The challenges of changing an employee benefits package

It’s often easy to forget the value of certain employee benefits to the employer...

Changing world of employee benefits

The majority of employers tend to provide employee benefits to their workers for a combination of reasons, whether it be from historical promises, competitive pressures, a paternalistic perspective or a combination of these drivers.

As a result, the range of benefits most employers offer deliver benefits to their workers, some of which are also intended to benefit the employer.

The range combine to reward or retain employees with the additional feature of providing benefits to a worker’s dependants.

Yet it’s often easy to forget the value of certain employee benefits to the employer rather than seeing them as a payroll cost to the business.

A good number of employers are facing financial difficulties as a result of Covid-19 and difficult trading conditions. Some employers made temporary changes to certain benefits during the furlough of employees and now need to consider making more permanent changes to reduce the company’s financial costs.

However, before changing employee benefits for the longer-term it would be sensible to consider the corporate benefits offered by certain employee benefits plans in addition to the more obvious employee benefits.

If making cuts is essential then clearly this takes priority over strategy, but if there needs to be some consideration of which benefits to amend or cut, perhaps the following points may help:

Workplace pensions

There’s no doubt that a workplace pension is usually highly valued by employees, particularly if the employer contributions are more generous than the statutory minimum required by auto-enrolment rules. We’re talking about defined contribution (DC) pensions here, as they dominate current pension provision in the UK (most defined benefit schemes are closed to accrual outside the public sector).

But there’s a key aspect of a workplace pension which is often overlooked – paying a generous pension contribution is much more tax efficient for an employer than paying a higher salary. This is because there’s no employer national insurance contribution on a pension payment, but there would be 13.8% NIC on an additional salary payment. In other words, a remuneration model with average pay and a generous pension contribution would be better for the employer than an average pension contribution with a generous salary. It’s better in tax terms for the employee, too, as they would be paying less income tax and National Insurance.

However, most employees are very focused on their salary level and take-home pay, and less aware of the value of their total benefits package (or what is commonly referred to as ‘total reward’). It would be difficult for an employer to move towards a generous pension contribution at the expense of inflationary salary rises. This is despite the fact that a huge number of UK employees are woefully short of pension contributions, at least in comparison to their expectations of when they might wish to retire and their expected standard of living (see PLSA research for more on this).

Nevertheless, an employer needing to make payroll savings will probably need to look at their pension provision given that they’re usually the highest cost employee benefit. This is subject of course, to maintaining the statutory minimum contribution level to meet auto-enrolment rules.

Making changes to pension contributions will usually also require some element of consultation, especially if pension contributions are contractual. In a trust-based scheme there is the additional potential diligence of checking if the contribution level is ‘hard coded’ into the Scheme rules or there are any specific additional requirements to change the structure of the benefits offered. To ensure that any change is effective an ongoing dialogue with the scheme trustees will be essential.

Group Life Assurance (Death in Service benefits)

These days, Death in Service cover is usually provided through an insurance policy written under its own trust rather than being embedded in a trust-based pension scheme. This benefit is usually near the top of appreciation charts in employee benefits surveys, and it’s also one of the lowest-cost benefits for an employer to offer. Removing such a scheme or reducing the cover is therefore not usually recommended. The cost saving would usually be comparatively small, and the negative effect on employees would probably be disproportionately large. In addition, many group life assurance schemes are a contractual benefit possibly requiring consultation before any amendments are finalised.

Group Income Protection

Sometimes called Permanent Health Insurance, GIP schemes are insurance policies held by an employer to offset the costs of continuing to pay a long-term salary to an employee who is absent through sickness or injury. The costs of such schemes vary widely based on the policy specification and also the type of worker covered. For example, office-based workers would generally be classed as a lower-risk occupation for insurance purposes, with someone working on a construction site being classed as a higher-risk occupation. Some occupations are extremely expensive to insure for GIP, and some aren’t even insurable at any price.

A typical GIP policy will pay out a benefit after a certain ‘deferred period’ which is the early part of sickness when a worker may still be receiving salary, but not necessarily. For example, a GIP policy with a 6 or 12 months deferred period will be considerably less expensive than a policy with a 3 months deferred period. GIP deferred periods should ideally coincide with the point at which sick pay ceases, but it’s not always affordable to do so.

The length of the claim period also makes a big difference to insurance premiums. The original design of these policies (which remains available) provided a long-term income until the employee reached their normal retirement date, usually age 60 or 65. Often the policy benefits would increase with inflation, so the potential claim payment for an insurer to underwrite could be enormous. Such policies are becoming rare these days due to the cost, so GIP policies have been developed with limited claim periods ranging from 2 years up to 5 years. These are much more affordable for employers and now growing in popularity in the employee benefits market.

The reason for explaining all these features is that if an employer has a GIP scheme and needs to reduce payroll costs, then checking the policy benefit specification is key. Rather than removing and potentially self-insuring the benefit entirely, with any consultation requirements and associated negative employee reaction; it may be possible to amend the specification to reduce costs considerably without removing the entire scheme. Working with an expert employee benefits consultant who understands all of the key issues will be essential.

Private Medical Insurance

PMI is a really important employee benefit, especially with the increase in NHS waiting times and availability in the current climate and is highly valued by employees who need to use it. However, we would argue the main point of PMI is to help reduce sickness absence.

PMI provides faster access to consultants, diagnostics and subsequent treatment for those usually non- critical but debilitating conditions so employees recover quickly.

PMI can be a relatively expensive benefit to offer, and it can be tempting to remove it when times are tough. However, employers should consider the effect on the company if a key person was off sick, or was less effective because they were waiting for a consultation or treatment.

With good advice, there are ways of ensuring that the PMI benefits are a key element of the company’s Health & Wellbeing strategy, remain cost effective and meet the employer’s needs. .

Voluntary Benefits

Often incorrectly confused with ‘flexible benefits’; a voluntary benefit is one facilitated by an employer but actually paid for by the employee. Examples include top-up life assurance, partner or spouse life assurance, critical illness insurance for employees and/or their partners, dental insurance and medical cash plans.

If an employer would like to widen the range of benefits offered to employees, but cannot afford to do so, introducing a range of voluntary benefits is ideal. Usually, employees benefit from large savings compared to the cost of arranging the same benefit privately. The employer has facilitated a bulk discount based on the size of their workforce, but without any explicit cost. Win-win.

However, managing voluntary benefits is usually a hassle for an employer, and typically a consulting firm will offer flexible benefits software as a means of managing everything. However this type of software is often expensive and perhaps too complex for the needs of most employers. A sledgehammer to crack a nut? Very possibly. But there is now a better way…

Punter Southall Aspire Benefits Manager

Each year, your HR team could be spending hundreds of hours overseeing the renewal process for your different employee benefits and transferring data to the providers.

If an employee needs to call on one of their protection benefits, accuracy of data is absolutely key. However, submitting data is time-consuming, complex and can be liable to human error.

This is where Aspire Benefits Manager comes to the rescue.

Our secure, streamlined platform allows you to reduce the cost and complexity of managing your core benefits provision. It covers the full range of benefits, including:

• Group Life
• Group Critical illness
• Group Income Protection
• PMI
• Pension
• Voluntary benefits

It’s easy to set up and can be configured within minutes to show exactly the data you want to see.

And as well as making it easier to submit your scheme data, you can wave goodbye to the hours you spend pulling off management information each month – Aspire Benefits Manager will send you automated, scheduled reports, exactly when you need them.

To find out more, contact us.