Volunteers, please

Much has been written in the press about the effects of Stakeholder pensions and how they have brought the subject of employee benefits into the spotlight. The recent Sandler and Pickering reports have added to the debate about the need for employees to take more control over their own finances to ensure their financial well-being and that of their families.

This applies not only to retirement but also to death or critical illness. For many people, death benefit is provided and paid for by their employers and, for some, income protection (IP) cover or critical illness (CI) cover may also be provided on a group basis. However, in the past few years voluntary schemes have been introduced, provided by ' but not paid for ' by the employer, that also offer voluntary cover for life assurance or CI.

A good deal

The main advantage for employees of group voluntary schemes is that they will be able to benefit from rates that are generally lower than if they were paying for cover on an individual basis. In addition this cover can be selected by the employee to suit particular needs and, most important, changed after an event such as marriage, childbirth or divorce.

Experience in the US, where worksite marketing is widely used, suggests employees are happy to purchase cover this way, since it offers the convenience of payment by automatic salary deductions spread over the year.

For employers, provided there is the facility to deduct premium payments from salary, such schemes can provide a range of additional staff benefits at no premium cost to themselves. In a period of low unemployment this can greatly aid staff recruitment and retention as increasingly the employee is swayed not simply by basic salary but by the flexibility of the overall package on offer.

So what scope does this market offer the IFA? Although there is normally no minimum size requirement to set up a voluntary arrangement, it is generally accepted that around 100 potential employees are required to make a scheme viable. However, this can be reduced to maybe 50 if there is a concerted effort by the provider, IFA and employer to actively promote the scheme to employees.

Figures issued by the Small Business Service show that in 2000 there were over 32,000 enterprises in the UK with over 50 employees, offering the potential to set up a scheme. Sectors such as local government, finance and pharmaceuticals have all been shown to offer significant opportunities.

Sharing the cost

The basic concept of a voluntary group life scheme is a cost-effective employee benefit that sits alongside the employer's existing benefit package. It offers employees choice and flexibility with a simplified application form and minimal underwriting. The contract is with the employer, who acts as the trustee and collects the premiums and provides a monthly data schedule to the insurer.

For a life assurance scheme the employee chooses the level of cover required up to a predetermined maximum level, usually in units of £10,000, and premiums are calculated from an age-related rate table.

For a voluntary CI scheme the same process would apply, with perhaps a core group of conditions covered or an additional number at a higher cost. The employee would again choose units of cover with the additional option of spouses' or partners' cover if the employer chose to offer this.

In both cases the IFA would work with the employer and provider to identify the ideal mix of product options to complement the employer's current benefit package. In some cases the voluntary arrangement will be offered to top up the employer's contribution whereas in others the employer might offer, for example, CI cover on a voluntary basis only, preferring to meet the cost of providing life cover and or group IP.

Flexibility of scheme design is crucial. For example, the IFA may suggest that the provision of limited units of voluntary CI cover, (such as a maximum of £20,000) might help employees return to work. This could pay for alterations to the home or car to accommodate a disability which will ease a return to work, while not providing a life-changing payment that would enable early retirement and the consequent need for staff replacement.

The key difference between the sale of a voluntary scheme and that of an individual or employer-paid group sale is that it is a two-stage process. First, the employer and then the employee need to be convinced of the value of the product.

Putting employees first

An IFA should have no difficulty in persuading an employer of the benefits of offering a wider range of employee benefits to his workforce at no premium cost to himself. These schemes will be tailored to the employer's needs and should be offered by blue-chip providers. The provider should be able to provide scheme literature for the employees. By offering such schemes the employer will enhance its reputation in the market as a caring responsible employer. This should also aid recruitment and retention and, by treating employees as individuals and allowing them to tailor cover to their particular needs, help to produce a more motivated workforce.

However, the most crucial part of the sale is the continuing promotion of the scheme to the employees. This is where the provider, IFA and employer must act in partnership, each actively promoting the scheme to encourage maximum take-up. Experience from Stakeholder pensions has shown that this follow-up is vital for the scheme to succeed.

Any provider of voluntary schemes must be prepared to produce publicity material such as posters and explanatory leaflets or flyers to generate interest in the scheme. These would normally direct respondents back into the employer's personnel department which would follow up with more detailed fulfilment packs.

Equally the employer must promote the scheme through existing or bespoke internal communications and briefings to demonstrate support for the scheme. However, continuing face-to-face promotion is vital. This would most likely take the form of a regular presence within the employer's premises, for example in the staff restaurant, in order to enroll new members, answer any queries from employees about the scheme and encourage buy-in by word of mouth.

Obviously the level of involvement provided by the employer will vary, but promotion via company intranets can prove very successful in enabling potential customers to browse the available products and make their choices. Also, the provision of comparative rates showing the cost advantages of group rates will help to make the case, as will the flexibility of adding or subtracting units of cover as circumstances change.

Quite clearly the provision of voluntary benefits is a growing market. It fits in with the increasing use of menu-based flexible benefit schemes, allowing employees to trade benefits up or down, starting with a given unit allowance from their employer.

Learning from others

Experience in the US has shown that employees there expect their employers to make cover available to them and their families. This is particularly true of voluntary life cover, which is the most commonly offered voluntary product, with total sales of $775m in 2001 and a 7% growth over the previous year.

The US position differs from that in the UK due to the lack of State health provision. However, it also represents the expectation that employees need to be treated as individuals and given a choice of flexible benefits to suit their needs. The benefits most valued by a single male employee will differ from a working mother whose main priority is childcare provision and flexible working hours.

Both IFAs and protection providers should be aware that as employers have increasingly tight human resources budgets, they must compete with not only traditional insurance providers but also other benefit providers, such as car manufacturers to ensure that their products appear on the list of benefits offered.

Anything providers can do to offer no cost alternatives to the employer is likely to be welcomed and this represents a major opportunity for the IFA to build continuing relationships with major corporate employers with built-in regular review opportunities. The voluntary market in the UK is still in its infancy and offers real potential for the professional adviser working in partnership with product providers and employers.

Jane Dale is director of group risk at Legal & General