Flexible benefits plans can help both employers and employees in hard economic times, but any scheme must include the right elements, says Peta Hodge
Most organisations find it hard to take radical, positive action in a recession. But if employers are brave enough, this could be the ideal time to restructure their perks by setting up a flexible benefits scheme or by revamping an existing flex arrangement.
Debby Hannaford, benefits consultant at flexible benefits technology supplier NorthgateArinso, says: “In these challenging times, staff can be an organisation’s most important asset. A flexible benefits solution can help to keep employees motivated and positive, particularly by enabling them to make better use of their income and enhance their spending power.”
But what are the crucial elements to include in a recession-busting flex scheme? The Employee Benefits/Towers Perrin Flexible Benefits Research 2009, published in March, showed 23% of flexible benefits schemes offer staff a flex pot to spend on benefits, with the option of taking some, or all, of it as cash. Clearly, the cash option will be attractive to many workers at the moment.
One of flex’s attractions for employers is that the pot tends to increase in line with salaries rather than with the cost of benefits. Paul Brown, senior consultant at Watson Wyatt Worldwide, says: “In times of recession, salary inflation is likely to be a lower rate of increase than benefit inflation.”
For a scheme to achieve significant employee engagement, a decent amount of cash will have to be put into the pot, but this could be done by offering benefits funding in lieu of a pay rise, says Hannaford.
As with the flex pot approach, a flexible benefits scheme that allows employees to trade down some benefits cover in return for cash is likely to appeal to staff struggling to pay their monthly bills.
The appeal for employers is obvious as it allows them to offer staff additional choice from existing funding, although Brown suggests that without an element of salary sacrifice thrown into the mix, the flexibility on offer is likely to be limited. However, a cheap way of creating at least the illusion of extra choice to any flexible benefits scheme is to add a few voluntary perks to the menu of what is on offer.
Trading down benefits
Schemes based on trading down benefits levels must be managed carefully because there are several potential downsides. The obvious one is that insurance premiums on risk benefits can be sent sky-high as young, it and healthy staff opt out, leaving older, less fit and less healthy colleagues behind. It is also important that, in offering theirstaff greater flexibility, employers do not forget their basic reasons for providing a benefits scheme. For example, if an organisation offers wellbeing products to help manage sickness absence, employees should not be allowed to opt out to the detriment of the firm’s wider business strategy.
Matt Duffy, online benefits consultant at independent adviser Lorica, says: “It is important, as part of the benefits audit, feasibility study and scheme design, that the flex consultant identifies benefits that should retain an element of core entitlement, to ensure flex helps to achieve the employer’s reward strategy and maintain economically viable insurance costs.”
Salary sacrifice arrangements is at the heart of an increasing number of flex schemes. More than a quarter (28%) of respondents to aforementioned Employee Benefits research now offer such schemes. Their appeal in a recession is they give staff access to discounted products, offer savings on national insurance, and exchange taxable pay for tax-free benefits.
Income tax rises
A number of income tax rises will be introduced over the next two years. “All these increases mean exchanging salary for a taxfree benefit will become even more valuable,” says Watson Wyatt’s Brown.
Matt Waller, chief executive at Benefex,adds that as long as employers follow compliant processes, salary sacrifice should be a win-win for both employees and employers.
But he suggests schemes should include certain protections, such as ensuring that any at-risk employees – for example, those who are at, or near, the national minimum wage or lower earnings limit – are prevented from making adverse or illegal decisions.
Salary sacrifice is one of the tools that can be used to set up a flex scheme ‘for free’, or at least on a cost-neutral basis, which has obvious appeal in the current climate. Some flex advisers also allow their charges for benefits broking to be offset against the project cost of implementing a flex scheme. But such arrangements are not really free as the project costs are offset by money earned elsewhere within the contract. “Whether this is good news for employers and their employees will largely depend on the structure of what is agreed,” says Waller.
“If it is just a mechanism to pay the costs using some other means, then it benefits everyone. If it is used as a means to maximise the commission that [an adviser] can take, as happens with some [advisers], then although being good for an employer, it can be detrimental to an employee.”
