Employee Benefits – Review Now or Pay Later

Unlike your general insurance arrangements, which are probably the subject of some form of annual review, your employee benefits programme may not have been properly reviewed and tested for a number of years. If this is so, you are not only missing an opportunity to obtain improvements in the way your programme is structured and serviced, you could, as we will demonstrate, also be storing up some significant financial issues for the future.

One such issue is the potential impact of pension auto-enrolment. Starting from October 2012, for the first time, all employers will have to enrol their staff in a pension scheme and make contributions. Auto-enrolment will be phased in between October 2012 and February 2016, starting with the largest employers. Employees will also have to contribute unless they choose to opt out.

The introduction of auto-enrolment, the most radical change in pensions’ policy in decades, is a key part of the Coalition Governments welfare and economic reforms, and is expected to see millions of working people saving for a pension for the first time. There are no exceptions, even for the smallest employers, and there are a complex range of changes surrounding eligibility and contributions all of which need to be taken into consideration when planning for this seismic change in the pensions landscape.

For most employers, particularly those that fail to plan for the changes, the advent of auto-enrolment will lead to significant extra costs in contributions and considerable additional administration. Despite this, Brian Morgan, Director, Employee Benefits at ERA Insurance Cost Management (ERAICM), says;

“From the conversations we are having with businesses throughout the country, it is clear that most employers simply do not appreciate just how great these increased costs could be. For large employers, the additional expenditure involved in funding contributions alone could run into millions of pounds each year. Yet our experience is telling us that few employers are fully aware of this, let alone actively planning for how auto-enrolment will affect their businesses.

“Recent research conducted by ERAICM shows that the likely increase in numbers joining and the need to match employee contributions means the financial impact for employers currently contributing to employee pension arrangements could be as high as a 40% increase in overall contributions, plus additional administration and management time costs.

“Our findings also show that few organisations fully understand how their pension scheme advisor’s commission arrangements are currently structured. Post the reforms, costs which are currently wrapped up in commissions paid for by the provider and levied from the fund’s investments will cease to be payable on new schemes, or if a move to a new advisor takes place. Where this is the case, any advisory costs associated with the running of such schemes will, in future, have to be met by the employer. Such costs will not be recoverable from the employees although employers may be able to deduct them from contributions.

“Given this, where an organisation has a scheme where its advisor is currently remunerated on a commission basis, it should consider reviewing its position now in order that any remedial or restructuring work can take place under the existing commission terms. Once the changes have taken place, it will be difficult to change advisors unless the employer is prepared to pay hefty fees for corporate advice.

“Auto-enrolment is however, only the latest in a long line of changes within the employee benefits marketplace. Traditional ways of accessing employee benefits provision are changing as fees displace commissions and purchasers increasingly question the value obtained for that expenditure. Old ways of providing cover, a ‘cradle to grave’ approach (or at least until an employee’s projected retirement date), are increasingly seen as inappropriate as employees stay with a company for only a few years, rather than several decades. This shift in the employer-employee covenant produces new challenges for employers – particularly in the areas of Long Term Disability, Private Medical Insurance and Occupational Health provision – and should lead to the consideration of new approaches to the structure and delivery of such benefits in order to make them morecost-effective and tax efficient.

“Given these major changes, which will alter the benefits landscape placing new responsibilities and legal obligations onto employers, a long, hard look at the entire structure and delivery of employee benefits is advisable. As we have demonstrated, the option of simply rolling over your existing programme, year-on-year, without subjecting it to an independent, transparent and impartial review is one which may come back to haunt your company in the years to come.”

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