation has now topped the government’s 2% target for four months.

Historically, rising inflation has impacted on pay levels. “Everyone used to have two pay changes a year up to [about] 1981 because pay and inflation were more closely linked in people’s minds. The whole thrust of Tory policy was to break that linkage. [And] profit-related pay structures were designed to move away from the concept of pay linked to inflation and tie pay to organisations and their profitability,” explains Edelsten.

That break in the link, followed by a period of low inflation, has led to other developments in benefits such as the introduction of total reward statements.

Rob McPherson, reward information consultant at the Hay Group, says: “Compensation and benefits managers are finding it hard to be competitive [as] there is less movement on wages. With total remuneration statements, organisations are trying to be more competitive by showing employees how effective their overall package is and how much they receive for each benefit.”

By focusing on benefits rather than pay, organisations can keep other costs down, says Lister. “As organisations put salaries up, national insurance costs could also increase. Lots of benefits are predicated out of salary, so pension contributions might also rise if salary does, as will overtime rates and, possibly, bonuses,” he adds.

When the stock market is buoyant, pension schemes tend to be one of the biggest beneficiaries, since their performance is often tied to the overall performance of the stock market. “Other benefits linked to this are private medical insurance (PMI) and life assurance, all of which are brokered benefits and whose cost will depend on a range of factors, not least interest rates,” adds Lister.

Interest rates affect savings products included in the benefits package and can also impact on company car schemes. “An organisation either has to finance acquisitions of cars or pay for the lease, and lease costs are directly linked to the underlying interest rate,” he explains.

One potential cause of concern in the UK economy is the rising unemployment rate, which crept up to 1.7m for the three months ending July, an increase of 280,000 year-on-year. For the same period, the number of people in employment was 28.97m, up 220,000 over the year. This is the highest figure since comparable records began in 1971 and is partly attributable to the fact that there are more people, including migrant workers, who are seeking to enter the labour market. The government is also trying to encourage Incapacity Benefit claimants back into work.

During periods of high employment, when competition for staff is more intense, employers have traditionally attracted or rewarded employees by increasing pay or benefits. But today, many employers choose to err on the side of caution and prefer to reduce their exposure to economic changes by offering increased choice through flexible or voluntary benefits schemes.

Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development (CIPD), says: “Organisations are trying to move away from fixed costs to variable pay or rewards linked to company performance. This shifts the risk and cost away from the organisation towards the employee.”

During a downturn, benefits are one of the first costs to come under the scrutiny of the finance director, with perks such as the staff Christmas party and concierge services often being cut from the package. When times are tough, employers might also offer access to services such as redundancy counselling, especially if widescale cuts are taking place.

Even though the current economic outlook is fairly stable, benefits such as debt counselling and financial education, are also attracting growing interest from employers, Philip Hutchinson, principal in Mercer’s health and benefits division, says: “The high levels of debt in this country are coming up in some discussions with organisations. For example, a well-known high street building society with one of the best benefits schemes in the UK has a problem: the majority of employees cannot afford the benefits it offers because they are in debt.”

According to figures from the Hay Group, in 1999, 10% of organisations didn’t offer any form of debt or stress counselling to staff. Today that figure has fallen to just 2%. In acknowledgement of the scale of the consumer debt problem in the UK – a record number of people became insolvent in England and Wales between April and June this year – the government has pledged £51m to increase the capacity of free face-to-face debt advice.

The government is also championing financial education in the workplace. Its aim is for four million employees to have accessed some form of financial training in their workplace by 2010. Transport firm Stagecoach is one of the employers that took part in a 12-month pilot with the Financial Services Authority.

Participating employees received some financial information and were offered one-to-one surgeries. Steven Stewart, group head of media and public affairs at Stagecoach, says: “There was an initial reticence to come forward and discuss financial matters, so we worked very closely with the trade unions to gain the confidence of employees and this was one of the key recommendations we fed back to the FSA.”

Rather than looking at the bigger economic picture, many benefits teams spend most of their time analysing the make-up of their own labour force. Dr Johnny Sung, senior research fellow at the Centre for Labour Market Studies at University of Leicester, explains: “HR departments pay relatively little interest to macro indicators, such as interest rates and unemployment rates. They are far more focused [on] the things that happen in their own organisations.”

