Smaller employers may have certain advantages when it comes to introducing benefits, says Katrina McKeever
Four years ago, a small PR firm was set up and attempted to attract key talent from the top agencies. But as it could not compete with the benefits offered by bigger PR companies, it adopted an aggressive pay policy, offering salaries and bonuses well above the market rate.
This worked until its employee numbers reached 80-100. At this point, simply throwing money at staff became unsustainable, so the company introduced benefits such as pension contributions, life assurance, critical illness cover and medical cover.
The story is told by Brett Smith, practice manager, corporate clients at Towry Law, who says: “The aim, over time, is to slow down salary and bonus amounts to level out a bit more within your industry. After a while, employees begin to expect the benefits package of a more mature business.”
Small and medium-sized enterprises (SMEs) seeking to boost their benefits offering have become fertile ground for a growing number of benefits providers. That is no surprise, given the potential market. Organisations with up to 500 staff make up over 99% of all UK enterprises, according to data from the Department for Business, Enterprise and Regulatory Reform. SMEs employ more than 45% of the UK workforce – nearly 12 million people.
The growth of the SME benefits markets means that the comprehensive reward package, once the preserve of big companies with blue-chip budgets, is increasingly accessible to employers with fewer than 500 staff.
For those building a benefits scheme from scratch, it is worth noting that even the smallest, most cash-tight employer can arrange some form of voluntary discount scheme for its staff. This can range from negotiating discounts at the local sandwich shop to offering savings on the employer’s own products and services.
Organisations with slightly bigger budgets can buy more sophisticated off-the-shelf voluntary benefits plans that can include discounted food, travel, days out, clothing, household goods and petrol. Staff pay for these services themselves, so the cost to the employer is minimal. SMEs are seen as a key growth area for such packages. In May, Love2reward launched an off-the-shelf voluntary benefits package, Everyday Benefits, for workforces of fewer than 350 people.
Simon Binney, divisional director, employee benefits at HSBC Actuaries and Consultants, says health and wellbeing perks, such as employee assistance programmes, gym membership and health screening, are also popular among SMEs. “Products such as dental cover, healthcare cash plans and optical plans are also much more available now, with SMEs being able to offer these benefits at corporate rates for individuals, again on a voluntary basis, so as not to incur additional costs to the business,” he says.
These benefits are relatively low cost and enable SMEs to project a caring image where healthy lifestyles are valued.
Tax-efficient benefits, such as cycle-to-work schemes, childcare vouchers, health screening, mobile phones and pension contributions, are also worth looking into, even for small firms. All these benefits take advantage of government-endorsed tax and national insurance (NI) savings that can add up to hundreds, or sometimes thousands of pounds of savings a year for both employee and employer.
To qualify for tax and/or NI breaks, these perks must be paid for by the employer. But they can also be offered via salary sacrifice, with the employee giving up a portion of salary in exchange for the employer buying the benefit on their behalf, thus accessing the tax and/or NI breaks. Binney says: “Salary sacrifice schemes are in place and working successfully for companies with as few as 10 employees, and as companies with fewer staff are more reliant on them for the future success of the business, providing these types of benefit is becoming more critical.”
However, some salary sacrifice schemes, especially around pension contributions, are complex to set up, so SMEs need to weigh up the amount of administration involved against the savings that can be made before heading down this route.
Dorian Hannington, manager of flexible benefits consulting and administration at Enrich, says: “Employers should be aware of the level of resources they have available. Cycle-to-work schemes, for example, may seem like a great idea, but take-up rates tend to be low. Employers should ask themselves: is it worth going through all that effort if only one person takes it up?” Flexible benefits providers are also getting clued up on the potential of accessing SMEs, as the flex market among larger organisations starts to reach saturation point.
Hannington says flex schemes are becoming popular among SMEs and the technology to run them is already in place.
