Editorial
What is flexible benefits?
Building the business case for flexible benefits
The benefits of salary sacrifice
How to implement flexible benefits
Tax and legal issues
Keeping flex fresh
Flex in action…
Contributor: Victoria Furness
Editorial
Interest in flexible benefits schemes shows little sign of waning. There are still many organisations which have yet to take the plunge and implement a flex plan. And those employers that have introduced a scheme are eager to find new ways to keep it fresh and interesting for their employees.
Although flexible benefits are known to help improve recruitment and retention, and improve staff perception of the benefits package by providing choice, senior management may require hard facts and figures in order to give a scheme the green light. This guide has been designed to help you establish a business case for a flexible benefits scheme and to identify tax-efficient benefits that can be used to fund it. Although the tax advantages around the home computing scheme have been curtailed, there are other tax-efficient benefits, such as pensions, that can produce savings. The guide will also help you to spot any potential tax and legal pitfalls in implementing a flex scheme and give you tips on maintaining employees’ engagement levels.
Amanda Wilkinson Editor, Employee Benefits magazine
What is flexible benefits?
Flexible benefits and voluntary benefits plans both offer flexibility but there are marked distinctions between them.
‘Flexible benefits’ must be one of the most overused phrases in the employee benefits industry. Organisations often use the term to describe their benefits scheme - even when it is not a formal flexible benefits plan - to make it sound more interesting and to promote the idea of employee choice.
But not all flex schemes are flexible in the true sense of the term. Philip Hutchinson, principal at Mercer Human Resource Consulting, says: “Some people think voluntary benefits [products available to employees at a discount] are flex, but they are not.”
What is confusing is that some terms have become interchangeable. For example, Tony Morgan, director at KPMG People Services, explains: “People have used the phrase ‘voluntary benefits’ in the past to describe benefits that [are] voluntarily selected.”
So what components does a flexible benefits scheme have that a voluntary benefits package doesn’t? “The classic definition of a flexible benefits scheme is one that involves trading one element of the reward package for another,” says Mercer’s Hutchinson.
Also important is employee access. In most formal flexible benefits schemes, employees can only select their benefits once a year, unless they experience a lifestyle change (such as marriage or retirement). Another difference is that flexible benefits have to be deducted through the payroll by the employer, whereas employees pay for voluntary benefits with net salary.
To confuse matters further, different schemes have different levels of flexibility - although very few organisations let employees trade every benefit. As Clive Cripps, director of flexible benefits at Entegria, points out: “One of my clients is a firm of lawyers, and the last thing it would want is employees being able to opt out of private medical insurance (PMI) because there is a business need for having them back at work as soon as possible.”
The popularity of flex
DEFINITION: A flexible benefits scheme is a formal plan run for a set contract period whereby staff can opt into or opt out of employer-paid benefits, select employee-paid benefits or take cash.
HOW POPULAR IS FLEX? 23% of organisations offer a formalised flexible benefits plan and 30% of organisations are considering whether to introduce flexible benefits.
Source: Employee Benefits/Towers Perrin flexible benefits research 2006
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The business case for flexible benefits
Flex might be an industry buzzword, but there must be a real business case for it to receive backing from the board.
Flex might be an industry buzzword, but there must be a real business case for it to receive backing from the board.
Benefits managers might think they have good reason to implement a flexible benefits scheme, but they will need a solid business case for a plan to get the backing of senior management.
Most HR reasons for implementing a flexible benefits scheme focus on the intangible benefits of flex: giving employees choice, improving the perceived value of benefits and enhancing recruitment and retention. Bruce Rayner, chief executive of You at Work, says: “The case for flex is really a case for a people strategy that values diversity in the workplace.” The HR argument is particularly strong in industries with skills’ shortages.
Paul Bartlett, head of product development for employee benefits at Grass Roots, notes that fewer organisations are now offering flex to gain market leadership. Instead, he says: “Some employers are having to offer flexible benefits because their competitors are doing it.”
While these intangible benefits have their own indirect cost savings - an improvement of 1% in staff turnover could save a large organisation a significant sum - most financial directors will typically be looking for some direct cost benefits.
These can come from a variety of sources: National Insurance (NI) savings by offering perks through salary sacrifice arrangements (see pages 11-12), a reduction in headcount from automating benefits administration and economies of scale through buying benefits in bulk. Also, the risk of future increases in the cost of a benefit passes from the employer to the employee.
