BENEFITS VALUATION ANALYSIS Get Your Benefits Package Right Claus Adam, Frankfurt EMEA Benefits Products Manager

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1 BENEFITS VALUATION ANALYSIS Get Your Benefits Package Right 2014 Claus Adam, Frankfurt EMEA Benefits Products Manager

2 Benefit Valuation Analysis (BVA) What is it? When it comes to benefits : Do you know how your benefits program compare to your competitors in value? Do your employees know what their benefits package are really worth? Do you have internal parity across your employee groups? MERCER 13 June

3 Benefits Valuation Analysis (BVA) Offering Why is it unique? A unique analysis and reporting tool developed by Mercer to value and compare the total benefits package rather than only single elements. - BVA provides a holistic view! Supplements the pure employer-view cost analysis with the employee-view relative value for attraction and retention purposes. - An effective tool in communicating the monetary value and competitiveness of the benefits program to employees. Provides a uniform and standardized approach throughout Europe. Requires minimal client time involvement: peer group selection profile definition (workforce segmentation) MERCER 13 June

4 Benefits Valuation Analysis Benefits Valued Health / Medical Benefits Defined Benefit Defined Contribution Retirement Group Benefits Dental & Vision Benefits Life Insurance Personal Accident Insurance Other Benefits Car Benefits Share Purchase Plan Company Car Long-term Disability Car Allowance Time Loss Policies 3

5 Employee Profiles Sample Individual profile: Each profile is determined by career stream, age or length of service. Standard profile: Created by weighting Profile 1, 2, and 3. Weighting criteria reflect the frequency of each profile within actual workforce. Market: Equals all participants excluding your company. Individual Profiles Profile 1 Profile 2 Profile 3 Standard Profile Staff Admin. Professional Sales Management Annual Base Salary (NOK) 52,000 91, ,000 89,100 Age Length of Service Weighting for standard profile 10% 80% 10% N/A Assumptions: Assuming that all profiles are married males with 2 dependent children. Since benefits are the same for men and women in all companies, the gender assumption feeds into actuarial calculations in a proportionate way for all organisations. The inclusion of dependent children means that family benefits are valued in the same way for all profiles. Note: The value of the benefits package for the standard profile is the weighted value of the benefits package for Profile 1, Profile 2 and Profile 3. MERCER 4

6 Benefits Valuation Analysis Plan Value Comparison EUR 25,000 20,000 15,000 10,000 Total Benefits Total value of benefits for average workforce profile overall attractiveness of benefit plans for each company in the peer group. 5,000 0 C F H D A Q Client J G I E EUR Company Cars Total Benefits Lower quartile Median Upper quartile 12,000 Ranking 7 Index 29% 10,000 8,000 Value of each benefit type for average workforce profile, including ranks and indices (one chart per benefit type). 6,000 4,000 2,000 0 E J B H Client C D G F I A Company Cars Lower quartile Median Upper quartile 5 Ranking 5 Index 23%

7 Benefits Valuation Analysis Employee Profile Comparison EUR Total Benefits 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 Total value of benefits presented by employee profile overall attractiveness of benefit plans for each employee category. 0 Total Benefits Lower quartile Median Upper quartile EUR 30,000 25,000 20,000 15,000 Management Support Functions Value of each benefit type, including ranks and indices detailed analysis of plans competetiveness (one chart per employee profile). Value LQ to Ranking Index Comments LQ Median UQ (EUR) Median Life Insurance & ADD 7, % Below median 5,221 8,880 13,741 3,659 Long-term Disability Benefit not provided , Private Medical 5, % Slightly below median 4,653 5,900 6,747 1,247 Retirement Pension 11, % Above median 7,649 10,422 11,508 2,773 Company Cars 12, % Above median 8,500 9,600 12,286 1,100 Total Benefits 24, % Above median 11,261 17,337 22,058 6, ,000 5,000 0 Life Insurance & ADD Long-term Disability Private Medical Company Cars Retirement Pension LQ to Median Median to UQ Client Total Benefits

8 Additional Prevalence Commentary Sample Retirement: Defined Benefit Market All peer companies provide retirement benefits in addition to statutory benefits (BVG/LPP minimum). 42% of peer group companies provide a Defined Benefit (DB) pension plan. Normal retirement age is 65. Pensionable earnings (PE) usually include base salary with offset according to maximum AVS/AHV pension. For benefit defined as annuity median accrual rate per year of pensionable service is 1.8% Employee contributions for retirement benefits are typically 6% of PE. 60% of peer group companies offer bridge pension. Your Company Your company provides a Defined Benefit pension plan. Normal retirement age is 65 for males and 64 for females. Pensionable earnings include base salary with offset defined as 10% of pensionable earnings with minimum of CHF 22,464. Accrual rate per year of pensionable service is 1.67% (maximum number of years is 40). Employee contribution for retirement benefits is 6% of PE. Your company provides retirement benefits as annuity and/or lump sum with defined conversion factors. For annuity, spouse reversibility is 60%. Your company is slightly above market with regard to DB retirement provision. In terms of accrual rate your company is slightly below the market practice. MERCER 7

