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In focus: Flexible benefits - Everyone’s a winner!

Concerns that staff will cut back on their healthcare in flexible and voluntary benefits schemes have not yet come to bear, while the technology on offer continues to improve. Edmund Tirbutt assesses what this all means for health insurance intermediaries

October 2009 Features

To date the impact of the recession on demand for flexible benefits schemes has been far from overwhelming. There has been no widespread evidence of scheme cancellations or of plummeting take-up rates although, with around half of all schemes renewing next April, the possibility of a belated reaction if the economy fails to improve cannot be discounted.

Similarly, there has been no epidemic of employers trying to save money by dismantling standalone group risk schemes in favour of offering benefits via flex. Most of the factors volunteered by those trying to talk up the positive impact of the recession on flex came into play well before the credit crunch. In particular, advances in technology were already reducing administration costs, making flex software more affordable to SMEs and helping to publicise total reward statements.

The attractions of salary sacrifice have certainly received a fillip as a result of organisations implementing pay freezes and wishing to increase overall packages on a cost-neutral basis. Ceridian, an HR and payroll outsourcer which provides flex in conjunction with Vebnet, reports that 99% of those interested in its flex proposition currently want to talk about salary sacrifice.

But this is to a certain extent being counterbalanced by a trend towards SMEs using salary sacrifice in conjunction with “voluntary” flex schemes – halfway houses that don’t actually provide a flex fund. National employee benefit consultants Buck Consultants reports that the majority of SMEs are now taking this approach, although some may be intending to introduce a full flex fund at a later date. Flex providers also report that that there seems to be a shift towards a more phased launch rather than a full launch.

Mark Carman, marketing and communications director at flex provider Motivano, says: “Employers are looking for the justification or return on investment for every pound spent on benefits, and, if this justification cannot be found, they might cut back. However, with knowledge gained from the last recession, most employers recognise the importance of keeping staff engaged as these are the employees who are going to carry them out of recession. So they will think very carefully about removing non-discretionary benefits.

“As well as having a negative effect on staff morale, removing benefits once they’ve been made available can be rather complicated. With potential contractual issues needing to be dealt with, meaning new employment contracts for all, it could turn out to be an expensive exercise. Unions are, however, becoming more willing to work with management and HR to improve benefits offered via flex.”

“The relationship between unions and employers varies across organisations and sectors,” Carman continues. “Some trade unions are concerned about flex because it is basically asking people to change their terms and conditions if they want to make benefit choices. On the other hand, the unions also see the tax and National Insurance advantages of salary sacrifice to their members, although they are sometimes reluctant to endorse g anything that saves the employers money unless that money is ploughed back into something the employees can benefit from.

“Trade unions can be very helpful when communicating flex to their members as they are trusted and have some expertise on benefits, but they are wary of over-selling the proposition. They can be very active or just want to be informed on how flex is progressing. By ensuring dialogue with the unions, an employer can explain to represented union members why changes are being made to the benefits package and what flex offers.”

TECHNOLOGY PROVIDERS

But, while recession has so far made no great impact on overall demand for flex, it does seem to have been influencing the relative popularity of certain types of flex provider. The technology providers such as Motivano, Vebnet, Thomsons Online Benefits, Benefex and Staffcare (all of which except Staffcare also provide consultancy services) are adamant that they have been taking significant volumes of business away from the major employee benefit consultants.

Richard Morgan, director of consulting services at Vebnet, says: “We are picking up five or six clients a year who are already dealing with employee benefit consultancies on flex. Companies are attracted to the fact that online technology is our primary focus and that we can cost half as much because we don’t have the overheads of major employee benefit consultants.”

Graham Jarvis, managing director of Staffcare, says: “There is a definite trend towards a second-user market in which companies which have already introduced flex are coming back to see if they can get a better technology solution, better service and better price. Because technology and service standards have moved on we have seen a lot of clients leaving established providers and joining us even though some of the very same established providers are winning new business.

