January 2010
Communications consultant Steven Laird is the editor for Buck Exchange. He works with an advisory board with representatives from each of Buck’s consulting practices: Health & Productivity, Retirement, Investments & DC Plans, Communications, Global HR Technology, and Research & Compliance.
Feel free to comment on any of these stories; comments will be posted after a brief review. Or you can contact the editor directly at steven.laird@buckconsultants.com. Steven will direct your questions and comments to the appropriate consulting practice for response.
Health and Productivity
Retirement
Investments and DC Plans
Communications
Global Perspective
Technology
Legislative Update
Health and Productivity
Collect data or improve the working culture?
Michele Bossi
by Michele Bossi, Health & Productivity practice leader
There is a new focus by insurers on preventive care in response to an aging population (“Insurers focused on prevention”, The Globe and Mail). Given double-digit annual health care cost increases over the past decade that’s not surprising; benefit plan sponsors have long been looking for proactive ways to contain those costs.
The insurers’ response is to invest in health data analysis: using the information they have from claims payments to identify those at risk so they can deliver targeted prevention programs. The impetus behind this focus is clear. There is a lack of individual-based health data in Canada and we are taking our lead from the U.S.
In comparing the employee health information available in both the U.S. and Canada, it’s easy to jump to the conclusion that the “significant gap in the amount of information that has been compiled on health care in Canada” is somehow indicative of our lagging technology. The natural solution is to invest in the type of data analysis that would result in a better understanding of the specific health issues facing insured individuals.
But we need to be careful not to rely too much on the U.S. model. There, the plan sponsor (the employer) holds virtually all of the health data on the individuals it insures. All claims are paid through private plans, including physician and specialist visits and all medical procedures performed in and out of hospital. Along with data on ancillary employee benefits such as drugs and medical supplies, a benefits program can generate a very accurate picture of the health of an employee, including his/her specific medical issues.
Contrast this with Canada where the public plan pays for all physician and specialist services, both in and out of hospital. In Canada, the only health data owned by private plans, aside from disability-related data, comes from claims for drugs, paramedical practitioners, medical supplies, and vision and dental care. It’s not so easy to put together a comprehensive picture of an employee’s health with such limited data.
In Canada, the two major stakeholders – government and plan sponsors – act separately. Instead of joining forces to contain costs, they compete. The government implements cost controls for the public plans and this, in turn, shifts cost to the private payer. The infrastructure behind the delivery of the public health system is totally separate from that of the private payer. Until both stakeholders come together to combat escalating health costs, investments like the one the insurers are making won’t achieve maximum returns.
I agree that taking preventive measures and focusing on employee wellness is critical to containing health costs in Canada. It seems to me though that employers would get far more value by investing in improving the work environment rather than in data analysis technology. There is only so much one can do with the data Canadian employers can access.
Buck’s Global Wellness Survey showed that the top driver of wellness strategies in countries other than the U.S. is employee engagement and productivity. Stress in the workplace is a top concern in these countries. There are many studies showing that the work environment has a significant effect on employee emotional health and morale. And the workplace is something over which the employer has a great deal of control. In Canada, investing in a healthy workplace culture is likely to yield a far greater return than investing in data analysis.
Retirement
Does our system provide adequate retirement income?
Charlene Moriarty
David Blundell
by Charlene Moriarty, Consulting Actuary and David Blundell, Director, Research and Compliance
Overall, Canadians are coping well under the Canadian retirement system, and individuals without private pensions are finding other ways to build assets to support their retirement needs. These are two of the conclusions contained in the report “Summary Report on Retirement Income Adequacy Research” tabled at the First Ministers’ Conference in Whitehorse in December 2009 by Jack M. Mintz.
The report was intended as a backgrounder to assist the ministers in assessing retirement income adequacy in Canada. While much of the report is a rehash of previously available information, some of the more interesting findings include:
- The Canadian retirement system is working very well by international standards. The three-pillar Canadian system (Old Age Security, Canada/Quebec Pension Plan, and private pension and savings plans) provides individuals with sufficient retirement income to maintain a reasonable standard of living.
- According to the OECD, by the middle of the first decade the Canadian poverty rate among seniors was 4.4% – one of the lowest among the OECD countries. The Canadian retirement system has therefore been fairly successfully in keeping retired Canadians from falling below the poverty line.
- While the industry holds that replacing 70% of pre-retirement income is the standard to aspire to, the reality is that optimal replacement incomes in retirement vary substantially by individual and circumstances. It depends on such factors as number of members of the household, whether a member is disabled, and the pre-retirement income level. Low income Canadians require a high replacement ratio to maintain their standard of living in retirement (and to avoid poverty). For higher income Canadians, a replacement ratio of 50% to 60% may be adequate.
