Success in a changed landscape

Employers are walking the fine line between competing with aggressive cost control and superior performance. Mercer has developed sensible strategies to manage costs and risks associated with benefit programmes.

At the beginning of the year, Foresight encouraged organisations to optimise their workforces and focus on strengthening their single greatest competitive advantage during economic distress – their people. Now it seems there is light at the end of the tunnel for the economy, but companies of all sizes find themselves continuing to walk a fine line between two imperatives – aggressive cost control and superior performance. Employers are focusing on cutting costs and enhancing efficiencies, but must also ensure superior levels of performance as business conditions improve so as not to compromise future growth. Added to this is the challenge of continuing to motivate and reward their biggest asset – their employees – so as to keep their key talent through the recovery.

Mercer’s second Leading through unprecedented times analysis, conducted in May and involving 2,100 organisations in over 90 countries, identifies client responses to the main recession generated challenges in four key arenas:

Talent; Compensation; Benefits; Investment.

Talent

Deep workforce and benefit cuts show signs of moderating in the last half of 2009. Some 58 percent of organisations plan some workforce cuts in the remainder of 2009, compared to 66 percent that reduced employees in the preceding six months. But only 5 percent plan deep cuts of more than 10 percent of employees, against 13 percent that made such cuts in the preceding six months.

Compensation

Organisations globally are almost equally divided on whether their 2009 base pay budgets will be more (31 percent) equal to (33 percent) or less than (36 percent) their 2008 budgets. They’ve been more likely to freeze pay or defer increases. “Organisations need to be careful not to stray too far from market rates,” warns Mercer worldwide partner Steve Gross, “or they may be at a significant disadvantage when the economy improves.”

Benefits

Most organisations (73 percent) don’t plan to reduce their contributions to defined contribution retirement plans. Mercer has recently released further insights on defined contribution plans following its 2009 Global DC Survey. Fees are also a factor. “Fee transparency is becoming a must,” advises Mercer worldwide partner Barb Marder. “Economic hardships mean closer scrutiny of the fees paid to investment and administration providers.”

Although use of health benefits often increases during a recession, most companies (94 percent) have not eliminated any current health and group benefit programmes to control expenses this year. Instead, most increased employee contributions and raised employee cost-sharing.

Investment

More than eight in ten organisations anticipate reduced business and financial performance levels in 2009 compared to 2008. There’s continued pessimism about growth by acquisition – 67 percent say they’re unlikely to be acquiring in 2009. Organisations most likely to increase M&A activity are in the technology and finance/banking industries (13 percent).

Cost savings for all

Cost saving strategies are growing in significance and value, but employers should not overlook those that can be beneficial for employees too. Most companies, for example, are not yet taking advantage of the significant cost savings they could generate through salary sacrifice programmes. According to Mercer’s recent webcast, many of the 200 participants offer salary sacrifice through childcare vouchers, but only 27 percent offer pensions salary sacrifice. However, there’s clearly considerable interest in the savings scope offered by this route: more than half of the participants have plans to implement a programme in the next 12 months.

Through salary sacrifice arrangements, employees agree  to the exchange of earnings for non-cash benefits. The reduction of base salary means both the employer and employee pay less National Insurance (NI). Employees can also get a tax saving with certain benefits.

“Companies are increasingly looking to their benefit programmes for cost savings,” explains Stephen Hempenstall, senior associate, Mercer. “They are realising that pensions salary sacrifice can generate significant savings for both employers and employees.”

And he predicts the mutual attractions will increase with future reduction in state second pension (S2P) accrual and increases in NI contributions. “Recent payroll system advances and the availability of streamlined delivery services,” he says, “mean salary sacrifice is no longer the reserve of larger organisations. Businesses with only 150-200 employees are still likely to achieve a return on investment within the first 12 months of implementation.”

For a pension scheme with 500 members, an average salary of £30,000 and an average contribution of 5 percent, the total potential company NI saving is approximately £100,000 a year. These are substantial savings, coupled with the benefit of savings to the members, which in this difficult climate should not be overlooked.

Reducing the cost of insured benefits

Businesses looking to reduce the cost of their risk insurance may benefit from the extremely competitive premiums available at the present time. For risk insurances such as life and income protection cover, there is no need to wait for current rate guarantees to expire, as it may be beneficial to remarket on an annual basis.

How to achieve significant savings

Over the last 12 months, Mercer’s clients have seen average premium savings in excess of 10 percent across all insured health and risk benefits. For risk benefits, over the last 18 months:

Mercer achieved average savings of 17 percent for all reviews.

For those clients switching insurer on their Group Income Protection cover, the average savings were 24 percent.

Paul Ashcroft, principal at Mercer, says: “We can secure preferential terms and conditions through unique service arrangements that we have negotiated with providers. In some instances, savings in excess of 40 percent have been achieved where a market review has not been conducted for some time.”

The next steps

Mercer’s risk and healthcare actuarial team will work with employers to determine the likelihood of seeing a reduction in their premium from an annual remarket, before a formal review exercise is undertaken. “The process is simple – just sign a letter of appointment, and we will proceed to review the market and report back on the savings that can be achieved,” says Paul.

Organisations are of course experiencing considerable pressure on costs in the current economic environment and Mercer provides businesses with the opportunity to minimise the expenditure on fees, with remuneration either on a commission basis, fully disclosed, or as a fee directly linked to the savings achieved through the premium.

For further information, please contact your Mercer consultant or e-mail  Mercer Foresight