Employee Benefits/Towers Perrin Flexible Benefits Research January 2007

The survey
Attitudes
What’s on offer
Administration
Sponsor’s comment by Towers Perrin: Flexing up

The survey

Our survey, which was carried out in November 2006 among readers of Employee Benefits and users of www.employeebenefits.co.uk, received 579 responses. The study concentrates ont the responses of employers which offer a traditional flex plan that is communicated as a whole and run for a set period of time.

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Definition: Flexible benefits is a formal plan run for a set contract period whereby staff can opt into and out of employer-paid benefits, select employee-paid benefits or take cash. This is not the same as voluntary benefits which are discounted products made available through the employer but the contract is between the employee and the provider.

Attitudes

Flexible benefits schemes can help to meet the needs of a diverse workforce and reinforce the concept of total reward, althought the true return on investment employers can expect to gain can be difficult to measure, says Debbie Lovewell

For the second year running, respondents believe that the primary advantage of a flexible benefits plan is its role in enabling organisations to recognise the diverse needs and values of the workforce by providing a range of benefits options for staff to tailor make their own package.

This also has a knock-on effect in helping to improve an organisation’s image as an employer, as well as improving employees’ understanding and appreciation of their benefits package. More than a third (34%) of respondents, meanwhile, believe that flex is valued more highly than traditional benefits schemes.

Flexible benefits plans are also considered to be an important tool in reinforcing the concept of total reward, according to 52%.

However, respondents appear to fail to subscribe to two of the oft-mentioned advantages of flex. Firstly, just 25% believe that it helps to reduce or control costs, while only 20% feel that it assists with the integration of businesses.

Judging the advantages of flex, however, is not something that can easily be done without setting up a scheme. And those thinking of doing so perceive that they may come up against a host of potential problems or challenges along the way. The cost of implementation and complexity of administration are cited as being among respondents’ top concerns. This is closely followed by the cost of administration (53%).

But employers looking to introduce a flexible benefits scheme should not be put off by these concerns. Our research shows that there are financial advantages up for grabs, primarily in terms of savings gained from utilising available tax breaks, and by improving employee recruitment and retention.

No benefits scheme can be judged as a success unless it is valued by staff. So it is hardly a surprise that two of the most popular ways respondents believe their flex plan has been effective are in showing staff the value of their benefits (58%) and in increasing their perception of the package (45%).

Flexible benefits schemes are also perceived as aiding the recruitment process and helping to improve staff retention.

Flex can also be a useful tool in levelling the playing field as far as perks are concerned, particularly following a takeover or merger and acquisition.

In fact, 41% of respondents feel that their scheme has been effective in harmonising benefits. A lesser number (18%), however, believe that such schemes help to remove or to reduce the perception of perks as a status symbol.

It is also interesting that while 62% of respondents think flex improves an employer’s image, just 35% of those that offer a scheme believe it makes them an employer of choice.

The government’s announcement in last year’s Budget that it was to remove the tax breaks around home computing schemes (HCI) came as a huge shock to the benefits industry. Many organisations (including several government departments) were in the process of setting up a HCI scheme, which then had to be hastily rushed through before the deadline given or shelved altogether.

Even employers which didn’t offer such a scheme were affected by the move. In the months since, there has been much speculation that other benefits that currently attract tax and national insurance advantages, such as salary sacrifice pension schemes and mobile phones, could go the same way as HCI.

This has also prompted 29% of employers to reconsider whether they should introduce tax-efficient benefits. And 6% of respondents say it has even deterred them from introducing a flex scheme, while 3% have reconsidered if they should continue to offer flex.

In recent years, benefits managers have found themselves under increasing pressure to justify the cost of providing perks such as flexible benefits schemes by proving their return on investment to the business.

This year’s research, however, found that the number of respondents which measure the success of their flex scheme has fallen to 59% from 70% in 2006. This may be partly due to the difficulties involved in isolating the impact of a flexible benefits scheme on issues such as employee recruitment and retention. Even the providers and consultants which are able to help with the process admit that measuring an exact return on investment around flex can be difficult.

Of those employers which do measure the success of their scheme, more than two-thirds (68%) choose to track savings gained on tax and national insurance contributions. This can produce hard figures which can then be presented to an organisation’s finance team or management board.