“When these switchers originally introduced flex they didn’t know much about it but they are getting so many complaints about service and price from their employees that it is making them look around. Within the last few weeks, in particular, we have seen an awful lot of requests for information from clients with existing flex schemes.”

LORICA SIGNS MORE FLEX PARTNERS

Lorica Online, the new flexible benefits division of Lorica Consulting, has formed a number of key partnerships since formally launching just a few weeks ago.

Launch partner P&MM Ltd, the B2B marketing services agency, is already offering a variety of benefits in the lifestyle area to Lorica’s clients. They include travel bookings and discounts, home and motoring products, health and leisure services, food and entertainment offers, discounts on green and ethical products and services, high street vouchers and even discounts specific to local areas.

Other Lorica Online partnerships include Sodexo, a provider of voucher services in childcare, meals, food, petrol, training courses, healthcare, parking and travel. It also provides bespoke solutions for public bodies and blue chip private companies.

Lorica has also added Wheelies Direct Cycle Solutions as a partner, for the provision of Cycle to Work schemes for clients. Since 2005, Cycle Solutions has been working with organisations all over the UK to help them and their employees to take advantage of the Government backed Cycle To Work Scheme.

Lorica’s flexible business partners’ online offerings will all be integrated into the consulting firm’s bespoke Cube portal.

Lorica Online is being headed up by Tobin Coles, who joined the consulting firm to take up the position of director of flexible benefits and marketing. He is joined by Matt Duffy who has been appointed partnerships manager.

The major benefit consultants could also find themselves facing serious competition from HSBC, which has been ramping up its flex offering since January 2008 and only deals direct. It already has a dozen schemes in place, with between 150 and 8,000 members each, and aims to be a top three player within three years.

Simon Binney, employee benefits director at HSBC Actuaries and Consultants, says: “We are offering a slightly different alternative as we feel our buying power and clout allow us to get good terms, and we have taken a very different approach to the one taken by other banks in the past, which have tended to treat flex as an opportunity to cross-sell other products. We are also whole-of-market whereas some other banks have promoted their own products.”

THE HEALTHCARE PRODUCTS

The recession has also failed to make any spectacular impact on demand for healthcare products within flex. Pensions is undoubtedly the main driver behind salary sacrifice and a few people are trying to make out that there has been a huge trend towards health screening, which can benefit more from salary sacrifice than most other health insurance products because of the potential to save on employer’s and employee’s National Insurance.

Although some providers do report a minor increase in interest in health screening, feedback on the product generally is inconsistent. National employee benefit consultants Lorica Consulting, for example, has health screening in every flex scheme it handles but Ceridian only has it in around 40%.

Most providers volunteer that the majority of flex schemes already have as core benefits life assurance, private medical insurance (PMI) and – if the employer doesn’t already have a standalone income protection scheme – a degree of income protection. Critical illness cover, cash plans and dental insurance are also normally available as voluntary benefits, and most take-up rates reported for these are in the region of 10% to 20% and are remaining broadly constant. Interestingly, however, CIGNA HealthCare reports a fall in dental take-up rates from 10% last year to 6% or 7% since the beginning of this year.

If any genuine new trend can be identified it is probably that employers are trying to make flex schemes support coordinated health and wellbeing programmes without adding to costs. In health screening there has been a move away from the “human MOT test” type screenings towards more sophisticated early diagnostic tools offered by the likes of Lifescan. Fitbug (the pedometer of PruHeath fame) is also becoming increasingly available on a standalone basis, as is the Best Doctors second opinion service.

Best Doctors did make itself available in a flex scheme for one major client in 2006, but it only formalised its flex terms this May. It reports that it has attracted considerable interest from benefit consultants and that it already has a couple of clients going live this October.

