In summaryLeaving your benefits offering unchanged for a number of years can mean it ends up drastically out of step with the needs of your staff. However, making sudden changes to remedy this can cause further problems, where even undervalued perks, when taken away, can cause uproar. Gradual updating of your package is best, identifying where costs can be reduced, and perhaps even offering staff a choice through flexible benefits.Case study: Lloyds TSB
Article in fullIf, like most employers, you are operating a benefits package that was set up years ago, the chances are that there are benefits on offer which no longer match your workplace profile. Workplace demographics are changing, as are the types of benefits that staff value most.
Unfortunately, a wholesale 'chuck out the chintz' type of exercise is likely to fall foul of employment contracts, even if you are still going to spend the same budget as before and the aim is to provide benefits that employees value more. So a subtler updating of what you are spending your budget on is necessary. "If you take away something someone has, even if they didn't value it, they would still object," says Andrew Dawson, deputy managing director of Gissings. "Young singles may argue that four times salary life cover is of no value to them, but it would be quite negative if you were to take it away."
One of the most expensive benefits on offer to employees is pensions. However, despite their difficult reputation, there are savings to be made. Employers with a defined contribution scheme in place that is more than three or four years old may very well have an old style scheme with more expensive, old style charges too.
Every time money goes in, charges go out. Old style charges typically include a policy fee of £3 per month, a bid offer spread and reduced allocation rates in the early years of the scheme. It may also have limited fund choice, only providing access to the provider's own in-house funds.
New style pension schemes offer a fund choice from a range of investment specialists and usually have only an annual management charge. As a result, the money is working harder and less is taken in charges, says Andrew Smith, an employee benefits consultant at Towry Law.
Salary sacrifice is another way that organisations can maximise benefits. If an employer wanted to give an employee a £1,000 pay rise, they would also have to pay NI of 12.8%. But if they were simply to pay it into the employee's pension, there would be no NI to pay. For example, a firm could consider giving its workforce a 6% pay rise, 4% of which might be in cash and the remainder could be put into the pension scheme.
Tim Roberts, managing director of communications firm Talking People, suggests that salary sacrifice is becoming increasingly popular. But he also points to the increased administrative burden where a distinction needs to be made between the notional salary and the one on which the employee pays tax.
He points to the importance of employers' openness and honesty with employees and recommends that employers communicate clearly the savings that have been made. They should explain what they plan to do with the money to incentivise workers further. "One company gave half of the NI saved back to the employees by encouraging them to make a flexible contribution to their pensions," he says. "Because it was no longer an employee contribution, it was even more tax efficient."
Mike Dowding, head of technical services, at PIFC, agrees that it is important that employers are open and honest with employees. He also believes that it is vital that employees know and appreciate the benefits they have and that these are communicated clearly to the workforce. He recommends that employers produce total reward statements, which indicate to employees what their benefits packages are worth in salary terms and give them something against which to compare other job offers.
PIFC recently conducted a benefits survey which indicated that 40% of its respondents could achieve a better perceived 'return on investment' for their benefits expenditure simply by improving their employees' understanding of the value of their current benefits package.
One solution to the problem of not being able to remove benefits that staff don't actually appreciate without causing an industrial uproar is to let them choose what they want.
A flexible benefits package would allow employees to do just that. For example, the employer could allocate a certain level of benefits to an employee that includes a core or basic level of benefits. This could include life cover worth two times the employee's salary, but with an option to buy up to four times with their benefits allowance. "People always value choice," argues Gissings' Dawson. "But they don't understand how much benefits cost and they don't value them. Flexible benefits give them the opportunity to choose the benefits they value."
He says that usually the things people value most are the benefits they anticipate using. That makes death benefits rather unpopular as most people like to pretend that they will live forever. Among the much more popular benefits are medical cover, company cars and discounts on various goods. Many of these are available on a voluntary basis.
Voluntary benefits can often be introduced at little or no cost to the employer. They can range from optical, medical and dental care cash plans to childcare vouchers and discounts on holidays, leisure and shopping. Many of these are tax and NI efficient. For example, the government has set up a plan whereby employers can provide up to £500 to employees towards the purchase of a home computer, tax and NI free.
With voluntary benefits, employers simply sponsor availability, taking advantage of the mass purchasing power they can bring to the table. However, they do not pay the cost of the benefits taken - that comes out of the employee's pay.
Talking People's Roberts, suggests there are opportunities to give employees incredible deals that do not cost the employer anything. Nowadays, employees can enjoy discounts of 30% or 40% on bicycles, mobile phones, home PCs and cars, to name a few of.
As Dowding of PIFC concludes, the objectives of employee benefits packages remain "controlled expenditure on relevant benefits, which are fully appreciated by employees".
CASE STUDYLloyds TSB used to issue its employees with an annual benefits statement so they could see how much their benefits were worth in terms of salary.
But when the employees of the high street bank were asked how much they thought Lloyds spent on benefits, there was quite a large discrepancy between what the 'perceived' and the 'actual' value of the perks were.
The company decided to introduce a flexible benefits and share-related scheme. This allowed employees to design individual packages to suit their needs. However, Lloyds also decided to capitalise on the new benefits by introducing a benefits brand - Flavours. Tim Fevyer, senior manager of compensation and benefits, explains that although flex meant much greater diversity and complexity, everything came under a single brand umbrella, including discounted offers on CDs, chocolates, and so on.
He emphasises that raising awareness was vital: "If we wanted to make a difference there was no point in just touching on what was available." He argues that it was easily self funding, given the change in employee perception and the cost of recruitment. "If we spend £100m on benefits but employees perceive that we spend only £80m, that's £20m of lost value," he adds.
Employees enjoy tax and National Insurance savings on pensions, a learning fund to which Lloyds TSB also contributes, a computer initiative and a proposed introduction of discounted bicycles. The most popular benefit by far, however, is the ability to buy additional holiday. For Fevyer, the most important point was better resourcing of communications. In the first year, one-in-two staff changed their benefits and in the second year, the figure had risen to 55%. Favourable perception of the benefits is up 25% among staff.
Maximising the perceived benefitsUpgrade old pension plansAbandon more expensive old style charging schemes for new, lower charging ones.
Use sacrifice salary schemesThese provide tax and national insurance savings.
Communicate clearly Total reward statements enable staff to appreciate the value of the package and help to make comparisons.
Offer a choice Introduce flexible benefits, which allow employees to choose the benefits that are valuable to them.
Introduce voluntary benefitsDiscounts can boost employees' purchasing power without the need to give pay rises.