Benefits India Quarterly Newsletter Volume 1 Number 12 May 2011 Welcome In this issue Welcome to the Twelfth edition of Benefits India, the first in the new Indian fiscal year. I know it has been a busy time for everyone, especially with growth continuing to gather momentum. We have also had a busy last quarter and are glad to showcase a summary of Towers Watson s latest healthcare trends in India study. We have conducted this for the second consecutive year. The survey focuses on emerging trends in health and wellness benefits provision and strategies adopted by employers to manage employer sponsored health benefits. The survey covered 154 large employers in India, representing more than 120,000 employees across various industries and there are some very interesting findings. Please do get in touch with us should you require more in-depth details on the survey findings. This year we will find out more in respect of the Direct Tax Code that is due to be effective from April 2012. As it stands there are a couple of measures to encourage employers and individuals to save through superannuation and pension schemes in the draft Code. With most employers continuing to grapple with growing benefits costs, we have included an article on effective communication of benefits for better employee engagement. Effective communication is key to improving employee perception on the value and maximising ROI on benefits spend. Our news round up covers the recent developments on the Health Insurance Portability, NPS and Provident Fund. We have attempted to explicate the broad issues in this area, and hope this is useful to you. If there are any queries or feedback you have from any of these articles please do not hesitate to contact us. Summary of latest healthcare trends in India study Maximising ROI on benefits spend through communication Market updates Kulin Patel Head - Benefits, Towers Watson India towerswatson.com 1
Summary of latest healthcare trends in India study Towers Watson for the second consecutive year, conducted the Healthcare trends survey in late 2010. The survey focuses on emerging trends in health and wellness benefits provision and strategies adopted by employers to manage employer sponsored health benefits. The findings of the survey cover the benefit provision, premium/ claim trends for the past two years, perceived value of health benefits by the employee, current industry trends, strategies in force and planned strategies for the future. The survey covered 154 large employers in India, representing more than 120,000 employees across various industries. Nearly 60 percent of the participants were large companies with an annual revenue turnover of more than Rs 400 crores. Some of the key findings of the survey include: Challenges in providing affordable health benefits Increasing health care costs are becoming a concern to employers. Last year, nearly 51 percent of the participant companies intended to increase their healthcare benefit. In contrast, this year s findings suggest that 57 percent want to align their medical benefit to the market 86 percent of the companies surveyed this year saw an average premium cost increase of more than 10 percent over the last three years, as compared to 55 percent companies last year that had a similar increase >50% 25-50% 15-25% 1.3 6.6 17.7 >100% 15-25% 3.45 62.07 10-15% 5-10% Less than 5% 3.3 9.2 18.4 10-15% 5-10% 3.45 20.69 No increase 17.1 Less than 5% 10.34 0 20 40 60 80 100 Percentage 2009 0 20 40 60 80 100 Percentage 2010 Percentage increase in premium cost 2009 versus 2010 Statistical evidence from the survey suggests that insurance companies are passing higher claims cost onto companies. Of companies having claims cost of 125-150 percent, only 9 percent faced a premium increase of 25-50 percent last year as against almost all respondents in that category this year. The correlation between increase in premiums and increase in claim cost has become stronger Strategies adopted by Companies Employers are adopting various strategies to manage the health benefit provision and these were broadly classified into the following categories 1. Cost sharing with employees 2. Improved plan administration and management and 3. Strategic plan design with focus on wellness towerswatson.com 2
The survey findings clearly show the prevalence and future plans for adopting these strategies and are quite insightful on the effectiveness of different approaches Need for intervention Health benefit is widely viewed as a good attraction and retention tool. Approximately 70 percent of the participant employers feel that the perceived value of health benefits is quite significant among employees. However only 28 percent of the participant companies felt that employees are well aware of the benefit spend to provide health benefits Extremely 11% Significantly 59% To some extend 28% No 1% 0% 20% 40% 60% 80% 100% Percentage Employee perception of value of health benefit They are well aware 28% To some extent 50% No 22% 0% 20% 40% 60% 80% 100% Percentage Employee awareness around the benefit spend This shows that while the perceived value of the health care benefit is high, not many employees are aware of the costs incurred by employers to provide such benefit. There