Jacqueline Otten, head of flex consulting at Towers Watson, explains how flexibility will be a key factor as the country emerges from recession
Well, what a year it has been, with a recession in full swing, massive modifications to the pension taxation rules, benefit changes in abundance – and now, with the recession beginning to lift, we need to start thinking: what next?
During this recession, we have seen companies think much more flexibly about how to respond to the need to cut costs and get through these difficult times. Many have introduced reduced hours programmes, pay freezes and even pay reductions to avoid or limit the need for redundancies. To help them and their employees respond to these changes, I have seen companies having to think more broadly about their reward programmes. In one example, a company allowed its employees to flex down their pension contributions to mitigate the reduction in their takehome pay after a 15% cut in pay for all employees.
Many employers have also used this period of economic uncertainty to review their benefits package, in particular their pension arrangements. Almost every week there is a new announcement of the closure of a defined benefit pension plan. Others are taking the opportunity to prune private medical cover or reduce the term of income protection benefits. Many companies have used increased flexibility, including the introduction of flexible benefits, to help mitigate negative employee reactions and help the company give something back.
And as merger and acquisition activity starts to increase again, it is always worthwhile remembering how effective flexible benefits can be in harmonising benefit terms across an organisation. Many organisations have a legacy of benefit differences, which can mean a significantly increased administrative burden, as well as lack of equity between employees. Flexible benefits can substantially ease the harmonisation of numerous benefits without needing to increase costs longer term.
Taxation of pension benefits
Since the last flexible benefits survey, we have had the 2009 budget, which significantly changed the taxation of pension benefits for senior employees. Some long-established expectations about the tax treatment of these benefits have been removed and the impact is being seen much further down the workforce than previous tax changes. Staff who may never have counted themselves as senior management may now be taxed on their pension contributions.
Responses to these changes are still developing, but it looks like cash alternatives could become more popular, as well as other types of savings vehicle, such as individual savings accounts (Isas). Including pension contributions in a flexible benefits plan and allowing employees to take some, or all, of them in cash, or to select other types of investment is a simple way to facilitate this. With more employees being offered cash alternatives, it will also be interesting to see whether this leads to a wider move towards increased flexibility for pension benefits.
As we (hopefully) move out of recession and staff begin to feel more secure and open to change, many employers will need to refocus on engaging employees. Recruitment and retention will once again become more of an issue, and flexible benefits can help employers here, with many survey respondents saying flex is effective in retaining and recruiting employees, and helping with staff motivation.
So, whether employers are trying to implement significant benefits change or re-engage their workforce as the economy improves, flex can be a very effective tool within wider reward programmes.
More articles on: Employee Benefits/Towers Watson Flexible Benefits Research 2010