Off-the-shelf flexible benefits schemes are now available for organisations with as few as 10 employees. These bespoke systems work by pre-negotiating rates with providers of products such as insurance, pensions, and a range of other benefits. The pre-packaged flex scheme can then be branded and installed into an organisation, with options such as a cycle-to-work plan, childcare vouchers and voluntary benefits added to the scheme at the employer’s request.
SMEs have an advantage over their bigger rivals, says Karen Gamble, regional director at Heath Lambert Consulting. “In organisations where there is just a handful of employees, there is no need to send out staff surveys and feedback forms to find out if people are getting the benefits they want,” she says. “They can just say to John and Mary: ‘do you think this is worthwhile?’ or ‘do you appreciate this’?” Whatever the level of appreciation for benefits may be, certain core benefits are expected, such as pensions and some insurance products, so SMEs will want to offer these to at least some key staff. “Key people, such as finance directors and other professionals, will probably want a pension because it is expected, says Towry Law’s Smith. “Employers can offer to pay 10% contributions for those key people and less for lower-ranking people.”
But employers must be strategic about pensions, says Smith. “If they are a retailer, for example, they may have a high turnover of up to 85% among sales staff, so why pay any pension contributions for those people? Choose benefits quite carefully and provide them to relevant groups.”
Although employers may be able to provide access to a basic pension scheme, such as a stakeholder pension, they may encounter barriers when sourcing other core benefits for key staff, notably insurance. Smith says employers that want to buy group insurance products will need at least three people or ‘lives’ to get anything at all. And with group private medical insurance and group life insurance, there may be a problem with getting the scheme underwritten if there are fewer than 20 employees. This could involve staff having to attend a medical or fill out health declarations and the insurance company could even decline to insure them.
Even if SMEs have enough employees to qualify for cover, it may be expensive because they lack the buying power of bigger companies. One option is to choose an umbrella scheme in which an intermediary uses its clout to secure good terms for insurance schemes. It can then offer these rates to a range of small businesses, effectively pooling the schemes and reducing the cost for all.
The only other real barrier to SMEs accessing benefits is budget. But creative thinking and maximising the strengths of being an SME can throw up some original ideas on perks. Such as the small firm that provided free lunch for all staff once a week and everyone could choose what they wanted before the shopping was done. Employers cannot do that if they have got 1,000 staff
Case study: IPD the right size to build perks
Real estate performance analyst IPD employs 250 people at its office in Farringdon, London. The firm offers staff a comprehensive range of benefits, including life and critical illness insurance.
Employees can also choose from a wide range of voluntary and salary sacrifice benefits, introduced in October 2008 with Thomsons Online Benefits.
These benefits include salary sacrifice pension contributions of up to 10%, depending on employees’ length of service, private medical insurance, dental cover, health screening and transport season ticket loans. Staff can also choose to take up holiday trading, gym membership, childcare vouchers and loans for training.
Urvashi Desai, IPD’s head of human resources and development, says: “Our size was just right to launch this. If we had tried to do it a few years ago, we would not have been big enough, but now we are just the right size.
“On the day of the launch, a lot of people logged in. They can access it from home, so feel more in control. People are much more aware of the value of their offering.”
Case study: Insurance products cool for Hotbed
Financial services firm Hotbed was launched six years ago and currently has 20 employees. The company recruits highly-skilled staff, such as investment directors, from the financial services sector.
Its benefits system was set up four years ago and centres on insurance products. All employees are offered income protection, death-in-service, a pension and Healthfund medical insurance, which was offered to staff and their families. Hotbed also offers childcare vouchers through a salary sacrifice arrangement.
Helen Cox, the firm’s compliance officer, says: “We considered all options when we were setting these benefits up. We recruit from very big companies, so we have to be competitive.” Despite the organisation’s small size, Cox says that it managed to find all the benefits it wanted to offer with no problems.
“We did not have any problems sourcing benefits, possibly because we went through a broker, but it was all straightforward,” she says. “We have had no difficulty in finding the products we need.”