Benefits packages are evolving in the wake of the pandemic. Mercer Marsh Benefits’ David Dodd, Jack Curzon and Mike Naulls look at how to build a business case for change as spend comes under pressure.
2020 was a rollercoaster year for UK employers – since the first Covid-19 lockdown beginning in March 2020, the focus has been on when and how to return to the office in some form. But the challenges our clients are facing have remained constant – namely, keeping people engaged, wherever they are, as well as safe, well and productive.
This is ultimately a people-based crisis – it is HR functions who will bring us through it, and into prosperity in 2021. This presents an opportunity to engage and educate the C-suite around people risk and the importance of having the right benefits and wellbeing strategy in place.
The key factors influencing benefits costs
It’s undoubtedly a tough time for companies, and this is being reflected to some degree in premiums. But beyond this, the first step towards understanding the cost of your benefits is to get a broad understanding of what each cost is, and the purpose it serves – something many companies don’t have a firm grasp of.
A broad range of factors influence cost, such as benefits design, the demographics of your people and the increasing cost of drugs and medical inflation in general. In the current climate, several other factors are putting pressure on providers to change premiums, such as the number of employees on furlough and recent redundancies, while provider attitude to risk in light of the pandemic is also a key contributor to costs. Despite a temporary reduction of claims across some benefits, providers are expecting a bounce back and this is leading to a more cautious approach to pricing in an already hardening market.
There is a large amount of uncertainty, and it’s difficult to know how the future will pan out. But while some reactivity to what’s happening is necessary, it’s also possible to be proactive when it comes to your benefits strategy and the premiums you’ll pay.
Outside of pensions, it is healthcare and protection schemes – group life and income protection – that typically represent the biggest spend for employers. These are highly valued benefits that help with recruitment and retention, and are effective short and long-term absence management tools. Over recent years, consolidation of providers has created a limited market in the health care space, and with very low growth of new schemes, the switch of existing business between providers has tended to dominate this market.
As a result, providers have aimed to differentiate through added-value services, such as digital care, which is good news for clients. But the challenge is that over recent years utilisation of claims has increased. Other external factors creating challenges for the market include Brexit, which is suppressing demand and appetite for further investment in benefits. This is all combining to create tension as providers try to balance costs and grow market share at the same time.
What this ultimately means for clients is that preparing for any upcoming scheme renewals and working with a proven employee benefits advisor will stand you in good stead. Every company’s situation is different, and will depend on your provider’s attitude to risk, their strategy for consolidation or growth in their respective markets and the impact of all the factors that we’ve referenced. But preparation and a careful approach will ensure you come out of any negotiation process with your benefits designed and priced optimally.
Smarter financing and placement
There are different approaches possible for financing, and the options depend on your own attitude to risk. The majority of today’s schemes are full insurance arrangements where the provider takes on the full risk and prices accordingly. There is little flexibility around benefit design, but more certainty around cost and cover.
Another option, self-insurance, involves arrangements that are linked to the size of the scheme, with usually the value of your claims fund being the main determining factor. For healthcare, a good starting point would be anything over £500,000. The main benefit is greater flexibility in design but companies do take on a share of the risk.
For multinationals there are other options, including multi-national pooling, captives and other financing tools that can leverage the total value of your global insurance spend.
You may be at the point of considering a new option because of the size and scale of your organisation, or the complexity of your arrangements, or because of market conditions. Typically, a feasibility study is the best way to understand the right option.
Changing the placement of your benefits means retaining or changing provider, regardless of the financing model that’s in place. When preparing for this, your advisor needs to have done their homework on scheme dynamics and the factors impacting your provider’s renewal terms.
A market review will help companies understand whether switching or retaining their provider is the best approach. Your considerations should not only include price but value, employee feedback, and perhaps how the provider can offer more via added-value benefits. It’s not just about picking the cheapest option, but finding the sweet spot depending on your specific needs.
However, if you have the right conversations and use a data driven approach there are often significant premiums to be saved. This is borne out by our own research data into our market review outcomes over the last 18 months.
Return on investment
Demonstrating ROI on benefits can be challenging, but the first crucial step to take is ensure your benefits are tied to the wider business strategy. If, for example, the business aspires to be innovative or cares particularly about wellbeing, benefits need to reflect that.
It’s also important to remember how diverse your workforce is – using personas can only take you so far, because putting people into boxes can reduce the effectiveness of your strategy. Wellbeing – whether physical, mental, financial or social – means different things to different people. It doesn’t matter if take-up is low of a particular benefit if it serves a specific need, and aligns with your strategy.
Finally, it is crucial to start building tangible evidence of what your strategy is, and why each part exists. Achieving ROI will never happen unless you begin by identifying your objectives and targets, and understanding what metrics you need to measure and constantly improve on these.
Once that is achieved, data collection needs to be automatic and constant. You want never-ending feedback loops, including measures for more intangible aspects such as engagement and culture. There are so many factors to proving the effectiveness of benefits that it is necessary to start from scratch.
Take expert advice. A range of complex factors can impact the cost of benefits, so ensure you have people that can help you navigate those challenges
Don’t be passive. Plan ahead of your next renewal – there needs to be a strategy around how you approach these costs.
Find the right financial model. There are a number of options, so work with an advisor to get the best value.
Make benefits diverse. Even something as seemingly straightforward as financial wellbeing needs a wide range of products on offer; people need different support depending on their time of life.
Start collecting data. It may seem overwhelming, but find out what you need to measure first, then start collecting information, then try and automate it.
This article is intended for general information only and is not tailored to your particular personal and/or financial position. It does not contain investment, financial, legal, tax or any other advice and should not be relied upon for this purpose. If you require advice based on your specific circumstances, you should contact a professional adviser.