Voluntary benefit schemes have finally made their way over the pond to the UK. However, the Government needs to take steps to ensure such schemes are in the best interest of both the employer and the employee
Not a week goes by without the publication of a new survey pointing out the obvious, namely that we are saving too little and living too long. To close the savings gap, several think tanks have suggested we take advantage of the workplace as a distribution channel for financial products, using employers' payroll systems as an efficient collection point for premiums.
In their respective reports for the Department of Work and Pensions and the Treasury, Pickering and Sandler both pointed out that the workplace is an obvious outlet for the distribution of basic savings and, possibly, protection products.
The National Association of Pension Funds (NAPF) added its weight to the promotion of workplace marketing in its recent paper Pensions ' Plain and Simple. The NAPF's arguments in favour of this under-utilised distribution channel are equally applicable to other savings and insurance schemes as well as to pensions.
The paper points out that joining is easy, as the employer handles the selection process and provides the necessary administration.
There are no lengthy fact-finding and advice procedures ' the employee receives a booklet and may be invited to a briefing where an adviser explains product details and answers questions.
Payments are relatively painless as they are deducted via the payroll.
Employers in the UK have a long tradition of providing pensions and protection products as employee benefits through the occupational pension scheme. However, with voluntary benefits (workplace marketing) the employer does not subsidise the cost of the product or make contributions. Instead the aim of a well-negotiated voluntary benefits package is to use the employer's bulk purchasing power to offer products at wholesale rates that are typically 25%-30% cheaper than employees could find elsewhere.
In the US this is known as worksite marketing. Precise figures are not available but according to the benefits consultants that advise employers on the other side of the pond, the bulk of insurance products in the US are distributed via the workplace.
Like most US trends in the pensions and investment markets, this one is finally taking off over here. Research carried out by Youatwork, the employee benefits division of Royal & SunAlliance, indicates that over half the working population would trust their employer, rather than any other business, to offer them reputable financial products and services.
Advisers could be forgiven for feeling a tad depressed by this statistic but nevertheless should take heart as they can and should play an important role in this growing market. For workplace marketing represents a rather elegant solution to the problem facing so many employers, large and small, namely that that they need to maintain the loyalty of staff through an attractive employee remuneration package but they cannot afford to maintain existing levels of benefits.
A well-designed voluntary benefits scheme demonstrates a commitment to the workforce without out any long-term cost implications.
Employers that have installed stakeholder schemes are obvious candidates for workplace marketing. According to the NAPF, by April this year some 320,000 employers had a stakeholder scheme in place and more will follow. The beauty of using this as the basis for the promotion of workplace marketing is that it will appeal to cash-strapped employers just as much as it will to those with deeper pockets.
The products most suitable initially for voluntary benefits are the protection insurances that traditionally form part of a generous employee benefits package. Top of the list would be life assurance, income protection, critical illness insurance, and private medical insurance (PMI).
Where the employer already offers a basic level of protection ' two times salary as a death benefit, for example ' the voluntary benefit can be used to top up to the desired level to suit each employee's individual circumstances.
The Government needs to clarify its regulatory treatment of workplace marketing to ensure it remains a win-win situation for employers and employees. Ideally employers should be required to use an independent adviser to select and monitor the voluntary benefits scheme.
Without this requirement there is a danger that insurance companies will regard employers as a cheap and very efficient distribution outlet and will attempt to install a suite of products alongside their stakeholder schemes. Without doubt, access to the workforce via the stakeholder scheme provides an excellent opportunity to cross sell other insurance and investment products that may in practice be uncompetitive.
Employees, naturally, will assume that the same level of regulation that applies to the stakeholder scheme also applies to these protection insurances.
When the Government addresses the question of the regulation of workplace marketing it is vital that it considers all the products likely to be offered. The Financial Services Authority (FSA) regulates pensions and investments and already gives guidance to employers on issues such as the importance of avoiding commission, for example.
In its guide to stakeholders and the employer's responsibilities the FSA says: 'As long as you are not in the business of providing investment advice and do not receive any commercial benefit for helping your employees with their pension options, you do not have to be authorised by the FSA. A 'commercial benefit' could take several forms ' being paid commission by the pension scheme provider or getting a reduction in your premiums for insurance policies you have with that provider are the two most obvious.'
When it comes to several key protection insurances, including critical illness and income protection, the FSA neither regulates the product nor the sales process. Moreover, as these products are classed as non-investment life products, the General Insurance Standards Council (GISC) does not regulate the sales process either.
This means that while employees are well protected when they buy a stakeholder, they are not protected when they buy critical illness or income protection, even where this is from the same company. Whether the FSA will embrace these important products when it takes over the regulation of general insurance in October 2004 in a few years' times remains to be seen.
The FSA says it will only regulate products that the GISC covers currently. To take on board extra products like non-investment life insurance would require government intervention, a spokesperson confirmed. The Treasury, however, says the FSA will have to take on board critical illness and income protection because as far as it is concerned these are general insurance products. As usual, the different parties do not appear to be talking to each other and in the meantime, as GISC spokesperson Catherine Nicoll puts it: 'The reality is that at present these products represent a gap in the regulatory floorboards.'
So how can advisers ensure employees are getting the best deal and that employers are protected from any accusations of mis-selling? The issue of commission clearly is important. Towers Perrin helps to run the voluntary benefits scheme for the Benefits Alliance, a group of major companies that joined forces to achieve competitive rates and terms for their employees.
The Alliance members, which include Asda, the BBC and BT, together command a total active workforce of half a million. Martyn Phillips, a consultant with Towers Perrin, says: 'We request that any commission the providers would usually pay is redirected into the deal to enhance the terms for the employees.'
Even where the best terms are offered and advice is paid for by fees, employers must accept that there will always be disgruntled employees. Kevin LeGrand, head of technical services at Buck Consultants, warns that employers should be very careful about the selection process because, he says, 'there is always a risk that employers will be seen as endorsing the products simply by allowing access to them through their premises.'
Phillips argues that employers should use an independent adviser in order to avoid any problems that might arise if an employee complains after buying a product. 'It is vital to have an audit track to demonstrate that the employee had enough information to make an informed decision,' he says.
A good audit track will demonstrate a first class selection process that is open to scrutiny. 'Naturally the cost of the benefit is important but while we look for a competitive premium or price, we will not necessarily choose the cheapest,' Phillips says . 'Equally important are the standard of service and the financial security of the provider.'
Interestingly, Towers Perrin insists, as part of its contract with providers, there are no attempts to cross sell other products to employees in the Benefits Alliance.
In turn the Alliance stresses to employees that the benefits on offer may not be the cheapest but explains that they offer what it believes to be the best combination of price, quality, and service standards from reputable, financially secure providers.
Voluntary benefits can include any or all of:
• Annual travel insurance
• Electrical goods
• Health insurance ' for example dental, eyecare, lump sums for critical illness
• Financial products ' for example loans, mortgages, and saving schemes
• Personal car purchase (new and second hand)
• Gas and electricity supplies
• Package holidays
• Property conveyancing
• Retail vouchers
• Will writing
• Plumbing insurance
• Leisure activities
Source: based on the package negotiated by the Benefits Alliance.
Workplace marketing is an efficient way to distribute investment and insurance products.
Employers should be required to seek independent advice in the selection process.
The sale of critical illness and income protection is not regulated, leaving employers and employees vulnerable.
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