Flexible Benefits research supplement 2002 – Flexible solutions: When flex is a stretch

When 101 Dalmatians opened at cinemas in 1996 it had a strange side-effect. Suddenly people with tiny top floor flats and full-time jobs tried to convince themselves they could care for a destructive dog that needs endless exercise and sheds hair constantly. Dog lovers rushed into something that cost much more time, energy and money than they ever expected. Naturally you didn’t make this mistake. Your mind – like a steel trap – analysed the situation and realised this fad wouldn’t fit with your life. But when flexible benefits hit the headlines just a few years earlier it wasn’t so easy to stay aloof. So what if administration was a headache? Who cared if suppliers were wary? What did it matter that you didn’t trust your employers to pick their nose let alone pick a benefits package? This was the next big thing and you needed to be part of it. Even Employee Benefits got carried away with declarations that: “Flex is in. Flex is fashionable!” Employers no longer wanted to offer benefits that were a bit flexible. Trading up on cars or down on pension contributions was so pass…. They wanted “Flexible Benefits”, the magic formula prepared by experts, that seemed to offer the ultimate tailoring opportunities. Richard Morgan, senior consultant with the human capital group at Watson Wyatt, remembers: “For some reason in the collective consciousness flex turned into something very specific. Unless you followed that exact pattern it wasn’t flexible benefits.” In the heady years that followed employers ploughed effort and resources into investigating flexible benefits, and although this unearthed exciting possibilities, for many organisations the idea turned out to be a bit of a dog, with fleas. According to Clive Cripps, director of Entegria: “In the early 1990s we ran a lot of client lunches. Unfortunately although there was a great enthusiasm from HR directors to discuss flexible benefits, there was little appetite from organisations for it to move on.” The idea often stalled when it became clear how much administration was involved. Chad Dougherty, head of flexible benefits design at Hewitt Associates, explains: “Back then, administration scared people off.” Morgan goes further, saying: “Some companies fell off their chairs when they were quoted hundreds of thousands of pounds for administration outsourcing.” Employers also struggled to find suppliers. As Cripps says: “There was a head in the sand attitude that underwriters of insurance benefits were taking at the outset, so market provision was a particular problem.” Alternative solutions So it’s hardly surprising that back in 1998, despite all the talk, there were only 50 fully-fledged flexible benefits schemes in operation. In the meantime, all the other companies had turned back to less fashionable ways of introducing flexibility. These plans fell into three categories. The first, and most common solution was voluntary benefits. Mark Eaton, director of The Personnel Group, calls this “flex without the aggravation”, and its popularity speaks for itself. According to Employee Benefits research, two thirds (64%) of UK organisations run voluntary benefit schemes. The second solution offered flexibility on a limited range of benefits, so employees could choose, for example, to trade up their company car, or make a higher contribution to their occupational pension. This not only introduced flexibility, but helped employees get to grips with making choices, and reassured employers that when they were given the chance to choose, employees wouldn’t do anything stupid. Under the third solution employers were sold on the idea of flexible benefits, and although they didn’t want to face the task of introducing it for everyone, they brought it in for a tranche of staff. Littlewoods, for example, introduced flex for its top 1,000 employees, and offered voluntary benefits to everyone else. This third group were the first to realise when flexible benefit products began to evolve, because their administration systems became gradually simpler. The most dramatic changes have been the result of developments in technology. Hewitt’s Dougherty explains: “The introduction of the internet and web-based application has made flex much more feasible. The per head cost of administration has come down and service levels have gone up. You could still spend as much on administration but you’d get an entirely different service.” Less HR graft Andrew Rice, head of channel sales at Eurobenefits, explains this technology has taken some of the graft out of flexible benefits by doing “the low value high cost work that human resources departments used to get bogged down in”. Gerry O’Neill, CEO of Vebnet, points out that this includes automatic generation of reports like payroll deduction requirements, which were once hugely complex to produce. He also explains that by putting enrolment forms online, employees end up inputting their own data and keeping it up to date themselves, which takes a load off the administrators. Meanwhile, insurers have developed flex-friendly products. Morag Bramley, head of the flexible benefits practice at Gissings, explains: “Insurers are comfortable with the idea of employees being able to select against them now, because experience has shown that people tend not to decrease their security benefits.” These changes didn’t herald more breathless excitement from the press, and