Rebroking existing benefits is another way employers can reduce or neutralise the cost of implementing a flex scheme. “There are a number of clients for whom we have been able to save substantial costs from benefits that are currently provided,” says Waller. These savings have enabled the client to implement flex for ‘free’.”
However, such strategies come with a health warning. Hannaford says it is important employers “do not end up with new rebroked benefits that are less attractive than the original ones, or provide reduced, sub-standard or less comprehensive cover or increased excess limits”.
Brown also warns of the potential danger of short-term premium cuts being followed by future price hikes, as the true cost of the risk is revealed.
“It is always possible to reduce benefit costs even though it sometimes involves a consultation process with employees,” he says. “We have seen clients introduce pensions salary sacrifice, reduce pension benefits or close pension schemes, reduce the term of income protection cover and switch providers in order to get cheaper premiums.
“For employers, this is a good time for these types of change because employees are more accepting of cutbacks. Using some or all of these savings to introduce a flexible benefits scheme can be a good way to give something back to employees.”
There is no particular right way to structure a flexible benefits scheme in these or any other economic circumstances. An organisation setting up flexible benefits during the current recession, or reviewing existing arrangements, may be motivated by the prospect of short-term or even ongoing cost savings, but in structuring its scheme, an employer should never lose sight of its wider business objectives and the particular nature of its workforce.
Questions to consider when reviewing a flexible benefits provider:
In a recession, it is important for organisations to squeeze every last bit of value out of their benefits spend. So this is a perfect time to review their flex provider – especially if they have not done so for a while. Key questions to consider include:
Is more effective and/or cost efficient flex software available?
Can employee engagement be improved by restructuring the scheme, changing the benefits, or simply by communicating better?
Could savings be made or benefits improved by implementing salary sacrifice arrangements?
Can money be saved by rebroking benefits (without compromising the integrity of the scheme or incurring extra costs further down the line)?
Can operating costs be reduced by outsourcing administration?
Would integrating the flex system with HR and payroll improve efficiency?
Can business objectives be better met without incurring extra costs?
Has the provider made clear the true cost of the arrangement and how these costs are recouped, especially if offering ‘flex for free’?
Case Study: Munich Re
Reinsurer Munich Re had specific business objectives in mind when it set up its flexible benefits scheme in 2007.
The organisation had been operating as three distinct divisions, each with its own culture, workforce profile and benefits package. But employee engagement levels were generally low, and staff turnover in one of its divisions was unacceptably high.
It wanted to create more of a onecompany culture, reinforced by a benefits package that treated all employees equally and engaged them more. It also wanted to reduce its benefits spend.
Thomsons Online Benefits was appointed to provide the scheme, which is known as Re:Flex.
This scheme harmonised benefits across the three divisions, added new options to reflect staff feedback and rebroked some existing benefits to secure cost savings.
After a comprehensive communication programme, employee engagement showed an immediate, significant improvement, with 81% of the 336 workers making benefit selections within the first two months. Turnover in one division fell from 17% to 13.4%.
Between them, employees at Munich Re are saving approximately £12,500 by using salary sacrifice.
Robert Wigmore, compensation and benefits specialist at Munich Re, says: “[Employees’] personal benefits decisions now rest in their own hands.”
Case Study: Law Society
Just over one in 10 (11.5%) of the Law Society’s 1,400 employees have opted to take cash instead of perks under the organisation’s new flexible benefits scheme, launched at the turn of the year.
The scheme, called Your Flex, was introduced alongside performance-related pay and pensions salary sacrifice with the aim of changing the organisation’s culture and improving employee motivation.
A spokesperson for the Law Society, says: “The Society is hoping to enable staff to tailor their benefits to their needs.”
Making a benefits package more relevant means allowing staff to opt out of benefits altogether if they want to. Your Flex gives staff a flex pot worth 3% of base pay, which can be taken as cash or used to buy benefits.
Despite the scheme being launched in the middle of a recession, and some staff going for the cash option, the majority have voted with their
feet and shown they still value benefits over cash.
When the scheme went live, 88.5% of employees chose benefits over cash, the most popular being dental cover and the new defined contribution pension plan.
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