Yet for some companies, the cost savings will be less important than the need to harmonise benefits across two (or more) disparate workforces post-merger (see page 23).
Executive boards normally have two main reservations about flex: administration and cost. Clive Cripps, director of flexible benefits at Entegria, recalls: “Back in the early 1990s, flex had an awful name for being an administrative nightmare. But with modern online systems, benefits administration is much simpler.” It also used to be the case that set-up costs were phenomenal for flex. But this too has changed, with the internet once again helping to bring costs down.
However, in some cases the cost case simply doesn’t stand up to scrutiny. Tim Johnson, managing director of Risk & Reward, warns: “You have to have a reasonable level of existing employee pension contribution to achieve the NI savings that make a flex scheme worthwhile. Otherwise, the NI savings on childcare vouchers, health screening and other benefits do not outweigh the costs.”
There are also instances when implementing a flexible benefits plan does not fit with the organisation whether due to cultural reasons - perhaps a large proportion of the workforce are close to the minimum wage - or bad timing, for example, if an organisation is closing its final salary pension scheme.
But flex certainly isn’t limited to any particular sectors, says Entegria’s Cripps. “I can think of one well-known investment bank where flex would not fit with the culture of the organisation. Yet I have been involved with some fairly hotshot manufacturing environments where flex has fitted really well. People used to think flex was for banks and pharmaceuticals but our experience has not borne that out to be the case.”
The feasibility study
In order to pave the way for flexible benefits, you need sound justification for its implementation. Phil Hutchinson, principal at Mercer Human Resource Consulting, says: “We do a feasibility study for clients to establish if flex is right for their organisation and, if so, what type of flex programme it should be.” The feasibility study gathers information from all over the organisation and examines factors that might impact on flex (such as existing perks provision), identifies where cost savings can be achieved and analyses what new risks might be involved.
Making a case for flex
- 80% of organisations believe the main advantage of running a flexible benefits plan is that it recognises the diverse needs and values of staff
- 57% said it improves retention
- 35% said it makes the most of tax breaks
The benefits of salary sacrifice
Tax and NI savings can help fund the set up and maintenance of a flexible benefits scheme.
The tax and National Insurance (NI) savings available by running flexible benefits plans on a salary sacrifice basis provide a big financial incentive for many organisations planning to implement such a scheme.
Mark Eaton, a director at Personal Group, says: “A well-run programme should be cost neutral, allowing you to spend more money on your employees than on administration.”
Under a salary sacrifice arrangement, employees agree to waive a certain amount of salary in return for some form of non-cash benefit.
Historically, the term salary sacrifice referred to an employee giving up the right to cash pay in return for the employer’s contributions to an approved retirement benefits scheme. However, the term is now increasingly used to describe any situation where an employee gives up a right to cash pay in return for a benefit-in-kind.
Salary sacrifice reduces an employee’s contractual pay, thereby lowering the income tax and National Insurance contributions (NICs) due from the employee and employer. Tax breaks occur when the cash is exchanged for a benefit-in-kind that is not taxable or liable to NICs, such as childcare vouchers and bicycles.
Tim Johnson, managing director of consulting firm Risk & Reward, says: “Pensions are the obvious benefit where an employer can make savings through a salary sacrifice scheme, but it can also be achieved through holiday, childcare vouchers, employee health screening, bikes for work and mobile phones. Between them, these core tax-efficient benefits can generate far more in savings for employees and a company than it costs to set up and maintain a flex scheme.”
Childcare vouchers have proved particularly popular after the government introduced tax breaks in April 2005. It is encouraging employers to help staff with childcare responsibilities by offering the first £55 a week for childcare vouchers free from both tax and NICs.
The government is also promoting its environmentally-friendly policies through benefits such as bicycles to work, whereby an employer ‘lends’ bicycles to employees for their journey to work without incurring a tax or NI charge. Other well-known benefits with tax and NI savings are mobile phones and employment-related training.
Naturally, all these benefits have conditions that have to be met, for example, the benefit-in-kind for childcare vouchers only applies if the scheme is available to all employees. Phillip Hutchinson, principal at Mercer Human Resource Consulting, says: “I would also sound a note of caution on salary sacrifice with three magic words: Home Computing Initiative (HCI). A lot of feasibility studies that used savings from HCI a couple of years ago will be out of sync [now the government has removed the tax advantage]. Bicycles and childcare vouchers might have a political purpose, but what is the government’s philosophy behind mobile phones?” Employers need to make sure their salary sacrifice arrangement complies with HM Revenue & Customs regulations, but also that employees do not fall below important earnings thresholds for statutory entitlements, such as the national minimum wage, when they sacrifice salary.