The percentage of respondents which focus on recruitment and retention as a determinant of success, meanwhile, has risen from last year – up from 27% and 32% respectively to 30% and 39% this year.

The size of an organisation and the resources that are available to it may also influence whether it is able to measure the return on investment of its flexible benefits scheme. Of those that measure the success of their scheme, 43% employ 1,000 staff or less, while 57% have a workforce of more than 1,000 employees.

What’s on offer

Including tax-efficient benefits offered through a salary sacrifice arrangement in a flexible benefits plan is becoming increasingly popular.

This year’s research shows that just a few organisations are not switched on to the advantages of salary sacrifice schemes for both employers and employees, with 84% of respondents saying that they offer benefits to staff in this way.

Of the 13% that don’t offer salary sacrifice through their flex schemes, 3% say they plan to in the future.

When it comes to selecting perks, most employees will value those that will save them money and be of use to them, so it is perhaps no surprise that childcare vouchers outperform benefits such as mobile phones and bikes-for-work schemes, which are often viewed more as luxury add-on items.

Childcare vouchers are favoured by 81% of respondents, while bikes for work are offered by just 3% of employers. A further 16% offer a salary sacrifice pension scheme through their flex plan. No respondents, however, offer mobile phones as a salary sacrifice perk through flex.

Employers appear to put the savings on National Insurance (NI) that they make by offering benefits through salary sacrifice arrangements to a variety of uses.

More than half of respondents (52%) use the NI savings gained from salary sacrifice to help fund their organisation’s flexible benefits scheme, while a further 6% plan to do so in the future.

Just over a quarter (27%), meanwhile, say they choose not to use the savings in this way, while a further 15% say that they don’t know where this money goes.

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For†the second year running, childcare vouchers have staked their claim as the most popular benefit to include in a flex scheme.

This year, 84% of respondents offer the benefit through flex, which is up on last year’s 81%, and the 69% of employers which did so in 2005.

The tax breaks offered by the government on up to £55-worth of childcare vouchers per employee per week are undoubtedly behind the benefits’ rise in popularity. However, an increased awareness of family-friendly policies and benefits to support working parents could also have contributed to the trend.

Following the changes to NHS dental charging, which came into effect in April this year, dental insurance has also experienced a significant growth in popularity. It is now offered by 83% of those that offer a flexible benefits scheme, up from 58% last year, making it the second most common benefit that is offered though flex, only slightly behind childcare vouchers.

Health screening for partners of staff has also seen a slight increase, with 44% now offering access to this perk. This is up from 39% in 2005, suggesting that staff value the opportunity to be able to extend the coverage of healthcare benefits to their family members.

With pensions simplification legislation and new age discrimination laws both coming into effect last year, it is perhaps no surprise that there has been an increase in the number of employers offering financial advice to staff. Just over a quarter (27%) of respondents now offer access to this perk through flex, compared with 18% in 2006.

An increased emphasis on employee wellbeing, meanwhile, may account for health-oriented benefits such as bicycles/bicycle loans performing particularly well. Some 41% of employers now include such a scheme in their flex package, compared with just 16% last year. Many organisations are also looking to increase their environmentally-friendly policies, which may account for the rise.

Mobile phones have also faired well. Just under a quarter of respondents (23%) now offer mobile phones through flex, compared with 17% last year.

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Take up

The level of take-up employers can expect to receive for each individual benefit depends on a number of factors, including the perks on offer and workforce demographics.

The benefits that staff previously received as a core option could also influence what they select through flex. Life assurance (for employees only), for example, is commonly offered as a core benefit, which could explain why 40% of respondents say that they achieve take-up of more than 80%. Additionally, staff with family commitments may consider it to be a valuable benefit.

Similarly, 18% of respondents receive the same high level of take-up (81-100%) for private medical insurance (PMI), which is also commonly offered as a core benefit.

At the other end of the spectrum, some benefits will only be suitable for certain groups of employees and therefore take-up is likely to be lower. The most common level of take-up for childcare vouchers, for example, is 10% or less – stated by 68% of respondents.

Other benefits attracting interest among employees include critical illness insurance and health screening (for both staff and their partners). According to 73% of respondents, critical illness is most commonly being taken up by 0-10% of the workforce, while 69% say health screening is most commonly selected by the same number of employees (0-10%).

