Benefits modelling – how to find out what your benefits bill will look like in 2020 and beyond

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Benefits modelling – how to find out what your benefits bill will look like in 2020 and beyond

The value of employee benefits has long extended beyond their expected inclusion within compensation packages.

In addition to driving corporate health and productivity goals, the employee experience has become an increasingly important workplace consideration – and benefits offer a powerful tool in a company’s armoury in the ongoing battle to attract and retain the best talent.

More than 50 per cent of HR decision-makers, however, have cited increasing benefits costs as a significant concern for the next three years in the latest Willis Towers Watson 2017 Benefits Trends Survey.

Although 40 per cent said they do not know their current total benefits spend, more than a third (35 per cent) voiced their concern over insufficient benefits budgets.

Indeed, rising insurance premiums, along with increasing life expectancy, can undermine the sustainability of benefits if appropriate management and control systems are not introduced.

Here we look at five ways employers can leverage the latest benefits modelling technology to help predict and plan for future costs.

1. Predicting the impact of benefits on cashflow

Cash remains king – even for the world’s largest multinationals.  Valuation, projection and alternative design modelling techniques are all used to help employers understand the financial risks of benefit provision and what their longer term spend might look like.

Specialist actuarial teams can help employers to model the future costs of benefits such as private medical Insurance, life insurance and income protection over long periods up to 50 years.

They do this by changing key parameters such as workforce demographics and benefit plan design strategies and measuring their predicted impact on cashflow over a given period of time.

2. Paying the right price for group risk cover

It’s important to know that a fair and reasonable price is being paid for group life and income protection policies, particularly for businesses who have remained with the same insurer for several years.

Regularly comparing, contrasting and challenging the costs, level of cover and service being provided against other insurers can pay dividends.

Sophisticated Monte Carlo volatility analysis can be used to simulate next year claims costs (based on predicted death rates) and illustrate the risk exposure with predicted confidence levels (e.g. the annual claims bill is most likely to be £5m but there is a 10% chance that it might be £50m).

It is also possible to model and illustrate the potential impact of any changes to benefit plan design, such as the introduction of a limited income protection term (e.g. 5 years and a lump sum payment instead of payment all the way to retirement age).

3. Navigating complex pathways to support employees with cancer

There were 359,960 new cancer cases in the UK in 2015 according to Cancer Research UK.  Yet survival rates are at their highest ever with more public information campaigns, better early detection rates and significant improvements being made in successful medical interventions.

Cancer treatment and drugs costs, however, continue to soar, placing a double financial pressure on insurers looking to cover the cost of more sophisticated and expensive long-term treatment for more survivors.

Specialist cancer modelling tools are now available which can project future benefit costs associated with targeted drug therapies. They can predict the financial impact of the latest, expensive monoclonal antibody treatments to help employers make better informed, measured decisions on what levels of cover they can offer to employees.

4. Reducing the cost of death-in-service pensions benefits

Dependents’ death-in-service pensions, which pay a percentage of an employee’s final salary to dependents until their own death, can create a significant financial drain on companies and premiums have increased by around 30%-40% in recent years.

While death-in-service pensions have increased in cost, the reducing likelihood of employees dying in service has simultaneously driven the cost of life assurance lump sums down.

A more attractive alternative for both employers and their workforce, death-in-service lump sum payments are offered in lieu of a monthly pension for beneficiaries and average at between two and four times the employee’s annual salary.

Modelling advisers can help to establish what represents a fair payment to both employers divesting of an unsustainable benefit and employees losing a pension but gaining a one-off lump sum.  They do this by calculating the true lifetime value of a pension in terms of salary multiple to create a benchmark against which to measure any potential design change.

This ‘benefit neutral’ approach allows employers to demonstrate due diligence when consulting with employees and can also help to win the consent of Trustees.

5. Mitigating against rising post-retirement medical benefits costs

While post-retirement medical benefit schemes were popular in the 1970s and 80s, they are less common today due to their rising cost base.

Medical inflation and rising premium rates have combined with improving survival rates for critical illnesses, as people generally enjoy longer lives.

Estimating and then addressing the future costs of running such post-retirement benefits is essential.

Renegotiating the best buy-out terms available for the scheme from the wider insurance market, for example, can deliver significant savings, as can negotiating attractive lump sum exit settlement figures.

Making subtle changes in benefits provision and plan design can also enhance future scheme sustainability.