There are ways to mitigate this risk, by, for example, using software that identifies employees at risk. Jacqueline Otten, principal at Towers Perrin, has also noticed a trend for employers not to use salary sacrifice for every benefit in a flex plan. “We are now mixing flex schemes so people receive NI savings on some benefits, but for other benefits, such as retail vouchers, employers can run these as a net pay deduction, to avoid some employees falling below the minimum wage threshold,” she says.
Tax-efficient benefits
Some of the less well-known benefits that receive tax and NIC breaks from the government include: Free breakfast for employees on ‘cycle-to- work’ days.
- Free coal supplied to miners.
- Cleaning of protective clothing or uniform.
- Car park charges for a space at or near an employee’s workplace.
The tax incentive
- Childcare vouchers are by far the most popular option offered to staff with 81% of employers making the benefit available;
- HCI schemes were also popular, with 61% of employers offering this benefit
- Mobile phones are offered by 17% of employers
- Bicycles for work are provided by 16% of employers
How to implement flexible benefits
Putting in place sufficient administrative support for launching a flex plan is vital, but don’t forget to communicate the scheme to staff.
For a flex scheme to be successful, sufficient time must be put aside to implement it properly. The length of time that should be depends on who you talk to in the industry, with estimates varying from 12 months to as little as three.
Clive Cripps, director of flexible benefits at consulting firm Entegria, advises against launching a flex scheme when pay is due for renewal. “It is the busiest time of the year for the HR team, and they’re the same people who will have to work on flex,” he cautions.
Tim Johnson, managing director of Risk & Reward, adds his own plea: “Don’t launch a scheme over Christmas - it has always been a disaster. And avoid choosing the first of April as everyone else does, so you will have capacity issues with software providers and insurers.”
Organisations approach the implementation of flex in different ways. Entegria’s Cripps notes that more organisations are offering a basic total reward statement prior to launching flex to “help people understand the value of benefits a little bit”.
Matt Waller, principal flex consultant at Benefex, agrees that a phased process of communication and implementation can ignite employee interest. “Five years ago, people took a big-bang approach with an all-singing, all-dancing flex scheme offering hundreds of benefits. But interest in these schemes dwindled as there was nowhere to go next. Now, employers are looking more sensibly at raising awareness before putting in a flex scheme, [and] with fewer [perks].”
Prior to implementation, a feasibility study should already have ascertained an employer’s objectives and the attitudes of staff towards benefits. It is then up to the employer to decide whether it wants to work with a provider to design, implement and maintain the scheme, or go it alone.
The majority of organisations choose the former option, often partly because managing one supplier relationship is easier than several. Specialist providers also have the advantages of experience, industry insight and contacts.
Most organisations implementing flex today also use an online or self-service system to reduce the cost and administrative burden of flex. But, Risk& Reward’s Johnson warns employers to make sure they use the right IT system for their organisation. “The criticisms we hear about flex nearly always come from the technology not being able to perform a task, such as enabling people to join mid-year. Ask vendors in detail about what the software does before you commit to anything,” he adds.
Within an organisation, it is important to find out the state and location of staff data, because if this is spread across multiple databases it will increase the time taken to implement flex. Project management is also crucial to keep the implementation on track and to schedule.
But perhaps one of the most important implementation elements is how the plan is communicated to staff because without the take-up of benefits, the entire investment is pointless. “You need to understand the audience and engage with them in as many ways as possible,” recommends Benefex’s Waller. Popular channels include email, one-to-one briefings, posters, brochures and the intranet.
Electing company champions is also effective, notes Johnson. “We train key people in the organisation and they spread the word about flex to their departments. It works because it is someone staff know, trust and can show them how to choose their benefits,” he adds.
International schemes
Chris Bruce, director of marketing and technology at Thomsons Online Benefits, recommends organisations include overseas employees in their flexible benefits plan, even if they have different tax systems. “It is a really great opportunity to reach out to overseas employees and encourage them to see the benefit of the employee brand. We would expect to roll out similar benefits, but tweak them for local tax rules,” he explains.How employers approach flex
- 36% of organisations offer between 11 and 15 benefits
- 67% use consultants to help them select benefits providers for the scheme
- 74% use IT/online to help administer flex schemes
- 83% use email and printed information to communicate their schemes to employees
Tax and legal issues
Careful planning and identifying flex’s pitfalls can minimise costs and the risk of embarrassment.
