With employee rights increasing in the workplace, more employers are looking to find cost-efficient ...
With employee rights increasing in the workplace, more employers are looking to find cost-efficient ways of providing effective employee benefits. Private medical insurance (PMI) is high on this list, as it not only keeps employees happy, but reduces absence times, preventing extra costs being incurred by the employer.
Group PMI schemes may provide excellent protection, but rising premiums are pushing many employers away in search of an alternative route to healthcare funding.
An employee benefit trust (EBT) is one way of bypassing traditional corporate PMI. EBTs, which were originally designed to set aside money for employee share options, can now be used to fund a number of benefits, from the company car fleet to employee loans. Setting up an EBT to fund private medical costs for employees is a growing trend, boasting sufficient savings to tempt employers away from expensive PMI schemes.
Reducing costs
Chris Moore, marketing manager at Medisure, says that by avoiding insurers' overheads, costs can be significantly reduced. "The self-funding route should work out to be at least 5% cheaper than large corporate schemes. If you take the overheads charged by major private health insurers against the cost of a trust, it does work out less expensive."
One of the main advantages of using a trust to fund corporate healthcare is the tax benefit. Unlike PMI, there is no insurance premium tax (IPT) to pay and there is also built-in tax relief when a trust is set up both attractive incentives.
"The accelerated tax relief is a good incentive. Unlike PMI premiums, there is tax relief when the money is put into the scheme, so the company also gets an investment return. There is no real saving for the employee, but the accelerated tax relief can be very beneficial to the company," says Roy Clayton, managing director of Manor House Financial Advisers.
EBTs may create opportunities to cut cost, but with no insurer to do the ground work, other expenses such as legal fees, can soon mount up. Martin Noone, head of intermediary services at BUPA, says: "There may be no IPT on trusts, but employers will have to pay extra VAT on administration costs which would usually be carried by the insurer with traditional corporate PMI."
What EBTs can offer companies, however, is the feeling of control over their scheme. Unlike many packaged schemes, employers can choose the exact level of cover and decide which benefits would be most suited to their workforce. Carolyn Derrington, head of bu-siness development at Norwich Union Healthcare, says: "The whole ethos of the trust route is that the company feels that it is its scheme and it can gain greater flexibility and benefits."
Removing the hassle
However, the administrative burden of trusts can be averted by employing a third-party administrator (TPA). Such companies will set up and administer schemes on behalf of the client. Although this means more fees to pay, a TPA can provide valuable guidance for companies and may still work out less expensive than conventional insurance.
Moore says: "We offer employers the option of setting up a trust. This gives employers ownership of the scheme, control of benefits and avoids extra costs such as IPT and insurers' overheads. We also help design an individual scheme, giving them advice and background information, explaining how a scheme should be set up and funded effectively.
"Employers can set up a trust by themselves, but the private sector is very complicated and it can be hard to know when claims are fraudulent or how to deal with hospitals, for example. We charge an administration fee that varies from scheme to scheme and can be paid as either a fee for life or as a percentage of the claims fund."
If an employer is thinking about setting up a trust without a TPA, they must remember that the responsibility of the trust and claims management is shifted onto the company. According to Nicola Smith, communications manager of employee benefits at Swiss Life, employers need to make sure that the company has the necessary skills to manage an EBT successfully. "The employer has to have the correct administrative skills and know when to intervene with a claim. It is also important that employers take on the problematic task of being a neutral adjudicator on claims that they are funding," she says.
In addition to the time and cost involved in setting up the trust, employers also need to be able to take on the extra risk, which would otherwise have been taken on by the insurer. It is for these reasons that the trust route is generally more suited to larger organisations who have the resources and financial stability to take on such responsibility.
"Trusts are generally more suited to organisations used to bringing risk in-house, with personnel equipped to deal with risk and administration," says Noone.
Self-insuring disability
If an employer is considering using an EBT as an alternative to disability insurance, then the risk is again increased and advice from an actuary may be required. Smith says: "Larger companies are often keen on self-insuring risks, but disability risk, for example, is complicated and employers need the skills to calculate reserves and to manage a claim if and when it happens. It is a good idea to seek advice of an actuary, but then this means more fees to pay. Employers need to remember that although there is usually a low claim frequency, they are likely to be of high severity. There is no telling whether an employee could be disabled for 10, 20 or 30 years."
Due to the high risk associated with self-insurance, many employers decide to implement stop loss insurance to carry some of the risk. This way the employer can decide on the maximum amount they are willing to pay out should a high claim occur, as Derrington explains: "The insurer views how many claims there are likely to be and the employer then agrees on the maximum amount they will pay. For example, a company wishing to have access to half a million pounds worth of cover could take a 150% stop loss, in which case they would only have to pay out a maximum of £750,000."
Stop loss insurance is however subject to IPT, so employers need to pay both the premium and the added tax in order to safeguard their funds. Premiums for the stop loss insurance are usually paid monthly in addition to the money paid into the trust, which is usually the amount claimed by employees over that period. If claims are consistently high, but fall below the level when the insurance kicks in, monthly outgoings can be high.
Having financial stability is therefore imperative to a successful investment. According to Moore, Medicare recommends that the trust route is only taken on by companies with over 400 employees to make self-funding viable and to ensure that the cost does not exceed the cost of PMI. Although financial stability and size usually come hand in hand, Derrington says that the trust option can also be open to smaller companies as long as they are prepared to make it a long-term investment.
"Although it is mainly larger companies that take this route, I have seen companies with as few as 200 employees opt for the self-insuring route. As long as the company has stability to take on the risk, why not? However employers taking this route have to be committed to the trust with a view to funding it in the longer term. There also needs to be an investment in time to set up the trust in the first place," she says.
Lessons from the states
Using EBTs as an alternative to corporate PMI can be viable, saving money on inflating premiums and giving employers more flexibility and control over schemes. Although they are not yet a popular option for employers, they have proved to be successful in the US and it may not be too long before more disability and life cover is also arranged via this route in the UK. According to Noone, the rise of the EBT is however dependent on the Government giving the same level of tax incentive as in the US. "The Government's position has been fairly loose over the past two or three years and is not providing enough tax incentives to allow EBTs to take off," he says.
In the meantime, EBTs can provide a good opportunity for IFAs with clients that are not satisfied with corporate PMI, as the complicated nature of this route means employers will need to seek sound advice about their options. As long as IFAs get a clean grasp on the complexities of corporate healthcare provision when advising on EBTs, they could prove to be an increasingly attractive option for employers.
Kirstie Redford is senior staff writer
