Is flex right for you?

Amanda Wilkinson asks what employers need to consider when deciding if a flexible benefits scheme is right for their organisation

Case Study: EC Harris

Article in full

Flexible benefits schemes are generally held up as the pinnacle of benefits provision, theoretically helping recruitment and retention by offering employees more choice. But implementing such a scheme is a major undertaking and an organisation should do its homework to find out whether it is right for its workforce and HR strategy. Philip Hutchinson, a principal at Mercer Human Resource Consulting, says: "The first thing a company has to decide is not whether it needs flex, but what it is trying to do." It may be that a flexible benefits scheme is not the most appropriate solution. If an organisation just wants to ensure that employees understand and value the benefits they receive, for example, then online total reward statements may be a simpler option.

Chris Bruce, director of marketing and technology at Thomson Online Benefits, says: "There can be cleverer ways of trying to achieve what you want to without going for full-blown flexible benefits implementation." A full flex not only provides employees with a tangible value for their benefits it also enables them to opt in or out of employer-paid benefits, select employee-paid perks or take cash. It is not the same as a voluntary benefits scheme, whereby discounted products are made available through an employer, but the contract is between employee and provider. Key business drivers for introducing flexible benefits plans include the harmonisation of benefits across an organisation following a merger or acquisition, management of pensions changes, keeping pace with competitors which have introduced flex and cost cutting through tax and national insurance savings.

Organisations may also opt for flexible benefits because they believe it will help their recruitment and retention prospects. But Alistair Denton, managing director of Motivano, says culture is crucial as management will have to accept that they are giving people choice, rather than dictating to them, and employees will have to adapt to this. "It’s something that everyone has to be supportive of and you have to make sure that people in the organisation at different levels have bought into it." Key to securing that support is getting the finance director on board. In most cases, they will concentrate on the hard reality of the business case in terms of national insurance (NI) and tax savings that can be made, but HR can also point to a potential reduction in recruitment and training costs on the back of an anticipated improvement in retention.

A thorough understanding of tax legislation can help employers make tax and NI savings where employees sacrifice salary around pension contributions, mobile phones, childcare vouchers, bikes for work, and buying clothing for work and travel. However, organisations will find it difficult to set up a flex scheme if they do not have benefits which can be flexed up or down, or are not prepared to allow the sale of holiday. "If they still want to go down that route then they will have to make a commitment to provide more finance [for benefits]," says Denton. In reality though, few organisations will be prepared to accept a rise in expenditure.

Other costs associated with the implementation of a scheme include advisers’ fees, changes to payroll administration, communication materials for the launch, cleansing of employment data, and internal IT and project management time. Small organisations, in particular, will need to look carefully at costs as they are often unable to negotiate the same degree of flexibility as larger organisations. Some providers may even refuse to underwrite certain insurance products for smaller employers in the belief that only staff who are likely to claim will take up the product, thus increasing the insurer’s exposure to risk. Even when employers are set to make significant savings by introducing flexible benefits, they may be thwarted by bad timing. Tony Morgan, director of flexible benefits at KPMG, says: "The question to look at here is whether there is a major change programme under way which flex would conflict with." There can also be practical difficulties around offering benefits on a salary sacrifice basis to staff on a sporadic income, those who are employed in the public sector in disciplines which are subject to restrictions on terms, or who are on the minimum wage.

Helen Freeman, a principal at Towers Perrin’s Benefits strategy practice, says, in theory, employers should not let staff sacrifice salary below the minimum wage. But she does not advocate limiting flexible benefits to the top of the corporate hierarchy. "I don’t think that works anymore because flex has more to offer the low paid in terms of making their take-home pay go further then it potentially does to the higher paid." But in rare cases it may be appropriate to limit flexible benefits to certain business units or to those on a monthly salary. Subject to legal and employment contract restrictions, most consultants believe flexible benefits can be applied across an entire organisation, even to cash-driven sales staff, provided they correctly understand the scheme, the choices and the fact that certain options can help them increase their net pay. So with few permanent hurdles standing in the way of introducing a flexible benefits scheme for most organisations, it may be just a case of if not now, then when.

Case study: EC Harris

EC Harris, international property and building consultants, decided to introduce a flex scheme to help staff understand their benefits package and assist with employee choices.Jo Wotton, reward manager, says: "The main drivers for change were simply to get a greater understanding among employees about their total reward package. "We also wanted to make sure we were providing the biggest choice and most effective benefits we possibly could, and were taking advantage of all possible tax and national insurance savings." Its car scheme was rolled into the flexible benefits plan. A further allowance was made available to those who had previously received private medical insurance as a core benefit. And instead of paying a bonus of £500 per head to the 1,600 UK-based staff, it turned this into a benefits allowance. Overall, its flexible scheme produced tax and NI admin savings of £200,000 for the organisation.

Questions to consider, when deciding whether flex makes sense:

Why flexible benefits?

If you want to harmonise benefits following a merger; keep pace with rivals or make tax savings.

Is the culture appropriate?

Management must be prepared to offer staff choice instead of dictating what benefits are provided. There may also be practical restrictions around the use of salary sacrifice for those on the minimum wage.

Can benefits be flexed?

If there are no benefits to flex up or down and staff are not allowed to sell holiday then employers will have to consider funding an allowance or restructuring core benefits.

What costs will be incurred?

IT software, advisers’ fees, additional payroll admin, internal IT and project management time, communication materials for launch of programme.

What savings can be made?

Tax and National Insurance contributions in relation to some benefits offered through salary sacrifice such as pensions, childcare vouchers and bikes for work.