Implementing a flexible benefits scheme is not without some degree of risk attached. It therefore makes sense to identify any potential pitfalls upfront.
For instance, whenever changes are made to an employee’s terms and conditions of employment - as under a flexible benefits scheme - employers need to make sure they have not opened any tax, legal or contractual loopholes
Also, a common reservation among employers about implementing flex is that no one will take up the benefits available, so it is worth identifying which ones may not be popular with staff early on in the planning process.
Paul Bartlett, head of product development for employee benefits at Grass Roots, says: “The worst-case scenario if you are offering certain benefits on a tax-efficient basis is that you have to reimburse HM Revenue & Customs (HMRC). And if staff chose benefits on the basis that they were tax efficient, you could have some fairly dissatisfied employees.”
One way to minimise the tax risk would be to approach HMRC before launching a scheme to obtain their endorsement. But, Jacqueline Otten, principal at Towers Perrin, points out: “HMRC does not approve plans anymore until they have gone live.”
Nevertheless, many benefits providers use processes and templates that have been approved by HMRC in the past. “Communications are worded in ways that have previously been seen and approved by the HMRC,” explains Grass Roots’ Bartlett. Employers should word salary sacrifice arrangements so that it is made clear that staff are giving up a right to future cash remuneration in return for a benefit-in-kind.
Legislative changes may also affect flex schemes. Many employers, for example, had concerns about the age discrimination legislation, which came into effect in October. David Naftalin, partner in the employment group at law firm Mishcon de Reya, warns: “In terms of benefits and loyalty payments that improve with length of service, these could discriminate against employees that are younger.”
Philip Hutchinson, principal at Mercer Human Resource Consulting, says: “A lot of private medical insurance cover is based on age-related tables, which is fine if these [are] approved by actuaries but employers have to make sure they have included the right age range.”
Employers working in industries with high staff turnover should take extra caution when wording their employees’ terms and conditions to ensure that if an employee leaves, their benefits provision terminates with their departure and the employer is not left with unpaid monthly bills. Where a benefit is provided on loan by the employer to an employee - such as bicycles - the organisation needs to make sure that terms and conditions state that the employee - not employer - is liable to meet benefits commitments during the contract.
In industries where employees are transferring from one organisation to another, employers need to be aware of the Transfer of Undertakings (Protection of Employment) Regulations - otherwise known as Tupe - which stipulate that employees receive the same terms and conditions in their new workplace as they had before. “So if an employee was previously entitled to health insurance and this is not offered under a new flex benefits scheme, the employer could get into trouble as it is not allowing the employee to transfer on the same terms and conditions.
“With a flexible benefits scheme, you have to be more careful as you have more benefits on offer. You also do not want to be boxed into providing benefits that you may want to later change,” explains Mishcon de Reya’s Naftalin.
Flex checklist
- Have you correctly established the tax and National Insurance treatment of benefits?
- Is your salary sacrifice arrangement compliant, effective and robust?
- Are the changes made to employees’ terms and conditions fully compliant with employment law? n Have you considered the worst-case scenario for each area of risk?
- How will your flexible benefits scheme impact on HR policies, such as maternity leave and sick pay?
Keeping flex fresh
The challenge for existing flexible benefits schemes is retaining the energy and vigour with which they were first launched.
Flexible benefits is not a new concept in the HR industry, with many plans set up several years ago. For organisations that already offer a flexible benefits plan, the challenges are two-fold: retaining existing employees’ interest in the scheme and encouraging new recruits to join.
Most employers review their flexible benefits selection once a year - usually in the run-up to the benefits election period. Matt Waller, principal flex consultant at Benefex, believes there’s nothing more valuable than hearing what staff have to say. “Some of the best feedback we’ve ever had is from survey workshops,” he claims.
Employers should also examine current take-up of benefits, although Paul Bartlett, head of product development for employee benefits at Grass Roots, warns not to dismiss benefits with low take-up outright. “When I worked at the London Stock Exchange, some benefits - such as concierge services - had very low take-up rates, but were highly valued by those individuals who selected them,” he says.
Historically, employee benefits packages have been insurance-driven, but lifestyle benefits - such as concierge services and experience days - can broaden the choice of benefits in established schemes. Another option, suggests Clive Cripps, director of the flexible benefits practice at Entegria, is to integrate flexible benefits with a voluntary benefits scheme, “so you have all your benefits delivered from one place,” he explains.
