The big chill

The last recession, in the early 1990s, was pretty brutal for the employee benefits industry. As employers struggled to survive in straightened times, many slashed reward budgets. So now amid a probably steeper recession, what will happen to benefits?

Iain Laws, director at reward consultancy Enrich, says: “In the recession of the early 1990s employee benefits were sacrificed for survival among small businesses. Medium and larger enterprises focused on containing costs while providers coped with shrinking employee populations and employer client bases. There is no reason to assume that similar trends will not be exhibited in the current downturn.”

Last year, demand was still shielded from the slump. According to the Trends in Employee Benefits 2008 report by Hymans Robertson, almost half (45 per cent) of employers planned to enhance their benefits in 2008. The majority of employers (95 per cent) had no plans to cut benefits.

However, this year could be different. There are now signs that the employee benefits industry may be catching a cold. David Kasamaki, channel sales director at flexible benefits provider Motivano, says: “It is already very clear that the economic downturn is having an impact on the employee benefits market. Potential new clients are taking longer to make decisions about what benefits to implement first, and there seems to be a shift towards more of a phased launch, rather than a full launch.”

In coming months, organisations will start cutting benefits, agrees Steve Herbert, head of benefits strategy at Origen, an IFA. “As employers really start to focus on the cost of providing benefits, many will question their benefits spend. Put simply, employers will be looking for the justification, or return on investment, for every pound spent on benefits. If this justification cannot be found, cutbacks are likely.”

Most experts agree that what is left of defined benefits pensions are first in line for the axe this time around. Currently, in most cases, companies are closing schemes to new members, but existing members continue to get the accrued benefits. In a chilly economic climate, however, more employers may wind up final salary schemes altogether.

The recession could well speed up DB schemes’ demise, says Martin Palmer, Friends Provident’s pensions manager. “Any employer offering a defined benefit scheme will certainly be reviewing the cost and weighing up the benefits. The costs are spiralling, and, as a result of the falling stock market, the benefits case will have to be tangible and very powerful. There is a strong chance this recession could put the final nail in the coffin for open DB schemes.”

Bonuses and pay rises are also out of the window, says Timothy Harris, flexible benefits consultant at Watson Wyatt. “It is not unreasonable to expect an increase in the number of organisations paying little or no bonus for 2009, or that they will freeze salaries for 2009. Budgets for social functions, such as Christmas parties, are also likely to be cut.”

But there is an argument that keeping perks can prove cost-effective in the long run. According to Clive Cripps, a partner at Hewitt Associates, employers would do well to learn lessons from the last downturn. “The lesson from the last recession was that there was too much slash and burn. Companies did not recognise the importance of keeping survivors engaged, and tried to cut benefits too much. Ultimately these are the people who will drag the company out of the recession, and this group holds the vital intellectual knowledge that the company will rely on to gain an advantage in the recovery.”

Removing perks can be tricky, says David Kasamaki of Motivano. “As well as being disastrous for staff morale, it is quite complicated to remove a benefit once it is made available. There are potential contractual issues that need to be dealt with. It may mean new employment contracts for all – not a cheap exercise.”

Futhermore, in hard times, some benefits are more important than ever. Advisers expect voluntary benefits, for example, to receive a boost in a recession, as workers dash to save cash. Clive Cripps from Hewitt Associates says: “I would expect to see a greater use of benefits that help cash go further, such as retail vouchers. “Voluntary benefits schemes should also increase, as employees try to make their money go further. We will also see an increased use of tax efficient benefits as a substitute for private spending. Childcare vouchers are an example.”

Already, calls to employee assistance helplines, which provide support with emotional problems and stresses, have soared. Employee Assistance Programme provider Employee Advisory Resource, which provides 341 UK firms with EAPs, reported that in July 2008 calls relating to redundancy had increased by 55 per cent on the same month in 2007. “During these increasingly tough times, employees are looking for guidance and advice more than ever before,” says Mark Eaton, director of benefits at provider Personal Group.

Financial advice schemes should also be busy as workers grapple with plunging house prices and out of work partners. Martin Palmer of Friends Provident says: “The main concerns of the workforce will be their job security, but many will also be experiencing difficulty remortgaging as negative equity begins to bite. Many employees will be focusing on rearranging their finances, so any form of support that employers are able to provide will be welcome.”

How can advisers help clients through the economic chill? The first step to surviving the slowdown is to do a complete benefits review, highlighting where savings can be made. Pensions and investment expert Dr Ros Altmann says: “In order to help cushion the blow of overall cost cuts, advisers may be able to help the employer design a new package of staff benefits that overall costs less than before, but also may offer advantages to many workers at the same time. Advisers need to discuss the range of benefits being provided to staff, and perhaps help employers adjust the package to be more flexible and cater for individual needs more directly, while perhaps also allowing a reduction in overall costs.”

A popular money-saving measure is salary sacrifice, a way of reducing National Insurance contributions for both employees and employer by increasing the proportion of salary going towards tax-exempt benefits such as pensions.”The implementation of pension salary sacrifice should be a priority in the current economic environment,” says Watson Wyatt’s Timothy Harris. “However, companies need to be aware that certain employees, usually low earners, may lose out on certain state benefits by participating in this type of arrangement.”