is clearly a need for improved communication of the total rewards to employees, including the benefits spends incurred by the organisation, especially against the backdrop of increasing health care costs 66 percent of the surveyed companies made some changes to the benefit design within the last three years but only 18 percent of the companies had a reduction in the insurance premium and 52 percent of these companies still continue to experience claim ratios in excess of 100 percent. This establishes a need for a thorough experience analysis to understand the key drivers of claim costs and introduce benefit levers that can be effective and robust to manage health care benefits in the future 64 percent of the participants have mentioned that providing segmented health benefits would be a great tool to increase the perceived value of the health benefit. This is an indication of the future development where we could expect the medical benefit provision to move from a one size fits all to a more targeted approach. Considering various factors like age, marital status, occupation, etc. while targeting would ensure that employees gain access to benefits that truly fulfill their needs Incentivising wellness is clearly one of the top priorities for employers. We could expect organisations to either introduce or enhance existing wellness benefits. This would help balance the conflicting issues of health care costs and adequacy of health cover Further information For more information, please contact: Kulin Patel kulin.patel@towerswatson.com Anuradha Sriram Anuradha.Sriram@towerswatson.com towerswatson.com 3
Maximising ROI on Benefits Spend through communication Benefits form an important element of Total Rewards for an employee. While the cash component of rewards is easily understood and appreciated, the same cannot be said about benefits. An effective communication on all aspects of rewards help employees better appreciate what their employers offer. The Communication ROI study report published in 2009-2010 by Towers Watson based on a global study shows that only 43% of the employers felt that the employees understand the value of their health care benefits. The percentage was far lower for other aspects of rewards like bonus, pension and pay levels. Other studies confirm that employee satisfaction as far as rewards are concerned improves significantly once an employee understands the value of the rewards. Specifically, a focused communication strategy often gives better returns than additional spend on the benefit programmes. The first step in understanding benefits as a part of the tangible elements of Total Rewards is to prepare an inventory (base pay, variable pay, incentives including long term incentives, training and development, executive compensation, if any) of all those elements that are quantifiable. The biggest challenge is around how one quantifies retirement savings, group life insurance and training and development on the same plane as say base pay. Valuing benefits involves applying standards and principles that are based on the nature and timing of benefits to help in a quantitative evaluation of these benefits. These are done in the larger context of the rewards strategy of the company. The company s rewards strategy would drive the approach between Market Value and Cost to Company. A combination of both would give the value add perspective. As an illustration, if one was to value group term life insurance, one could compare the premium paid by the company towards group cover vs. the cost of buying the same cover in the retail market. Other benefits like Gratuity involve more complex decisions like accrued benefit vs. actuarial value. Once the company has decided upon the valuation methodology for all the elements, the key messages that the company needs to emphasise upon and convey to the employees need to be identified and incorporated into the communication design. Pay Base salary Bonuses Recognition Allowances Geographical and shift allowances Employee Benefits Health insurance Long-term sickness benefit Pension Holiday Staff restaurant Relocation assistance Life insurance Learning and development Career development Learning experiences Performance management Succession planning Training Talent mgt. Coaching Work environment Leadership Culture Involvement Diversity Work/life balance Interesting meaningful work Job security towerswatson.com 4
The communication could either be web based, paper based or a combination of both. The modus operandi would depend upon the level of IT maturity that the company s HRMS has. From a strategic viewpoint, the key differentiator to Total Rewards approach on benefits communication is that it is employee centric. It needs to address requirements of various demographics as well as business/ geography specific requirements. It reinforces the message that rewards are more than just salary. It enables better understanding of the value of benefits, particularly those that are not highly appreciated and hence improves employee perception of the overall programme. This is the preamble to optimising spend on employees while ensuring that the company understands what employees value. Further information For more information, please