they didn’t inspire talk of a fashion revival. But gradually and quietly the products developed, became accessible to more organisations, and by 2001 there were more than 400 schemes in operation. Direction dilemmas This has brought something of a dilemma to employers which have been forging ahead with benefits that are flexible – rather than “flexible benefits”. Should they dive into fully fledged flex and keep ahead on the recruitment market, or should they stick with what has been largely successful so far? At Watson Wyatt, Morgan warns against boarding the bandwagon for the sake of it: “Employees have no idea what traditional flex is. They don’t care how flexibility is provided as long as it’s value for money.” The consultants all offer the same advice. Do a business case for your own company, see if fully flexible benefits fit, and only start making plans if it’s right for you. For those running voluntary benefits for a largely blue collar workforce, for example, there may be little value in flexible benefits. Back at The Personal Group, Eaton explains: “In some groups the core package isn’t exactly extensive, so having a well chosen voluntary package is far more suitable and cost-effective than trying to squeeze a flexible benefits programme out of one or two benefits.” Some employers running voluntary benefits for a more diverse group, on the other hand, have been inspired by the flexibility of voluntary benefits, and used it as a springboard to full flexible benefits. This was the route that the BBC took, and Eaton says it’s a popular approach: “We market voluntary benefits as a stepping stone to flex. For a lot of companies where they’ve had a core benefit offering, it’s a huge step to suddenly change to flex. The success of voluntary benefits can provide a stepping stone.” For those which opted for flexible benefits for a limited number, the temptation to move to full flex is even stronger. As Hewitt’s Dougherty says: “Doing the administration for 1,000 isn’t that different to doing administration for 10,000 once you’ve got the electronic systems.” The largest growth in flexible benefits, however, is coming from organisations which offered flexibility in one or two benefits, and are tempted into the type of package they have heard so much about. At Gissings, Bramley says: “If you’ve already moved towards some flexibility, flexible benefits are the next step along.” Employers are tempted by the thought of bringing administration of the whole package together in one system. Bramley explains: “The technology means it can actually be less expensive than administering the schemes separately.” But following the trend doesn’t mean throwing away the flexibility that has worked well for years, because a combination of voluntary benefits and flexible benefits can be more powerful than flex on its own. Vebnet’s O’Neill explains: “Flex has annual fixed enrolment cycles, but throughout the year people can go into voluntary benefits, so there’s more freedom.” This appealed to The Body Shop, when it added voluntary benefits to its flexible package last year. Combined communications In addition, by adding a package of voluntary benefits, employers can expand the scope of choices beyond the remit of flex into products such as cheap holidays or car insurance. It is this perception of increased flexibility that can make the combination of flexible benefits and voluntary benefits most powerful. Trevor Blackman, head of reward at The Royal Bank of Scotland, positioned them under the single banner of Total Reward. Flexible benefits were brought together with elements of the voluntary package that most closely resembled core benefits, such as life assurance. Meanwhile, voluntary benefits offering things like car hire, special offers, and deals with local companies were grouped within Staff Club. The two brands were then communicated together. Blackman explains: “The most powerful communication method is as a single offering. By putting it together they can see all the benefits of working for the company, and when they leave they know just how much they’re losing.” Hybrid schemes This marriage of flexible benefits and voluntary benefits has produced the latest development in the market, a hybrid scheme. Watson Wyatt’s Morgan explains: “There are some flexible benefits that add a lot of value like buying and selling holiday, but to be honest most of the rest of flex is voluntary benefits. You only get a small national insurance saving by offering them out of gross pay, and is it worth the bother? No it’s not. So we’re running a few schemes which flex holiday and PMI and run the rest out of net pay.” The administration is operated like a voluntary benefits scheme, and the information is held by providers rather than in a central administration programme. But the scheme is presented as full flexible benefits. Morgan claims: “Flexible benefits got put in a box and people thought flex meant a big admin system and everything out of gross pay. But flexible benefits is just the ability to make benefits flexible. It doesn’t matter how you do it.” As thousands of dog lovers discovered by the time 101 Dalmatians came out on video, you don’t need to oust the family favourite for a new fashionable breed. You can stick with the cross-breed you’ve had for years, and just dress it in a smart spotted coat. For the full results of the survey please see Flexible Benefits research supplement 2002 – Results at a glance, on EBi