schemes to flex arrangements, finds Edmund Tirbutt
Whether the primary reason employers offer group risk products via flex is to give employees greater choice or to cut costs has traditionally been a subject of considerable debate. Whatever your long held view on the subject is, with cost cutting becoming such a high priority in most areas of business, it will be no great surprise if the issue of employee choice soon starts to take something of a back seat.
So far insurers and intermediaries consistently state that there is no discernable trend in the direction of employers deciding to reduce their outgoings by dismantling stand-alone group risk schemes and offering the products via flex instead – so that they transfer part or even all of the premium costs to their employees.
They are, however, equally consistent in acknowledging that it could only be a matter of time before we see such a trend emerging, even though it could involve employers having to consult with their workforces. The only area where there is a lack of consensus is the timing.
Helene Gullen, commercial marketing manager at Unum, feels that we could start to see changes at renewals taking place this April but has not observed a particular spike in flex quotes to date.
But Darren Dopson, lead consultant at Hewitt Associates, does not regard the renewal season as that relevant on the grounds that decisions to move to flex tend to be taken at a higher level and renewal dates for insurance policies subsequently brought into line with flex schemes.
He says “Although there are a lot of companies out there moving to flex, there is no really significant change as a result of the downturn and it’s too soon to tell what will happen. The lead-in time for moving to flex, setting up the administration and putting insurance products in place is typically six to 12 months for a larger scheme.”
The initial costs of setting up a flex scheme are emphasised by many – but not all – as being a big issue during the current economic climate. Even for a scheme with only 500 to 1,000 lives you are talking about around £50,000 for a bespoke format and around £20,000 for an off-the-shelf no-frills version – and these prices don’t even include soft costs such as HR time.
Simon Bailey, head of marketing at Aegon Scottish Equitable, says: “Smaller companies in particular are likely to baulk at the installation costs at the moment as they simply don’t have the necessary volume of employees to make a sufficient impact on the company to achieve value.”
Nevertheless, Adrian Houlihan, flexible benefits manager at Origen, is seeing a lot of “flex through the back door.” He is referring to flex schemes that start off small by merely offering benefits such as childcare vouchers and holiday entitlements but which then gradually decide to include group risk at the expense of stand-alone versions of the products.
He says “They are doing it piecemeal rather than wholesale by, for example, changing one or two benefits each year. At the moment you have to spend your pennies more wisely. So those who have a scheme often include group risk but with those who haven’t got one there is a lot of watching and waiting going on because of the implementation costs.”
However, most existing flex schemes already offer group risk products so there is clearly far more potential to be realised by introducing new flex schemes. Enrich reports that only around 10 per cent of its clients have flex and that a further 15 per cent are talking about it.
Justin Crossland, head of health and risk at Towers Perrin, says “Almost all large flex schemes will have critical illness cover and virtually always as a ‘voluntary’ benefit. Most will also have life cover although some clients prefer not to include it if they are paternalistic or feel there is a complication of a benefit promise relating to pension provision.
“Whether they include income protection really depends on whether they have a stand-alone income protection scheme already. If they haven’t they would be unlikely to put income protection in flex but most employers who do already have a scheme would include it. The exceptions would be those who are paternalistic or who believe that the absence management benefit to the employer is such an integral part of their offer that it’s not appropriate to put it in flex.”
There is also no discernable trend in the direction of product innovation within flex. This is undoubtedly partly due to a realisation that there is a very fine line between making flex attractive and making it over-complicated. After all, group risk products are already more complicated than most other flex products.
Legal & General has, however, launched a new income protection flex product this January. Entitled Multiflex, this allows employees to flex the length of the benefit term in addition to the proportion of salary that they cover, and it therefore also enables employers to manage costs without restricting benefit. Although the concept had previously been offered by some other insurers on a bespoke basis, this is the first time it has been formalised in a standard package.
For further evidence of significant innovation one has to go back to Aegon Scottish Equitable’s launch of its Employee Protection Menu in 2001. This provides a range of options to suit different employee profiles and, although employees can chose a different option each year, they cannot actually flex their benefits up and down as with a standard flex scheme. The primary attraction is that it gives the employer certainty over costs, whatever decisions employees make.
If there does prove to be a marked trend towards flex in the near future it is possible that we could see further innovation that helps employers control costs. But advisers could be forgiven for not holding their breath in light of the many false dawns flex has had over the years. Much will doubtless depend on how long the economic downturn lasts and that is the one thing that no-one is currently able to forecast with any confidence.
Group risk products through flex
Group risk premiums tend to be slightly higher in flex than in stand-alone schemes to reflect the risk of higher claims resulting from the element of individual choice. The cover does, however, offer employees significantly better value than individual protection products together with the flexibility to alter cover levels to suit their own requirements.
As with a stand-alone scheme, income protection offered via flex pays out a regular income to those who are unable to work due to long-term health problems. But via flex employees will normally receive a lower level of employer-funded benefit along with the opportunity to flex this up – and often also down. A stand-alone employer-funded income protection scheme will typically cover 75 per cent of salary but a flex scheme will normally cover between 40 per cent and 75 per cent as a core benefit, although some will go as low as 25 per cent.
The most affordable of the group risk benefits and, as with income protection, the primary difference from a stand-alone scheme when held in flex is normally the ability to flex up and down. The core level of employer-funded cover can be anything from one to four times salary, although a basis of four times salary is fairly commonplace. Employees are typically allowed to flex up to 10 times salary.
Critical Illness Cover
Critical illness cover – which, as with stand-alone schemes, pays out a lump sum if the employee is diagnosed with one of a stated number of serious conditions – is commonly offered only as a ‘voluntary’ benefit within flex (ie: with no employer-funded component.) It tends to be purchased in units of £10,000 or £25,000, typically up to a maximum of six or 10 units, and take-up rates are frequently reported to be as high as 15 per cent to 20 per cent. A further difference from life and income protection is that very little critical illness cover is offered by employers outside flex.
Adviser view: Jamie Barnes, client services director, Enrich
“Firms that are postponing implementation are probably not being properly advised”Begging to differJamie Barnes, client services director at Enrich, does not subscribe to the commonly expressed view that the implementation costs of flex schemes are necessarily a major barrier to companies deciding to go ahead with flex schemes in the current economic climate. He maintains that the entire installation of a flex scheme can be self-financing through the use of salary sacrifice – to create National Insurance savings on pensions and some other benefits.
He says “I have come across a number of schemes recently that have cost nothing to implement, and some were as small as 100 lives. So firms that are postponing implementation are probably not being properly advised.”
Barnes also questions the assumption commonly made by insurers that claims made on group risk products offered within flex schemes will be higher than those made on stand-alone group risk products.
He says “Potentially claims could be higher but I haven’t experienced it in the 15 years I’ve been in the business. However, insurers clearly view it as a potential liability and therefore charge a slightly higher premium for flex. I have no doubt that insurers can give you the odd example of anti-selection within flex but they could do so on stand-alone group risk schemes as well.”