Staff may also value the opportunity to extend the coverage of perks such as PMI and critical illness insurance to include their partners. This will only apply to certain members of the workforce, however, which could account for the fact that the most popular level of take-up for critical illness insurance for partners was between 0-10% – cited by 73%.

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One of the biggest challenges facing employers when launching a flex scheme is how to encourage staff to make the most of the new level of choice and to move away from simply taking the default benefits selected for them.

Where few employees choose to make changes to their package when a scheme is first launched, this could be because it takes time for staff to become used to the concept of being able to select their own options. This could account for the fact that the number of eligible staff who choose not to make any changes to their benefits package drops from the time when a scheme first launches (6%) to when the plan was last renewed (2%).

Encouragingly, a quarter of respondents say that between 61% and 80% of eligible staff made changes to their flexible benefits when the scheme first launched. This dropped slightly to 17% of respondents who say that the same percentage of staff made changes at the planπs last renewal, suggesting that employees may have already tailored their package to suit their needs.

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Administration

Concerns around the complexity of administering a flex plan is often cited by employers as a reason for not introducing a scheme. Technological advances around flex have made schemes easier to run, and 50% of those that offer a flexible benefits scheme run it in-house.

As employers become more sawy with what running a flexible benefits scheme involves, some may choose to bring elements of this back in-house if it was initially run by a third party, or outsource some tasks for the first time. As a result, a growing number partly outsource their scheme. Just over a quarter (27%) now do so compared with last year’s 21%.

The use of consultants is on the increase as more organisations look for strategic advice to try to get the most from flex for their staff.

In fact, 69% of respondents say they sought advice from consultants on flex, compared with just 54% last year.

As in 2006, the main reason for employers using consultants is to aid with provider selection. This year, 70% of employers say they use consultants to help with provider selection, compared with 67% of respondents in 2006 and 62% in 2005.

The number of employers looking for advice around the design of flex, meanwhile, has notably decreased. The number of respondents using consultants for this purpose has fallen from 64% last year, to 52% this year.

The number of respondents that use consultants for advice around communicating flex has remained static at 36%. Seeking tax advice, however, appears to have become more popular this year. The number of employers that say they use a consultant to gain tax approval has risen by 13% year on year. Concerns around the complexity of administering a flex plan is often cited by employers as a reason for not introducing a scheme.Technological advances around flex have made schemes easier to run, and 50% of those that offer a flexible benefits scheme run it in-house.

As intranets and online systems become more common in the workplace, it is no great surprise that this is the channel that the majority of employers opt for when it comes to administering a flexible benefits scheme.

Organisations whose employees are not primarily office based may previously have administered their schemes using paper-based materials sent directly to staff via the post. The technology now available, however, has made the internet a more cost effective and viable option in many cases.

This is borne out by the results of this year’s survey. More than three-quarters (81%) of employers now use IT as a means of administering flexible benefits schemes, which represents a 9% increase on 2006.

The use of call centres to administer flex, meanwhile, has dropped from 39% last year to 28%. This follows a growth in the number of employers which use call centres between 2005 and 2006, when the number of employers administering their schemes in this way rose from 14% in 2005 to last year’s 39%.

Perhaps more striking, although possibly to be expected, is the continuing fall from grace of the traditional paper-based method of administrating flexible benefits schemes. Just 15% of respondents to this year’s survey say they choose to use this method, compared with 24% in 2006, and 44% of respondents in 2005.

Email remains the most popular method of communicating respondents’ flexible benefits schemes. Unsurprisingly, this does not differ from the last couple of years, although the number of employers doing so has risen slightly. This year, 92% say that they communicate flex through email, while in 2006, 83% chose this method. This can be a good way of reaching a large number of staff quickly, although there is no way of gauging if staff have read and understood the information.

The most dramatic move is the plummeting number of employers which use printed information to communicate flex to staff. In 2006, 83% said printed information was their favoured method of communication. This year, however, just 12% of respondents report using printed information.

And with just 6% of respondents opting for face-to-face internal meetings, compared with 39% last year, the degree of personal interaction appears to be falling.

Also decreasing is the use of online modelling tools to communicate respondent’s flexible benefits schemes, which has fallen from 35% last year to this year’s 6%.

Sponsor’s comment: Flexing up