contact: Preeti Chandrashekhar Preeti.Chandrashekhar@towerswatson.com Market updates Health Insurance Portability The insurance regulator IRDA has on 10 February 2011 issued guidelines for portability of health insurance policies. The guidelines are effective 1 July 2011. The portability feature will allow policyholders to switch insurance companies without having to lose any of the benefits the current health insurer provides. In other words it would ensure continuity of benefits such as The credit from the waiting period for pre existing condition(s) already completed can be carried forward to the new insurer The new insurer will provide cover at least up to the extent of cover under the old insurance policy However some additional clarifications are awaited with regards to waiting period for certain diseases, maternity cover etc, before portability becomes operational. The General Insurance council has sought some clarifications to this effect from the regulator. While these guidelines are applicable to individuals, it is not likely to have much of an impact on group policies, as generally the group policies are negotiated and tailored to employer needs. However in case of group policies we need to wait and watch if there could be a resultant spin off benefits that could emerge due to portability guidelines, though there is no clarity as of now. Recent Changes: New Pension System (NPS) Swavalamban Scheme was announced in the Union Budget 2010-11 to address the longevity risk of workers in the unorganised sectors. Under the scheme the Government of India shall contribute Rs 1,000 per year to each NPS account opened in the year 2010-11 and for the next 3 years. The benefits will be available only to persons who join the scheme with minimum contribution of Rs 1,000 and maximum of Rs 12,000 and there are a host of other conditions to be eligible for the Government contribution. In the Union Budget 2011-12 the Government has decided to extend this benefit of government contribution from three to five years for all Swavalamban subscribers who enroll during the financial year 2010-11 and 2011-12. Further, the Government has proposed to relax the age of exit from 60 years to 50 years, or the minimum tenure of 20 years, whichever is later towerswatson.com 5
Tax Benefits for New Pension System (NPS) The NPS introduced by government few years ago allowed contributions to be made by non government employers and employees. The Direct Tax Code Bill includes confirmation that a deduction could be claimed by an employee for contributions made by him not exceeding 10% of the salary subject to an overall limit of Rs.1 lakh in a financial year. Likewise, the employer also enjoys corporate tax deduction for the contribution made by it. This is over and above the combined contribution by the employer to the extent of 27% of the employee s salary for each year towards the superannuation fund and recognised provident fund. Thus tax treatment is expected to make NPS popular as a cost effective and efficient tool for providing for pension to its employees, amongst companies. It is important to note that even though the withdrawals from NPS are currently taxable, under the proposed DTC the NPS is proposed to be covered under the exempt-exempt-exempt regime Convergence of Indian Accounting Standards with IFRS Ministry of Corporate affairs notified and confirmed that 35 converged Indian Accounting standards (now called Ind AS) to IFRS have been placed on the Ministry website (http://www.mca.gov.in/ministry/accounting_standards.html) This includes Ind AS 19 for employee benefits. The date of implementation is yet to be notified. We will keep you updated on any further developments. Declaration of PF interest and related aspects In continuation to the circular from the Ministry of Labour declaring final interest rate at 9.5% for 2010-11, it has been notified in April that pending declaration of the rate of interest for 2011-12 the rate of 9.5% would be considered for the settlement cases Private PF trusts too will have to pay 9.5% interest for the year 2010-11 Government has allowed tax exemption on 9.5% interest on Provident Fund Private PF Trusts get one more year of extension of time for re-recognition Private PF Trusts already recognised by the IT Act, employers were required to apply for fresh recognition after obtaining exemption under section 17 of the EPF and MP act by 31st December 2010.The time limit is now extended to 31st March 2012. This amendment will take effect retrospectively from 1st January 2011. International Workers As per the recent notification by the EPFO it is now required to insert relevant clauses in respect to International Workers in the PF Trust rules of the exempted establishments. Further information For more information, please contact: Anil Lobo anil.lobo@towerswatson.com About Towers Watson Towers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk, and financial management. With 14,000 associates around the world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson covers the length and breadth of India and operates from five offices in four cities. For more information, please email us at benefitsindia@towerswatson.com or visit www.towerswatson.com towerswatson.com 6