9 Benefits Valuation Analysis In a Nutshell... Unique, apple-to-apple value comparison of the client benefits package versus a peer group Helps to effectively compare benefit plans that have different designs Reflects the workforce structure in terms of eligibility for various benefit plans Employee perspective Peer group size: min 6-8, max 15 companies Fees: 12,000 depending on scope Timelines: 3-6 weeks depending on scope 8

10 BENEFIT VALUE ANALYSIS Methodology and Assumptions 9

11 Methodology Benefits are valued according to the employee value methodology i.e. we determine the cost of purchasing the employer-funded part of the benefit, as a private individual This approach involves typically estimating the benefit values and the premiums or costs on the market for private individuals to purchase such benefits The approach of employee value is fundamentally different to an employer cost methodology; however in certain cases employer cost and the value to the employee can reasonably be considered as the same e.g. car allowance Where benefits are optional, employees are assumed to take maximum benefit e.g. it is assumed that employees take a loan of the maximum amount for each type of loan available in that company 10

12 Methodology (1/6) Defined Contribution, Defined Benefit DC pension value = employer contributions plus administrative costs Employer contributions may be a flat amount or a percentage of pensionable salary. There are several types of DC pension plans: occupational pension plan, group personal pension plan, stakeholder pension plan. DB pension value is calculated in a number of steps a) pensionable salary = employee s salary taken into the retirement scheme calculations. Social security amounts may be deducted from employee s earnings: a multiple of lower earnings limit or basic state pension. b) final pensionable salary = projected employee s pensionable salary at normal retirement age, may be the final pensionable pay or averaged over the full career (40 years of service) c) retirement pension is calulated as a percentage of final pensionable salary, based on accrual rate used in the plan. Possible employee s contributions are deducted from the benefit. Spouse s pension for employee s death after retirement is included. d) present annual value of benefit is calculated 11

13 Methodology (2/6) Life Insurance Life insurance benefit (all causes) value = lump sum + pension from retirement plan(s) Lump sum = sum insured x life premium rate Sum insured usually is a multiple of annual salary. Pension = regular payments paid to the surviving spouse These payments may be: a) a percentage of employee s salary b) a percentage of employee s pensionable salary c) a percentage of employee s retirement pension If spouse pension is based on retirement pension, it may be based either on employee s service until death or a projected service to normal retirement age 12

14 Methodology (3/6) Long-term Disability, Private Medical, Share Purchase Plan Long-term disability value = insured lump sum + pension from a retirement plan Pension from a retirement plan is usually a percentage of employee s retirement pension. This retirement pesnion may be based on actual service or service projected to the retirement age. LTD benefit value is grossed-up with personal income tax rate and social security rate. Private medical benefit value = employer contributions (tier approach) Private medical benefit value is grossed-up with personal income tax rate. SPP value = maximum annual purchase value x discount rate 13

15 Methodology (4/6) Company Car Benefit Companies can provide an allowance value, lease value and purchase price for a vehicle. Where more than one of these is provided, data is used in the following priority order for valuation purposes: 1. car allowance 2. lease price 3. purchase price. For those peers that did not specify a benefit level, the median benefit level of the peers was assumed Allowance Value = Annual Car Allowance Lease Value = Monthly Lease Price x 12 x 70% (for personal use) + Annual Private Fuel Purchase Value = Amortization + Insurance + Maintenance + Annual Private Fuel Amortization is based on depreciation rate 15% p.a., doubled in year 1 Amortization = 70% x Purchase Price x (1 (1 2 x Depreciation Rate) x (1 - Depreciation Rate) (Replacement Term -1) ) / (Replacement Term) Insurance = 6% x Purchase Price x 70% x % paid by organization Maintenance = 3.6% x Purchase Price x 70% x % paid by organization 70% reflects the value of the personal use of the car 14

16 Methodology (5/6) Company Car Benefit Purchase Value cont. Fuel = flat amount per month based on private km assumption and average fuel cost/km and % paid by company 2,000 EUR (assuming fuel consumption 8l per 100km) Private km assumption km Petrol price 2.00 EUR / l Replacement term if not provided by company, assumed 5 years 15

17 Methodology (6/6) Assumptions (Sample) DC plan administration fees: 3% Personal Income Tax Rates: - Up to EUR 34, % - Between EUR 34,371 and EUR 150, % - Above EUR 150, % Married male with 2 children Life insurance premium (all causes) per 100,000 cover: Profile 1: Profiles 2 3: 230 EUR 173 EUR LTD premium: Profile 1: Profiles 2 3:

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