Look for potential savings to fund flexible benefits

Employee%20Benefits%20-%20Flexible%20benefits%20supplement%20October%202007%20coverAlthough the cost of flexible benefits is falling year on year, organisations are finding it a challenge to implement schemes on a cost-neutral basis, says Sarah Coles

Flexible benefits schemes used to be like the BMXs of the benefits world. Everyone wanted one, everyone lobbied those holding the purse strings for one, but often they had to settle for something inferior and less exciting – on the grounds of cost.

In recent years, the price of flexible benefits schemes has plummeted dramatically, as online and off-the-shelf versions have proliferated. But some employers are looking to go a step further than simply implementing flex at an affordable price, and are aiming to do so on a cost-neutral basis for the organisation using a variety of clever funding methods.

When it comes to funding flex, there are two issues to consider: the first is providing employees with an allowance to spend on benefits and the second is controlling costs.

Although some companies seed the scheme with extra money to allow staff, not just to buy back their original benefits, but to buy additional benefits too, most don’t. Philip Hutchinson, a principal at consultancy Mercer, believes employers are more likely to simply put into the flex scheme the value of the benefits that staff already receive, therefore keeping the provision of an allowance cost-neutral. “The company puts in a sum of money to enable you to buy back exactly what you already have, or to trade them for something else. You could, for example, trade down from family private medical insurance to single cover, and spend the remainder on more holiday,” he explains.

Employers can also provide more flexibility around some core perks if staff want to beef up their benefits pot. “[The scheme] may allow you to put in your bonus, your car allowance, or some salary, depending on the level of flexibility they wish to offer,” Hutchinson says.

The second cost involved in running a flex scheme is setting up the plan in the first instance, and its ongoing administration, although the cost of both has fallen significantly for those prepared to accept an off-the-shelf scheme. So while there are still a number of high-end tailored offerings that remain the preserve of the wealthiest HR departments, there are also now an increasing number of lower-priced solutions.

Mark Carman, marketing and communications director at Motivano, says: “Online systems have made flex much cheaper to run. You can put the data in, the system will sort it, and send reports to all the benefit providers. The headache isn’t there any more. Our maximum cost is £25 a head plus set-up costs. But it could be as low as £10, a head, a year.”

Many organisations opt to fund flex through the tax and national insurance (NI) savings that are available for some benefits, such as childcare vouchers, cycle-to-work schemes, and pension contributions. Offering these perks through a salary sacrifice arrangement saves on the tax and NI that employees would otherwise have paid on that portion of salary. The employer, meanwhile, will benefit from NI savings of up to 12.8%.

“Both parents are entitled to £55 a week to spend on childcare, [for children] up to the age of 15 [years]. Typically, there’s a 5% take-up of childcare vouchers, and most people take their full allowance. That can create a significant saving for the employer’s NI bill,” says Carman.

In fact, if an employer provided childcare vouchers worth £200 a month to its employees and 20 took them up, the organisation could save £6,144 a year on NI.

Cycle-to-work schemes are eligible for similar tax and NI breaks, although these involve smaller sums of cash and are less popular, so overall typically provide smaller savings for employers.

However, on their own, these benefits are unlikely to fund the administration of a scheme. “If you’re relying on childcare vouchers and bikes for your NI saving, there’s not nearly enough to pay for the flex scheme,” explains Hutchinson.

In the past, this could have been significantly boosted by NI savings from the tax-efficient home computing scheme, but the then Chancellor Gordon Brown pulled the plug on these schemes in his Budget report last year, leaving some organisations high and dry. “There were some [employers] that were going to put in salary sacrifice computers, childcare vouchers and bikes, and once computer schemes were withdrawn they couldn’t afford to do it. There were a couple of councils that backed away from it,” says Carman.

Offering pension contributions through a salary sacrifice arrangement can also help to fund the set-up costs and ongoing administration of a flexible benefits scheme. Hutchinson explains that this can produce bigger tax savings than either childcare vouchers or bikes-for-work, as it has a broad appeal.

However, not all organisations are happy to offer their pension scheme flexibly. Some offer a final salary scheme with little or no flexibility, while others don’t want to give staff an opportunity to flex their pension benefits, for example, if they see no demand for extra employee contributions.

This means employers need to be creative in finding alternative methods of funding their flexible benefits schemes. One option is to call on providers to help foot some of the bill. “Benefit providers can contribute to the communication of the scheme. They can provide material, or fund the space they occupy in communication documents. It will help improve the take-up of their benefit, so it’s in their interests to contribute,” says Carman.

Employers can also take the opportunity to get better deals on existing benefits, rebroking with those providing more competitive offerings.

In the long term, implementing a flexible benefits scheme can also produce indirect cost savings for employers, for example, in the shape of savings on future benefits provision for perks such as private medical insurance (PMI). If the cost of offering these benefits to staff continues to spiral, flex can help to cap this. Instead of having to match increases of 10% a year, for example, employers could build in an overall benefits cost increase of 5% or 6% with staff funding the remainder through flex. This caps an employer’s liability, and thus keeps rising costs under control

It may also be possible to draw on budgets from other parts of the human resources function – such as recruitment – as a flexible benefits package can help with retention, and reduce the recruitment need.

Hutchinson also points out there may be some budget that can be taken from performance management functions. “Sometimes flexible benefits are put in to help improve productivity. They can help engagement, which, in turn, can drive up productivity,” he says.

It is these indirect savings that Hutchinson believes often provide the basis of a business case for flexible benefits, making the initial outlay and ongoing cost of administration pay for itself. “Employers will look at all the cost savings and the risk, and make a commercial decision about whether it’s worth investing in flexible benefits,” he adds.

The continuing growth in the flexible benefits market goes to show that an ever-increasing number of organisations are doing the sums and deciding that flexible benefits schemes will eventually pay for themselves.

The majority of employers (84%) have incorporated salary sacrifice arrangements into their flexible benefits scheme, with 52% of them using the savings made to help fund their plan.Employers that haven’t introduced flex are worried about the cost. More than half (57%) think the cost of introducing a scheme is one of the biggest barriers to flex, while 53% see the cost of administration as one of the main hurdles. However, there are cost benefits. Some 40% of employers say flex helps make the most of the available tax breaks, while 25% say it helps control costs.

Flexible benefits also saves on expenses in other areas. Approximately half of employers (52%) believe it helps to improve recruitment, and 49% say it aids retention.

Source: Employee Benefits/Towers Perrin Flexible benefits research 2007

Case Study: ING Direct†

ING Direct launched a flexible benefits scheme on 1 January this year, with the aim of running it on a cost-neutral basis after start-up costs. Human resources director, Jennie Monon, explains: “We wanted to increase choice without increasing cost.” The company’s flexible benefits pot was created by enabling staff to trade down existing benefits, such as 1% of the 5% pension contribution, some holiday, private medical insurance and a portion of income protection cover, in order to fund other options. Employees could also trade a portion of their salary.

ING also offers tax-efficient benefits. “We offered childcare vouchers. They’re a real no-brainer, because employees can save tax and national insurance. We also offered bikes, and 12 people of the total 600 took them up,” explains Monon.

Some of these savings helped cover the administrative costs of the scheme, but Monon explains that the real savings came out of negotiating better deals on benefits. “We took the opportunity to rebroker our benefits and get better deals with suppliers. That alone covers the running costs. We expect it to improve retention. We don’t have a retention issue, but it should improve still further, because employees will find it hard to get anything as suited to their needs in another call centre environment.”

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