- Low-income Canadians don’t really need to save for retirement, since the first two pillars of the Canadian pension system (i.e. OAS and C/QPP) will replace a substantial portion of their pre-retirement income. Higher-earning Canadians however, do need to rely on additional sources in order to maintain their pre-retirement standard of living. And the studies cited in the report suggest that a “significant minority” (20% to 35%) of Canadians in the middle and higher income brackets have insufficient savings to maintain the same level of spending enjoyed in their pre-retirement years. Insufficient savings may be attributed to a number of factors including bad luck in losing a job or erosion of wealth as a result of economic downturns.
- Individuals who don’t participate in registered pension plans supplement their retirement income with other assets or continue to work past age 65. For those between ages 65 and 70, employment earnings have been the single most important factor contributing to adequate income replacement levels.
- Retired Canadians who are receiving income from a registered pension plan (RPP) have somewhat less overall retirement income than those who have no income from an RPP. Non-RPP holders tend to have other assets to support their retirement and are also likely to work past age 65
- Retirement income levels depend not only on disciplined savings but on the rate of return realized on those savings as well. About 40% of the difference between low and high replacement income levels can be attributed to investment returns.
- While Canadians are prepared to pay for investment advice, the high cost of mutual fund investments is reducing the available asset pool in retirement.
- Defined benefit pension plans reduce retirement income risk for longer service individuals; however, that risk can increase if the plan investments do poorly or the plan sponsor becomes bankrupt. While defined contribution plans and group RRSPs are seen as less desirable, they do maintain better value than defined benefit plans when an individual changes jobs, because of the DB plan’s greater reduction in the value of the pension on termination of employment.
The report concludes that our retirement system provides Canadians with adequate levels of income in retirement, and on the whole is performing well. It does recognize that a portion of Canadians don’t have sufficient retirement income for a variety of reasons ranging from economic conditions to personal judgment. And for this group, further research is critical to developing sound retirement income policy. Additional research needs to include an analysis of income replacement ratios that would constitute a serious drop in the standard of living in retirement, a more thorough analysis of the subgroups that appear not to be saving enough, and a better understanding of the reasons for investment choices made by Canadians.
Not surprisingly, the results presented in the Mintz report point to the need to address problems with the private pension and retirement savings pillar of the Canadian retirement system. This conclusion is consistent with the reports of the various provincial expert panels which are calling for some fundamental changes to the private pension system and which have led to the very meeting the Mintz report was commissioned for. Will politicians listen?
Investments and DC Plans
Four big-ticket items missing in CAPSA consultation paper
Peter Arnold
by Peter Arnold, Investments practice leader (excerpt from a longer article in Benefits Canada)
CAPSA’s November 30 consultation paper, The Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment, is a good summary of what most sponsors and administrators are currently doing with respect to pension plan investments. If your plan is not doing the things outlined in the paper, then you run a serious risk of being exempted from the CAPSA application of the Prudent Person Rule. Note the statement on p. 9, Applying the Prudent Person Rule: “When fiduciaries exercise prudence they will be judged solely [emphasis Buck] by whether they have followed a reasonable and prudent process in reaching their decisions, with consideration of the circumstances.”
We observe the following as being ‘big ticket’ items:
Risk
By its very nature investing is risky, yet our industry is rife with multiple variations of what “risk” means. We would like to see a standard definition of risk in the context of pensions, and some priorities assigned to the risks that sponsors and administrators need to deal with in both DB pension plans and Capital Accumulation Plans (CAPs).
CAPs
There is little written about CAPs in this paper which, like current legislation, focuses on DB plans. This is very concerning, given the marked shift we have seen in the marketplace, with sponsors moving towards CAP pension plan designs over DB in Canada. While employer costs can be ascertained under a CAP program, the sustained viability of CAPs in enabling members to retire successfully is an outstanding issue. The paper also does not distinguish between CAP and DB programs in the sponsor/administrator resources needed for the set-up, operation and monitoring requirements the program.
Investment Policy
The plan administrator’s responsibility for investing pension plan assets is becoming blurred by the increasing use of pooled funds by many DB pension plans and CAPs. Which investment policy supersedes the other? We would like to see clarity on the legal connection and implementation of pension plan Statements of Investment Policies and Procedures (SIP&Ps) and manager internal pooled fund policies, and to see the key elements of this consistently outlined in investment management agreements.
