Market trends: Flexible Benefits for SMEs

Developments in the flex market mean it is now often easier for smaller employers to offer a plan, says Laverne Hadaway

Flexible benefits plans were once considered the preserve of large organisations typically due to the cost and amount of work thought to be involved in launching and running a scheme. But developments in the market over the past few years mean this is no longer the case as, in many instances, it is now feasible for more small and medium-sized enterprises (SMEs) to offer a flex scheme.

Yet their concerns have not gone away altogether. For some employers the cost of implementing flex and their size can still present a major challenge. Gaining value for money is also particularly important for SMEs when putting flex in place. Annika Haslett, flex delivery consultancy lead at Hewitt Associates, says: “The budget is such a big issue for this sector that it can hinder [employers’] ability to do what they want and they have to compromise.”

Using the employers’ national insurance (NI) savings gained from offering tax-efficient benefits, such as pension contributions or childcare vouchers, through a salary sacrifice arrangement is one way that employers on a limited budget can fund a flexible benefits scheme, for example.

A further barrier to implementing flex among SMEs is that small organisations may not have sufficient internal resources. A tiny HR department, especially one with only an HR manager reporting to a finance director, may lack the infrastructure to maintain or measure the success of a flex package. Michael Newstead, head of reward at Ceridian, says a flex programme requires constant supervision as employers will need to keep abreast of issues such as whether the scheme is up to date and relevant or whether legislation has moved on.

Technological advances

Dorian Hannington, head of client implementation at You At Work, adds that when a flex scheme lacks the proper support, the ongoing administrative burden falls on the HR department. For small departments with only a couple of staff this can be a significant burden.

However, technological developments have also made it easier for smaller organisations to offer a flexible benefits scheme. James Verner, sales director at Vebnet, explains: “As technology has improved and providers have recouped their development costs, the price of introducing flex to SMEs has come down.”

Tim Harris, a consultant at Watson Wyatt, adds: “Once upon a time, providers wouldn’t offer flex to employers with fewer than 500 staff. Over the years, the numbers have come down and now you can have flex for 50 employees.”

Improvements to technology also mean some providers can now supply off-the-shelf packages designed for SMEs. “Three years ago, providers were offering flex out of a box for £5,000. When you dig down further, that’s the very basic platform,” says Harris.

However, he adds employers may now be able to negotiate deals directly with suppliers. If employers opt for this method of sourcing a flexible benefits plan, they should ensure the product includes the necessary support, says Hannington. “I’m not convinced by flex in a box. Flex is broader than just a website. If a provider can offer it, do they have the capacity and capability to offer proper support?”he says.

Providing flexible benefits plans to SMEs cannot be as cost effective as it is to larger employers. Yet there are tales of some providers pricing their services at around the same level, regardless of an organisation’s size. This has led other providers in the market to question how such practices can be commercially viable. Hannington says that some providers are trying to buy business at any cost as some of the prices quoted for implementing flex have been “silly money”. However, this kind of approach could backfire and cause cashflow problems for some providers.

Market changes

The market in flex providers has still to mature and there is plenty of room for consolidation. A number are backed by venture capitalists, and are rumoured to be up for sale. French firm Accor has been attracted into the market recently taking a majority share in Motivano, while Aon has acquired a minority share in flex technology provider Staffcare.

As the market matures, some providers are keen to maintain profit margins and, according to Haslett, are not throwing in services for free anymore. “Nowadays, providers are very strict about what they concede. If there’s anything extra that wasn’t in the original procurement process, they’ll charge extra,” she says.

Hannington cites the example of one employer which, having signed a deal with a provider to implement a flex scheme, later discovered this did not include a helpline. It subsequently had to pay extra for another provider to supply one.

Employers could also encounter problems when sourcing some of the benefits to include within flex. Providers of some medical and group risk benefits, such as income protection, are said to be taking a tough stance, and may not quote for smaller organisations.

Employers may also find difficulties in sourcing mobile phones. Flexphone, now the only provider in the market, was recently taken over by Vodafone with a consequent change in its policy. It is now targeting firms with 2,000 employees and above. “Now there is no one in the market offering mobile phones to firms with fewer than 1,000 staff,” says Hannington.

These issues suggest the SME flex market may be in for a period of uncertainty. No doubt there will be more consolidation and, in time, the market will settle down into some sort of stability and maturity, although exactly how that will happen remains to be seen.

Focus on facts

What are flexible benefits plans for small and medium-sized enterprises (SMEs)?

Flexible benefits schemes are run for a set contract period whereby employees can opt into or out of employer-paid benefits, select employee-paid benefits or take cash.

Flex schemes for SMEs are simply such plans run on a smaller scale. These may have to overcome issues, which are not a problem for larger organisations, such as limited resources particularly in terms of budgets and HR personnel.

Some providers offer off-the-shelf products, also known as flex in a box, which are designed for smaller employers.

What are the origins of flexible benefits for SMEs?†

Flex for large organisations has been around for at least 10 years, but has only been available for SMEs for about half that time. Flex for SMEs began as a limited menu of benefit choices. As technology has improved and providers have recouped their development costs, the price of implementing flex schemes for SMEs has fallen and the market has become more viable.

Where can employers get more information and advice on flexible benefits for SMEs?†

The Chartered Institute for Personnel and Development (CIPD) should be a good starting point for information. Visit or call 020 8612 6200.

HM Revenue & Customs’ (HMRC) website includes information on the tax status of individual benefits. Visit

In practice

What is the annual spend on flexible benefits for SMEs?†

The annual spend on flexible benefits schemes for SMEs is not available as the level of competition means that providers play their cards close to their chests.

Which flexible benefits providers for SMEs have the biggest market share?†

The market share for providers offering flex to SMEs is also not available. However, a number of providers name Vebnet, Thomsons Online Benefits and You at Work as major players in the market.

Which flexible benefits providers for SMEs increased their share the most over the past year?†

Again, these figures are not known.

However, You at Work was listed as 58th in the 2007 Sunday Times’ Microsoft Tech track 100 with annual sales growth of 76%.

Nuts and bolts

What are the costs involved?†

Implementation fees will vary depending on the size and complexity of a scheme. Some providers offer their flex technology for free and make their money on the group benefits. In the SME market, implementation fees (other than where this is swallowed up as part of a full service model) have been known to be as low as £5,000 for schemes with less than 100 staff. Fees are generally between £15,000 and £35,000, and will not exceed £50,000.

What are the legal implications?

The introduction of a flex scheme will have implications for employees’ terms and conditions, so employers must ensure they do not open any tax, legal or contractual loopholes. Legislative changes may also affect flex schemes.

What are the tax issues?†

Employers must ensure they establish the tax and national insurance treatment of each benefit included in flex. Employers that include benefits offered through a salary sacrifice arrangement must ensure these schemes are set up in accordance with HM Revenue & Customs’ guidance. For providers without access to legal and tax compliance and support, it can be a challenge to ensure the rules around the schemes they design remain watertight.