Paul Robertson talks to Ian Bird about the little known benefits that many companies offer their staff and the more cost effective products on offer to them
One can tell Foster Denovo is not your average IFA as soon as you ask to interview them. The firm acts much like a protection or private medical insurance (PMI) provider in asking what the thrust of the interview will be, what topics it will cover, and honing down who will be its spokesperson. Also, in line with the provider experience, once the interviewer is through these barriers to the person beneath the corporate shield they are as affable as any other IFA from a less corporate environment would be.
Ian Bird, principal partner at Foster Denovo, is an employee benefits consultant specialising in the charity sector but, as he began his financial services career in 1987 as an adviser working his way up to senior sales management before making the career decision to specialise in employee benefits in 1998, he has an obvious market knowledge.
A qualified adviser for 21 years, Bird has a team of 10 who manage their clients’ pensions and benefits requirements from end-to-end, from design and implementation to ongoing administration and management. Foster Denovo’s business is split into three areas; employee benefits, wealth management and private finance. Within employee benefits there are eight teams that work with employers.
“From a revenue point you could say that 10% that comes in from those teams is from group risk products, including PMI and employee assistance programmes,” says Bird.
targeting markets
Typical clients will run from employers with 10 employees through to 3,000 staff. Different teams will target different markets, with teams targeting FTSE 250 companies, whose needs would be quite different to a charity, for example. When pushed, Bird estimates an average employer as having 100 to 500 staff.
So what are the best sellers at the moment in the employee benefits arena? “Employers are always looking for the methods that are most cost effective and employee assistance programmes can be picked up for around £10 to £12 per year per person. It’s possible to launch a new benefit at negligible cost,” says Bird.
“Group life is another cheap benefit. In a recession people are looking at the cheap yet effective and low administration products to the detriment of products such as PMI.”
In essence, Bird says there are no really easy sales out there at the moment - but there are difficult ones. “There are very few employers out there at the moment willing to take out an income protection (IP) scheme, for example. This is because the premiums are perceived as high and because if the scheme is not set up correctly then the employee claiming can stay on the company’s books forever. But there never is a typical client, they all need an individual assessment and then some sort of benchmarking.”
Poor communication
He sees employee benefits as having two aspects in terms of the adviser’s role. Firstly, employees do not appreciate what it costs the employer to provide benefits to staff, it is always underestimated. Secondly, employers are poor in communicating to their staff just what benefits have been bought for them, and what they do.
“There are an amazing amount of employers out there who have a group life scheme and have not even told their staff, like it’s a secret or something. This is very much in the remit of the adviser” says Bird.
“A lot of what we do is presentations to groups of people to explain these things – we take an educational point of view.
“Smaller brokerages could take the same path. The way to engage with staff is either in paper form, which people don’t read, or in presentations. Education around group risk benefits is important, people don’t understand them. If you take a critical illness policy and an income replacement policy, are they different, do you need both? People rarely understand.”
Although expensive benefits such as PMI often come out on top in surveys of employees favourite benefits, Fostor Denovo sees a different attitude on the ground. Bird says a lot of employers in the recession are interested in giving employees benefits that are not P11D rated, so there would be no tax element. “As soon as the more costly things are offered you see a lot of people opting out because they don’t want to see take home pay drop. So with a lot of flexible benefits menus you are really saying ‘here it is’ and if the employee doesn’t want it then the employer has saved their costs.”
Removal of these high ticket items is another recession tactic the firm has seen employers opt for. Bird explains: “For most group products there are several firms fighting for the same business, this makes premiums pretty competitive and the likelihood of getting a big enough difference in premiums to make it worth swapping is limited. But firms still need to reduce costs. What we are seeing them do is look at the products that people are not engaging with, so removing PMI for example or not promoting it as heavily.”
Bird is cautious on PMI products in general: “The problem with PMI is that it comes down to claims history. We put a scheme in place recently for an employer and the insurer is already having claims back of more than 150% of the premium, so immediately the insurer is out of pocket.
“When this comes to renewal next year they will say they need to escalate the rate. The problem here is that once a scheme is set up, and as you get people sick and claiming, they become uninsurable. So when it comes to swapping the insurer they will no longer cover the sick employees. You can find the employer stuck with a high premium, or staff uncovered.”
Bird assesses the current state of the provider market as healthy, aided in part by the recession. “This credit crunch has made a lot of providers consider what their core business is. We have Aegon which decided to pull out of the group protection market to concentrate on pensions and investment. I think the market is finding its feet and rather than being all things to all people firms are focusing on their unique products. This is a good thing as it helps to differentiate providers when advising clients.”
Glaring holes
However, as far as Foster Denovo is concerned there is a glaring hole in the market’s array of products. There is currently no product that suits the smaller employer of 50 to 200 people, which would act like a mini flexible benefits package.
Bird explains: “An employer would decide, for example that it could afford £20,000 per year for protection for 50 people. It should be possible to create a mini menu offering the various products. We can do flexi benefits really well when we have 250 people and above. However, since Aegon pulled out, there is not a product on the market that offers a fixed cost to the employer but a variable menu to the employee. There would be a huge market out there for a product like this but nobody seems to be able to nail it.
“As it stands if I go for a group life policy with Unum, for example, and a critical illness policy with another provider and group IP with another, then we have three firms all underwriting the same people. A product like that would cut that down.
Spreading risk
“When Aegon left the market we persuaded Unum Provident to replicate the product and take the existing business, but whether they will take the product and turn it into something they can market is too early to say. It remains a huge gap in the protection market, it all comes down to spreading risk.”
So what of next year? Although Bird acknowledges that the country is pulling out of recession, he notes that the average member of the public has not felt the recession yet, but they will. “If people are in a job they have a cheaper mortgage and things are discounted in the shops. The pain is about to come with VAT going up, tax thresholds about to change and interest rates beginning to increase. The recession pain will be felt after the recession by most people.
“What employers are going to be doing is getting a better return on their investment by focusing on what they do better, promoting their benefits better. This will mean technology plays a big part going forward. But while technology makes the delivery process more efficient we still need the face to face input of the broker. A lot of the time employers and employees just don’t know about employee benefits, and they don’t know that they don’t know. This is the benefit of giving specialist advice.”