Rebalancing
Rebalancing is mentioned only once in the paper, as a checklist item during the annual investment review process. It is easy to dismiss the importance of rebalancing in normal market performance periods. Rebalancing really earns its stripes during periods of great volatility, so it should constantly be on both sponsor and administrator radars. Our view is that sponsors who utilize specialty management (as opposed to balanced management) should adopt a ‘trigger’ rebalancing mechanism: when portfolio allocations surpass threshold deviations from the target asset allocation, then money is taken away from overweight asset classes and distributed to underweight asset classes. This enforces a ‘buy low and sell high’ strategy, which has yet to be refuted as a quality rule of thumb in investment philosophy over the longer term.
Communications
“Creative” and “expensive” are not similes
Marina Scassa
by Marina Scassa, Director, Communications and Sales Support
We all know how valuable clear, effective communication is to the success of any initiative. A slew of surveys and studies support the idea. So why do companies shy away from investing money in making it right? What I’ve learned over the years is that:
- When push comes to shove, anything that is regarded as “fluff” is cut from the budget or can’t get approved
- Communication, especially when provided by an outside “creative” professional, is considered “fluff”
- The more expensive it is, the “fluffier” it is
While many communicators rhapsodize about the creative aspect of what we do, it actually scares off some decision makers. The reality is that we have to present communication solutions to clients in bite-size, budget-friendly pieces that make sense and fit them. And yet they still have to be creative and fresh. How to find a balance?
Communicators are reluctant to commodify the creative work that we do. But the truth is that the base element of any communications piece is a product. For example, we can produce a basic template for a total rewards statement for a fixed fee. Where the fee becomes variable depends on the degree of customization those clients want added to the template. With just about everything we create, there is a “base model” version, which we can easily price and is usually very affordable, and a “Cadillac” that has more bells and whistles. It’s your call what you buy.
But how do you, as a client in need of communication support, go about finding affordable solutions?
Step 1 – Strategize
Stop spending money on things you don’t need. Set a strategy first so that you look at the project holistically and make sure that every element has value. This is where a good communications consultant can help you tremendously – in fact, skipping this step can be hazardous to your financial health. Even if you plan to execute the project internally, I strongly encourage you to engage a consultant for the strategy piece. The experience and objectivity that they bring to the table will serve you well.
Step 2 – Prioritize
You don’t have to do everything all at once. In the end, there will be some things you’ll decide you don’t need to do at all. Your consultant can give you a variety of options that can work together, like a menu. Always with an eye on your strategy, you can develop a plan and a budget that makes sense for your organization.
Step 3 – Minimize
Sometimes it’s true – less is more. And a good communications planner or consultant can show you how to get the most with the least cost:
- Use one communication as a base. A single message that is built well and delivered properly can be the model for future communications on the issue, thereby spreading your costs.
- Deliver one pointed message. A simple, focused communication is more effective – and cost-effective – than something with an overwhelming amount of information. Too much information in one message risks being ignored or misunderstood, and that always costs money in the long run.
- Limit the reviewers. Having too many internal “editors” chipping in their two cents can increase your hard and soft dollar costs dramatically.
You depend on communications to help your initiatives succeed – the process is not “fluff”. But a communications planner or consultant can make sure you spend wisely by presenting creative ideas that respect the realities of the bottom line.
Global Perspective
Is a healthy workforce the sign of a healthy company?
by Andrew Supple, Wellness Consultant, Buck U.K.
(This article first appeared in HR Magazine, January 2010)
Our recent Global Wellness Survey highlighted that 50% of participants in the UK now have a workplace wellness strategy. Why are these companies so interested in the health and well being of their workforce?
The survey showed that wellness strategies were put in place as they have a positive impact on employees’ productivity, absence and engagement levels. These are three solid business reasons to invest in this approach.
But there seems to be more than just the straightforward business case involved in the decision by these participants, and others, in operating a wellness strategy. These types of companies invested in workplace wellness before the recent flurry of case studies that clearly demonstrate the potential return on investment. It seems likely that they invested in workplace wellness primarily because it reflects the culture and goals of their company, intuitively sensing that the financial benefits will follow.
So can we tell what a company is like from their workplace wellness strategy (or lack thereof)? Well, we can definitely see a number of common themes developing:
Culture - companies which believe that employees are their most important asset are very likely to have a workplace wellness strategy. If your employees are your key business differentiator, then you need them at work; healthy, focused and engaged. Workplace wellness is a key tool in assisting with this and it is not surprising to see a strategy in place in companies with this type of culture.
Engagement - workplace wellness can be an excellent indicator of how engaged employees are with their organisation and how much an employer listens to the opinions of their employees. Most wellness strategies will not work without making sure that they include programmes that the employees want as, without high participation, they will not have the required impact. Again, it is no surprise that companies with high engagement already have a workplace wellness strategy in place.
