Five governance and financial risks arising from benefit plans and how to manage them.
Organizations are increasingly offering a wide range of benefits to employees, but poor plan design and rising costs can have significant impacts. Firms need to adopt a risk management approach to manage and mitigate these threats – protecting their people, reputations, and even bottom lines.
Employer-sponsored benefit plans have become a central pillar of the employee value proposition with increased C-suite attention. When managed effectively, they deliver tremendous value to the organization and workforce, but like any other investment, must be managed to ensure judicious use of spend.
Many firms are going beyond insurance benefits to offer a broad range of well-being initiatives, savings, retirement, perquisites, paid time off, and allowances.
However, the cost of providing these benefits are climbing rapidly, leading to an increased focus on cost containment. For instance, our medical trends research shows that health costs increase at close to three times the rate of inflation.[1]
At the same time, errors or poor decisions around design, financing, administration, and vendor management can have substantial implications for the business – potentially leading to reputational and financial damage.
In many cases, employers also have a fiduciary or compliance obligations to meet, meaning the burden of financial and governance risk grows heavier. As such, companies are increasingly looking to centralize decisions to ensure agility in executing on strategy, improve visibility, and reduce risk.
At Mercer Marsh Benefits (MMB), we believe that there are five key governance and financial risks that organizations must address if they are to protect their reputations and their bottom lines. These are:
- Increasing health, risk protection, and well-being benefit costs: Increased spend due to factors like reduced insurer appetite for risk, medical inflation, increase in utilization, claims duration and severity impacting premiums, and other costs.
- Pension financial risks: Investment, inflationary, and longevity risks affecting plan sponsor financial commitments to retirement plans (balance sheet, cash, and expense) and individual retirement savings adequacy.
- Administration and fiduciary: Inability to administer plans accurately, fairly, in accordance with promises made, or prudently manage employee benefit programs/investment funds resulting in errors and unmet obligations.
- Legal and compliance: Misalignment of benefit and other HR practices/programs to regulatory requirements, tax, labor, human rights and employment law causing fines, penalties, and litigation.
- Benefit decision making and accountability: Outdated benefit plan design, financing, vendor selection/management, and communication and administration decisions due to lack of controls/expertise, resulting in suboptimal costs, liabilities, and commitments.
Employers need to use lots of tactics to respond to and control these risks, showing prudence in how they manage funds and make decisions on behalf of employees and being fair and consistent in the rules they apply.
Those that don’t manage risks may come up against consequences such as surprise accounting expenses and liabilities associated with retiree medical benefits, benefit promises that are uninsurable because they are missing exclusions or don’t contain a financial incentive to return to work, and poor compliance with regulatory requirements, tax, or other legislation causing fines, penalties, and litigation.
Multinationals, in particular, often benefit from a global benefits management offering because it helps provide visibility into potential risks across employee benefit plan arrangements globally. Multinationals typically use dozens of insurers for global benefits. Choosing and negotiating with vendors at a local level can lead to inefficiencies and may be preventing them from leveraging economies of scale across their global broking. And while such organisations do need to take local regulations and customs into account, they also want to create an overarching global – or regional – strategy to incorporate their local benefits plans. Bundling them under regional and global benefits management arrangements reduces workload, maximizes financial impact, and ensures consistency in governance.
Employers need to develop a cost containment plan that is right for them to make sure their benefits program is sustainable from a cost and risk perspective – typically encompassing plan design, health risk management, and efficiency-related opportunities.
Important questions to think about include:
- What steps are you taking (at the local and global levels) to ensure that benefits are being managed appropriately in each country?
- Do you have specific strategies to manage health risk and steer people to high quality efficient care in order to manage cost?
- How do your local HR teams report upward into headquarters and seek approval/guidance around benefit design and placement?
- Have you taken an enterprise risk management approach to your benefit programs in order to address the risks inherent in your benefit plan, including unsound placement, compliance, and cost escalation?
Conclusion
As employers of all sizes reinvent different areas of their business to keep up with market trends, they need to also look at the scope and level of benefits they provide for their workforce and how they finance, deliver, and govern these programs, taking a risk management approach. Organizations across all sectors face several challenges in delivering high-quality employee benefits;
[1] Mercer Marsh Benefits. MMB Health Trends: 2020 Insurer Perspective, 2020