Steve Haynes, business manager at Best Doctors, says: “The only difference from our standard offering is that the flex proposition focuses entirely on the expert second opinion and does not include our other services. We are hoping to become a standard feature within flex and would be happy with take-up rates in the region of 5% to 10%. Employers and employee benefit providers are clearly beginning to understand why people need Best Doctors, and our monitoring shows that our utilisation from employees of existing clients has quadrupled over the last two years.”

Cash plans are playing their part in the move towards co-ordinated wellbeing programmes by coming out with more sophisticated formats and moving towards a modular style. They are also increasing in popularity as a means of plugging the gap when the PMI offered in a flex scheme has an excess.

Most other news volunteered relevant to PMI differs from one commentator to another. Bupa notes a trend in the direction of employers wanting to make PMI available to the whole workforce via flex to run alongside a standard scheme for senior management. Thomsons Online Benefits points to an ability for employees to get cover for maternity, private GPs and a greater range of physiotherapy treatments, and HSBC observes that a lot of companies are scaling down their core cover on PMI to cut out dependents but offer choice to flex them back in again.

Tobin Coles, director for flexible benefits and marketing at Lorica Consulting, feels that, with providers trying to make PMI more affordable and with cash plans broadening their cover, the two are likely to meet in the middle. He also feels that PMI providers have considerable scope for improvement.

He says: “I still don’t think that the majority of PMI providers have got their heads around flex at all yet. We need to agree firm terms four months in advance of the next year, as we need time to load the system, but only three providers will do this. Others will only do it around certain parameters. This is not good enough from the industry, and all PMI providers need to think about flex strategy. I think the majority of PMI providers have hummed and ha’d about whether flex will really take off in the UK and haven’t built their strategies yet.

NEW FLEX PRODUCTS

The launch of Legal & General’s Multiflex income protection (IP) product this March represented a rare piece of innovation in the flex market, although it was really only formalising in a standard package what some insurers already offered on a bespoke basis. Multiflex allows employees to flex the length of the benefit term in addition to the proportion of salary they cover, therefore helping employers to manage costs without restricting benefit. Legal & General reports considerable interest in terms of quote activity but only modest amounts of new business to date.

Katharine Moxham, spokesperson for industry body Group Risk Development (GRiD), says: “Group IP is often not flexed because employers often don’t trust employees to make the right decisions, and the product is just as important to employers as it is to employees. But the employer mindset is changing and is looking at shorter-term payments, so the potential is there for allowing flexing back by individuals. I can see the ability to flex the level and the term, and possibly also other elements such as escalation, as an important future trend.”

A further less well publicised development with considerable potential has been the 2007 launch of voluntary IP schemes within flex by Personal Group, a national employee benefit provider and consultant. It is still the only flex provider to offer the approach, and is already using it for over 10 flex schemes – the cover being underwritten by Unum.

Unum had toyed with standalone voluntary group IP schemes in the UK in the past but the concept had proved unsustainable due to anti-selection. It is, however, very happy with its claims experience to date via this flex tie-up.

Katrine Johnston, director of Personal Group, says: “There is great interest in voluntary IP during the recession because employers are recognising that employees are stressed and it provides a valuable absence management tool at attractive rates and involves very limited underwriting, with only five medical questions for employees. When you get above a 30% take-up rate there are no medical questions at all, and our average take-up rate is around 25%. We even have one scheme with a take-up rate of over 50%.

“The fact that the cover is non-transportable helps to tie employees to the business, which is what employers want, and the scheme slots beautifully into the existing sick pay terms of the employer. We even have further underwriters looking at partnering us in offering the voluntary IP approach.”

To find the only previous significant piece of product innovation within flex one arguably has to go all the way back to 2001, when AEGON Employee Benefits launched its Employee Protection Menu. But, due to AEGON’s announcement this June of its withdrawal from group risk market, the product has once again sprung to prominence as other providers seek to take on parts of the departing insurer’s book.