Few employers can have failed to notice one of the main changes in their workforce in recent decades: a significant increase in the number of women in the workplace. The UK employment rate of working-age women rose from 56% in 1971 to 70% in 2005.

With the main responsibility for childcare normally falling to women, it is not surprising that child-friendly policies such as childcare vouchers and flexible working, have risen up the agenda for most benefits managers.

Many organisations have also gone beyond the statutory requirement of offering the right to request flexible working to parents with disabled children or children under six years of age, and opened up the option to all staff.

Bromford Housing Trust, the largest housing association outside London, offers flexible working to all staff, 75% of whom are female. Michelle Beardshaw, HR team leader, says: “We do not have a strict policy about what people can and cannot do, as long as it meets the needs of the business.”

Flexible working has led to a major change in working patterns in some organisations and it’s a trend that is set to continue, says Tony Clare, partner in consulting at Deloitte, “not just because of the number of women in the workforce but also because lots of older workers want to stay in employment beyond the age of 65 years but not necessarily in a full-time role.”

The ageing workforce will have an impact on other benefits, particularly insurance, warns Mercer’s Hutchinson. “It will become increasingly difficult to price benefits such as PMI.” Most products are based on some form of age banding, which will be discriminatory under new age laws. “I think it will drive up the price of insured benefits,” he adds.

Labour trends Another trend driving the labour market is one of the most controversial: the growing number of migrant workers. Tesco and First Group are among a number of employers turning to EU accession countries to fill a labour gap in their organisations. According to the CBI’s Employment trends survey 2006, just under a quarter (22%) of employers expect to recruit from these states this year.

John Chilman, group pensions director at First Group, says: “We run a two-week residential course in Warsaw for recruits from Poland, which includes English lessons. We help recruits from Eastern Europe find accommodation and obtain National Insurance numbers. They also have access to our network of life-long learning centres.” Other organisations might offer relocation packages including cheap flights home or flexible working arrangements.

The significant growth in migrant workers highlights one of the main trends in today’s economy: globalisation. “Globalisation is standardising the benefits platform in big multinational firms, with tweaks being made for local tax laws,” observes Deloitte’s Clare. At the same time, organisations are trying to offer more flexibility and segmentation in the benefits package to appeal to an increasingly diverse workforce.

As ever in life, contradictions abound. “You can look at trends but the nature of society is that it tends not to do what it’s supposed to do. Whatever organisations choose to do with pay and benefits, above all, they must make sure it is robust, transparent and flexible enough to deal with changes in the labour market in the future,” says Hutchinson.

Case study: Robert Gordon University

Stiff competition for staff means that Robert Gordon University (RGU) needs to pay close attention to labour market trends.Based in Aberdeen, the state of the oil industry can influence how easy it is to recruit certain groups of staff. Julie Skinner, resourcing specialist, says: “We’re obviously affected by general labour market trends, but also by how good or bad the oil market is doing as it is the biggest employer in the region. Even when it is not performing at its best, unemployment tends to [sit around the] 3% [mark] or less, so attracting support staff is always a challenge.”

RGU is currently considering a introducing a flexible or voluntary benefits scheme to help boost employee recruitment and retention. “We want to give people choice and we recognise that a lot of other employers offer flexibility in the benefits package,” says Skinner.

The ageing workforce is also going to be an issue for the university over the next five to ten years, particularly with regards to its academic staff, which bring the university skills and research funding. “We are predominantly looking to address this through flexible working,” says Skinner.

Ireland integrates EU migrant workers

Employers with operations in or based in Ireland have seen a much higher influx of migrant workers from EU accession states than those in the UK.

According to Irish financial services group, Friends First, there was an increase of 34,200 EU migrants in the first quarter of 2006, a year-on-year rise of 98%.

Financial services institutions, for example, are heavily recruiting in Eastern Europe to fill positions such as customer service representatives through to statisticians and fund accountants.

Sinead Wallace, regional manager at Grafton Recruitment, signs up workers from countries such as Poland and Slovakia to plug skills gaps in Ireland and parts of England. She claims the new recruits enjoy the same pay and benefits as their [British-isled] colleagues, if not more.

“Abbott, a pharmaceutical company will pay for workers’ accommodation for the first month. It offers an on-site English teacher, and employs someone to research the native cultures workers come from to help them integrate,” she says.