As important as any physical change to the scheme is the way in which it is communicated to staff. Targeting messages to segments of the workforce is a fairly new trend in the industry, but it can drive take up of less popular benefits.
Employee case studies also work well in established schemes by communicating benefits in a real-life way people can more easily understand. Branding is just as important, says Alistair Denton, managing director of Motivano. “So make sure any changes or additions are made under the benefits brand, and that you start to communicate using a brand people recognise is about them and not the business,” he adds.
Flex in action…
Learn from employers that have already implemented flexible benefits plans.
PricewaterhouseCooper harmonises benefits post-merger
Accountancy firm PricewaterhouseCoopers (PwC) was formed from the merger of Price Waterhouse and Coopers & Lybrand in 1998. Carolyn Wilkinson, senior benefits manager at PwC, explains that a year later, it implemented a flexible benefits scheme partly to “align benefits for all staff within the company and recognise the diversity of our staff.”
PwC worked with suppliers and advisers, but relied on its own internal expertise to design and implement its plan entitled Choices for its 14,500-strong workforce. Choices contains compulsory core benefits - such as life assurance, personal accident insurance, income protection insurance and 20 days annual holiday entitlement - as well as tax-efficient benefits.
While the structure of the scheme has not changed significantly since 1999, the branding and communication has. Choices is now part of a wider employee brand called Life, which also includes voluntary benefits, wellbeing initiatives and financial education programmes.
Life was communicated to staff this year through a glossy magazine sent to everyone’s home. PwC also ran roadshows on Choices to explain how many of the benefits work. Toni Graves, UK reward and recognition leader at PwC, adds: “We’ve found that targeted communication, such as benefits roadshows for graduates, work very well as we can focus on benefits they are interested in, such as bikes for work.”
The AA revamps its scheme under new ownership
The Automobile Association (AA) was in the opposite position to PwC when its owner, Centrica, sold the vehicle recovery organisation to two private equity firms in 2004.
In its first year of operation, the AA stuck with the status quo and continued with the flexible benefits scheme (and provider) Centrica had used. Lindsay Fitzpatrick, HR manager at the AA, said it was initially a paper-based scheme because “the cost of moving online was prohibitively high considering the number of individuals we had covered by flex.”
But as the HR team became more familiar with flex, the AA investigated the possibility of enabling online benefits selection and moving to a new provider. In November 2005, it held a formal pitch and selected Benefex to introduce a new flexible benefits plan.
The new online benefits platform went live in June 2005 with the addition of three new benefits: will writing, experience days and health screening. This was on top of the package of flexible benefits previously offered to staff, which included dental insurance and payroll giving.
“The scheme has exactly the same name as before: FlexSA (Flex Spend Account), but we’ve added a strapline: ‘You’ve got AA choice,’ which ties in with our external branding: ‘you’ve got a friend,’” explains Fitzpatrick.
The AA also introduced two new types of communication. Firstly, it sent out a warm-up card with a welcome letter, which introduced the new branding and some of the new benefits. This was followed by a 12-page brochure, which gave more detail on the benefits and the rules of the scheme. The new communication was clearly worth the investment: at launch, more than 93% of employees enrolled and selected benefits rather than taking cash. Toshiba Information Systems UK, which makes PCs, flat screen TVs and mobile phones, introduced a flexible benefits scheme for its 350 sales staff in 2001, at a time when it was hard to recruit IT specialists.
Toshiba maintains flex momentum
Toshiba Information Systems UK, which makes PCs, flat screen TVs and mobile phones, introduced a flexible benefits scheme for its 350 sales staff in 2001, at †a time when it was hard do recruit IT specialists.
Toshiba used an online flex platform from day one. Susan Stevens, head of HR at the organisation, explains: “As we’re a high-tech company, we had to go down that route.”
The flexible benefits scheme launched with more than 12 benefits after a nine-month implementation process. Employees are unable to opt out of death-in-service benefits, private medical insurance and holiday entitlement, but can select additional benefits from a range including dental insurance, health screening and travel insurance. The most popular benefit - with 91% take-up - is the firm’s pension scheme.
Each year, the company reviews employees’ benefit selections and removes those that are unpopular with staff, such as the tax return service this year. “We try to bring something new into the scheme each year to keep it alive. It also helps when we are reminding people to renew their benefits,” says Stevens. Benefits recently added include childcare vouchers, as well as discounted rates on Camp†Beaumont holidays.