Employers with fragile finances are also locking into fixed-contract prices to get peace of mind. Stuart Merry, a senior consultant at Capita Hartshead, says: “We are seeing an increase in the number of employers asking about options such as fixed-priced contracts, where costs are agreed up front. This means that there are no unexpected surprises further down the line. Cost management is the key to getting through the downturn.”

Organisations that want to cut costs without risking workers’ wrath should scale back insurance terms, says Paul Waters, senior benefits consultant at Hymans Robertson. “Look at the insurance provisions. Redesigning the benefit, such as restricting hospital networks for medical insurance schemes, can reduce premiums without significantly affecting the benefit.”

Flexible benefits schemes can be another strategy for stretching cash further. Here, rather than providing pricey perks to all workers as standard, the employer offers a core level of benefit and gives staff the option to upgrade. A common example is funding medical cover for all staff, allowing workers to opt for family cover if they wish.

Employers reduce their expenditure not by cutting benefits, but by creating cost savings and making sure staff appreciate current rewards, says David Kasamaki at Motivano. “2009 will see a greater emphasis on benefits; this doesn’t mean that employers will add new benefits, but during the recession they will ensure that their people get a better understanding of the real value of their benefits package.”

Waters says employers are using increasingly sophisticated methods to entice workers to take up schemes. These include ‘segmenting’ communications, slicing and dicing the workforce into particular demographics and sending out only relevant information to different groups. This can be as simple as mailing out childcare voucher information only to employees with kids.

Easy access to perks is essential, says Waters. “Remove barriers to participation such as complicated application forms, restrictive enrolment windows and lack of ready access to clear information. In short, don’t spend money providing benefits that don’t match employees’ needs,that they don’t understand, or that they can’t easily take advantage of.” At the very least, employers should take up the free communication and education that most suppliers include in their packages. Martin Palmer says: “Often web services and educational seminars are bundled into the price of the offering, and these can often be white labelled to reflect the adviser brand. Pension presentations are a good way of helping the workforce to appreciate that their employer is looking out for their best interests.”

Finally, there might be one reason for advisers to keep smiling through the slump: there may never be a better time to bond with clients. Debra Edwards, a director at voluntary benefits provider CB Affinity says, “This is a real opportunity to demonstrate innovation and support to clients, by stopping being advisers and becoming partners. By aligning themselves and understanding the culture and the specific HR issues clients have in the current climate, advisers can tie themselves into a client, resulting in a mutually beneficial lasting relationship.”

What can we learn from previous downturns?

Stuart Merry, senior consultant, Capita Hartshead

“Employee benefits tend to be cyclical in nature and are aligned to the fortunes of the economy”

As the benefits industry braces itself for the crash, what lessons can it learn from previous downturns? “Employee benefits tend to be cyclical in nature and are aligned to the fortunes of the economy,” says Stuart Merry, a senior consultant at Capita Hartshead. “If we look back at 2000 and the end of the dot.com bubble, we saw a sea change in employee benefits. As the excesses of the previous years unwound, so employers moved from focusing on recruitment and staff retention to cost reduction. “As the economy began to expand again after the tech bubble burst, so employers began to invest in total reward and flex plans, benefits that would aid retention and recruitment,” he says. Back in the last recession in the 1990s, small employers cut perks and larger organisations scaled back benefits. However, employers could be better placed to weather the slowdown now, says Debra Edwards at CB Affinity. “The concept of flexible benefits, as we know it today, wasn’t around so employers wouldn’t have had the choice to use flex to contain costs.”

The recession was actually good for the voluntary benefits industry, adds Edwards. “Downturns will always make employees and employers think twice about spending money, and helping employees’ money go further. This certainly fed into the voluntary benefits market last time.”

Dos and don’ts for helping clients survive the recession

  • DO Do a full benefits audit. Help clients analyse all potential ways to save cash, such as salary sacrifice or cutting back insurance terms.
  • DO Lock in now. Tell clients about the option to agree scheme costs up front for peace of mind.
  • DO Think big. Many advisers are looking at bundling services for employers, to help them take advantage of economies of scale and reduce administration.
  • DO Have a natter. Ensure clients know exactly what you can do for them, covering all services provided, including benefits administration.
  • DO Get line managers on board. If managers feel disengaged from benefits, it is likely that their team will feel the same.

  • DON’T Look for a short-term fix. Employers need to be in a strong position take advantage once the economy gets on the road to recovery.
  • DON’T Cut benefits. Trimming perks can demotivate staff; organisations need top talent to help them weather the downturn.
  • DON’T Break contracts. Some benefits are covered by contractual agreements and safeguarded by law; employers cannot change them without workers’ consent.
  • DON’T Give pricey perks as standard. Flexible benefits schemes allow employers to give a core level of benefit, with the option for staff to upgrade if they wish.
  • DON’T Skimp on communication.