Debi O’Donovan, editor of Employee Benefits: Is the rise of pensions in flexible benefits all that is seems?

A striking finding of the Employee Benefits/Towers Perrin Flexible Benefits Research 2009 is the number of employers considering introducing pensions into a flexible benefits scheme. Almost a quarter (24%) of our respondents said they were thinking along these lines.

So why this sudden surge? I believe there are four key drivers: the rise in the number of flexible benefits schemes on offer, the demise of defined benefits schemes, the incoming Pensions Act 2008 and, most importantly, the rise in the use of salary sacrifice to structure flex schemes and maximise national insurance breaks on pensions.

The research, among 832 medium-to-large UK employers, found that 41% now offer a formalised flexible benefits scheme. This is a huge rise compared to the 23% which were offering it back when we conducted our 2006 research. It indicates that flex has reached a tipping point.

Historically, many employers skirted around putting the pension in a flex scheme because defined benefits (DB) schemes didn’t really lend themselves to flex. Instead, if an employer wanted to have a pensions element to flex they included added voluntary contributions (AVCs). But with defined contribution arrangements it is a whole lot easier as often the employee usually gets to pick their contribution level.

But there is more to it than that. Over the years flexible benefits have frequently been used as a bit of smoke and mirrors when employers have switched from DB to DC, or had to make any other major changes that may not be popular with staff. By flexing and maximising salary sacrifice, many an employer has managed to distract staff by improving the other benefits on offer while quietly reducing pension offerings. Or in the case of mergers, simply smoothed over discrepancies between the reward packages of staff from the merging companies and thus avoid major changes to anyone’s benefits.

Our research showed that this type of use for flex may continue to help ease the implementation of the new pension rules in 2012. As many as 17% say they will use flex to this end, no doubt ensuring they maximise tax breaks to reduce the financial pain they may feel as a result of the introduction of auto-enrolment and compulsory contributions.

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The bottom line is that flex makes clever use of salary sacrifice, and the pension provides the biggest NI efficient break there is for employers and employees.

And it makes sense to place the biggest, most important benefit – the occupational pension – at the heart of a flexible benefits scheme.