Edition: September / November 2017
Memo on global benefit programmes
To: HR Managers, Financial Directors, Trustees and to a lesser extent employees with some financial knowledge. Objectives: To re-introduce global benefits programmes, different solutions under these programmes and key considerations when considering these plans.
July marked National Savings Month. During this month South Africans were exposed to numerous savings campaigns. Households exposed to these campaigns may, for example, increase savings by making small adjustments to spending habits and by purchasing cheaper goods and services.
By reviewing benefit arrangements, trustees of retirement funds, human resources specialists as well as compensation and benefits managers can also play an important role to ensure that employees are better positioned to save. These small adjustments add up and can result in significant savings.
Global benefit programmes are solutions set up by global benefit networks. These networks are central entities that partner with different insurers from countries around the world to implement global benefits programmes in those countries. Typically, global benefits programmes are available to multinational corporations operating in more than one country.
Global “captives” are one of the few types of global benefit programme solutions. A captive can be set up and managed by a global benefit network. The captive ultimately insures employee benefit policies of a multinational’s worldwide operations.
The multinational corporation therefore becomes the insurer through the captive. This provides some level of self-insurance that can lead to reduced risk charges. The local insurer’s role is still to collect premiums, provide policies and pay benefits. Multinationals would thus not have to set up insurer expertise in the respective countries they ultimately insure. This creates a saving on overheads, thus keeping pricing competitive.
There may also be instances where a multinational parent company is not comfortable with bearing the risk of having a captive. In this instance, a global pooling arrangement becomes another solution that can limit the downside risk associated with captives.
With this type of arrangement, the premiums less claims and other charges of participating benefits plans from around the world are combined. If the premiums are greater than claims and charges, the excess is paid to the multinational corporation as a dividend. If the premiums are less than claims and charges, the deficit may be written off.
By their very nature, global benefits programmes are insurance arrangements. They work because they leverage on large scales. For example, a local company with 2 000 employees may find it risky to self-insure.
There could be claims that completely wipe out the premiums received. This could leave the company with significant out-of-pocket employee benefit expenses. For such companies, the risk becomes significantly spread if the larger pool of employees is for example 80 000 at the multinational level. Combining these benefit plans and insuring them through a pool or captive can provide a feasible form of self-insurance.
Another advantage of global benefit plans is in coverage and underwriting. Local insurers are sometimes not able to offer certain levels of coverage for various reasons. In these cases, the global benefit plan may still offer the desired level of coverage.
Free cover limits are also significantly impacted with certain global benefits programmes. In most cases, the limits are significant, removing the need for underwriting of a significant number of employees. This, in turn, has the potential to reduce administration costs.
In the South African group risk market, price has become the key determinant regarding insurer and product selection and retention. When looking at a global benefit arrangement quote, there are a few considerations.
The first is whether the quote is comparable with a similar quote for a local arrangement. A global pooling arrangement and a local arrangement will have similar or identical benefit structures for employees. However, with a pooling arrangement there may be potential for dividend payments.
The second, given that some global arrangements have an element of self-insurance, is to consider whether price matters.
The third is that a global benefit arrangement must be considered in terms of a long-term sustainable context. This is because global benefit arrangements are a form of a financing mechanism so that premium rates can be better aligned to benefits.
While global benefit plans can be used to control costs or provide exposure to insurance profits, the benefits are not only financial. Data and information are normally passed on to the global benefit network for presentation to the parent company.
Parent companies therefore gain valuable insights on benefit plans of their subsidiaries. This enables centralised decision making on plan alignments between various regions. Global benefit arrangements have been around for decades. However, these solutions are not always considered when a benefit arrangement is being reviewed. In an economic environment where every rand counts, these arrangements are worth considering.