The Employee Protection Menu provides a range of options – albeit all with the same insurer – to suit different employee profiles and, although employees can choose a different option each year, they do not receive a flex fund. Of particular appeal to employers is the ability to enjoy certainty over costs, whatever decisions employees make.

Some other insurance providers have now created broadly similar platforms to enable them to acquire Employee Protection Menu business from AEGON. Others are merely coming up with rough equivalents.

Bob Free, national business development manager at Canada Life, says: “The Employee Protection Menu is very important for SMEs as it was designed specifically for them. It used to include ‘spouse and partner’s life cover’, which was based on the salary of the employee but paid out on the death of the spouse or partner, and most flex players don’t offer this. We are taking some Employee Protection Menu business but we can’t replicate the product, so we are just offering a small flex equivalent which covers as many of the bases as possible.”

OPPORTUNITIES FOR INTERMEDIARIES

Although trends in the flex market may be of great interest to health insurers, major employee benefits consultants and other flex providers, the average smaller health insurance intermediary could be forgiven for wondering exactly what relevance the area has for them. But most major flex providers – including the employee benefit consultants – are willing to consider commission splits with intermediaries who introduce new flex clients to them. Some will also use smaller health insurance intermediaries as consultants to advise on selecting the most appropriate health insurance products within flex schemes.

Opinion is, however, much more divided when it comes to the question of whether it is worth smaller health insurance intermediaries seeking to get involved in flex as a new area of specialisation. There is nothing to stop them dealing with a range of different flex providers or forming an official tie-up with one of them – operating on a white-labelling basis, if required. But it is questionable whether the time and effort involved will prove worthwhile when business could simply have been passed on for a commission split. i2 Healthcare, a small firm of employee benefit consultants based in Birmingham, does not have its own in-house platform and does not do a great deal of flex business, but it deals with the likes of Vebnet, Motivano, Thomsons Online Benefits and Staffcare when opportunities arise.

Simon Derby, director of i2 Healthcare, says: “We are capable of doing the necessary administration, consultancy and promotion, and we work very closely with Vebnet on a few schemes. It does the administration from a technical point of view and the technical communications relevant to the website and extranet, while we do the scheme administration, provide the benefits and do the roadshows.

“I don’t see why a health insurance intermediary of any size shouldn’t handle its own flex business. But the complexities of the administration involved are very labour intensive. The data from both the flex provider and client must be checked for accuracy.”

Adrian Houlihan, corporate solutions manager at national IFA and employee benefit consultants Origen, stresses that a lot of flex administration can now be done by clients because their systems have become so advanced. He feels that viability is not a size issue but that it boils down to the technical expertise of the staff an intermediary has. Doing flex business therefore opens up an element of risk for most intermediaries unless they recruit suitable people.

Marcus Underhill, global reward director at Thomsons Online Benefits, highlights that there is usually a knowledge gap for the first couple of flex cases that an inexperienced small intermediary deals with. After that he feels there is no reason why they shouldn’t be involved but that they may struggle to obtain initial value that justifies the costs of either securing the necessary training or recruiting a flex specialist.

Dorian Hannington, manager of flexible benefits consulting and administration at national employee benefit consultants Enrich, which has 35 flex clients, is notably less keen on the idea of newcomers trying to join the party.

He says: “Over the last few years a lot of IFAs and smaller benefit consultants have nominally moved into the flex space and, while they could pick up bits of work while the economy was good, as the economy declined they have decided to focus on their core competencies as a result of failing to enjoy critical mass. They realised that flex was much more difficult than it sounded, and I don’t want companies dabbling in this important area. To be involved, intermediaries have to know not just the theory but also how to implement and run a scheme.”

Nevertheless, even those specialist intermediaries who have no desire to specialise in the flex market should ensure that they remain broadly familiar with developments within it. An existing client might ask them for initial advice in this area, either about an existing scheme or about the pros and cons of introducing a new one. To demonstrate ignorance on the subject could clearly have implications for client retention, and most intermediaries could do without such problems with the economy in its present state.