Strategic thinking - a workplace wellness strategy is often a reflection of an organisation that has a strategic approach to all aspects of their business. Many companies offer a range of health-related programmes to their employees, but these are rarely coordinated in their delivery or communication. Companies that are strategy-led are attracted to formalising their investment in their employee’s health to ensure that they have a clear plan to implement and carry out programmes that maximise the impact of this investment. This is often tied to the use of data from a range of sources – allowing this success to be measurable and new trends to be identified.
When considering what type of company you work in and how you manage your employees, workplace wellness can be both an indication of your intentions and a tool to progress your plans. Is your company in good shape?
Technology
Can “shared services” ease the pain of recovery?
by Tim Seguin, Manager, Customer Response Centre
The pressures of the current global economy have “HR being tasked to reduce costs, mitigate risks and increase efficiency, all while supporting global expansion.” That’s the jumping-off point for a recent article by Buck’s Inderjit Jhajj and Scot Marcotte (“Managing HR Costs and Risks by Empowering the Service Center”) that guides HR in how to plan for designing and building “an optimal service delivery model” for a Shared Service Centre. The article is important for anyone considering the shared services model, as it simplifies the process and decisions needed. In this post I bring out the highlights of the article from the point of view of my own work.
I manage a service centre, and in 2009 we saw many of our clients shelving their plans to implement or adopt strategies to leverage their HR service centres and move to business process outsourcing models. With the conflict between short term need and long term cost reduction plans, they decided to defer signing on internal and external resources until the economic picture became clearer.
As companies begin to rebound, they are revisiting those deferred plans. They recognize that reducing overall costs and keeping cash flow stable have taken priority over improving the service experience. The Jhajj/Marcotte article gives companies a clear framework to use when considering alternative uses for a Shared Service Centre. The flexibility of their overall approach can reduce overall costs while keeping cash flow stable and creating an environment for improved service levels. In effect, the article lays out a roadmap of the required steps for any organization looking to use the Shared Service Centre model to accomplish many of the tasks HR departments are looking for. It explains the need for evaluation, leveraging technologies, and collaborating with a trusted and experienced outsource/shared source provider.
Evaluating the best Shared Service Centre model
There are three basic shared service models. The familiar outsourcing model delivers the maxium in cost reduction; for maximum control and governance issues, insourcing is the preferred model; and a combination of these two, where certain functions are outsourced while others are kept in-house is called either smart sourcing or flex sourcing. Current surveys show that among organizations adopting shared service centres, 69% are insourced, 4% are outsourced, and 28% use the flex sourcing model. The industry surveys also point out that 11% of responders will be moving to the fully outsourced model shortly.
Centralization
The obvious benefit for centralizing HR services is cost savings, but the article explains how the resulting standardization of processes and collaboration among services bring added value, beyond just cost saving. Current industry surveys show that 28% of organizations have introduced a centralized provision for a shared service model.
Leveraging HRIS (Human Resources Information System)
The Society for Human Resource Management’s (SHRM) conducted a technology survey recently that identified the leveraging of HRIS as a technology trend in the sector. Specific key findings mentioned a heightened awareness of HR data privacy, given the rise of identify theft.
Finding the right partner (five areas any solution must have)
A successful shared service solution needs to focus on five areas identifed in the article – telephony, software, quality review and control, global networks, and comprehensive solutions in HR/Benefits/BP services. It also presents a list of “common pitfalls” to avoid, demonstrating a logical, structured method to assist companies in understanding what the needs are for selecting an HR solutions partner.
Pressures
A recent HR Outsourcing Trends and Insights survey identifed HR operating cost reductions and clearer focus on HR strategic and core capabilities as the toughest pressures on HR functions in 2010 and 2011. Companies will be leaning on HR staff to find ways to reduce costs while still keeping current employees satisfied and in their jobs. Some HR departments argue that the current economic environment creates more work for HR (i.e. headcount reduction programs or hunting for cost savings, managing performance, dealing with potential employee disputes). And if the HR function met with its own staff reductions, this increase in workload will have to be shouldered with fewer resources.
“Managing HR Costs and Risks by Empowering the Service Centre” provides an excellent roadmap for corporate HR departments thinking about using service centre capabilities to reduce operating costs and focus HR on their core business.
Legislative Update
Buck will be publishing a “Year In Review” Advisory later this month to capture the legislative and regulatory developments that have taken place in the pension and benefits landscape. Watch for our announcement.
Communications, Global Perspective, Health & Productivity, Investments & DC, Legislative Update, Retirement, Technology
