100th issue supplement -Flexible benefits

Technology has allowed the flexible benefits system to move from a recruitment tool to one that is more about cost management, says Alison Coleman

Case Study: Motability Operations

Article in full

When the concept of flexible benefits first arrived in the UK 20 years ago few employers took it seriously. The idea of offering a comprehensive menu of benefits from which staff could pick and choose according to their allowance seemed, to many, a costly and complex system.

Today, flex is at the heart of a growing number of corporate benefits systems, with the Chartered Institute of Personnel and Development (CIPD) Annual Reward Survey 2004 revealing that around 500 UK companies now have a flexible benefits strategy, while the Employee Benefits/Towers Perrin Flexible Benefits Research 2005 found that 9% of employers are planning to implement one this year.

CIPD reward advisor Charles Cotton says: "When flex first appeared quite a few years ago it was viewed very much as a useful retention and recruitment tool by those firms that could afford it. Today it is seen as a cost containment tool with greater controls of benefits funding allocation and, more importantly, a way of engaging with employees and communicating to them the value of their benefits package."

In the early- to mid-nineties, when structural changes within industries resulted in mergers of firms with very different reward packages, there was a greater demand for a more flexible approach to benefits integration. Flexible benefits were valued for their help in facilitating the harmonisation of two very different corporate cultures.

Since 1997 the rate of uptake of flex has not been linear; the fastest growth has undoubtedly been in the last two or three years, coinciding with the quickening pace of technological developments that have helped to bring accessible flex and voluntary benefits systems to a broader cross section of industry.

Elliott Webster, head of flexible benefits at PIFC Consulting, says: "Back in 1997 there were very few flex schemes around. Those that existed were in the very biggest corporations, based on expensive software provided by one or other of the very large employee benefit consultancies.

"Benefits in the flex scheme were much more limited and tended to centre on health and death benefits, also pensions, mostly where they were defined contribution, but very little salary sacrifice. The type of discounted voluntary products that employees could take on at their own expense also majored on insurance-type offerings with only limited lifestyle products and services."

Now there are hundreds of flex schemes in place, including many within medium-sized companies that are growing in number. Based on a choice of economical, proprietary, off-the-shelf but tailorable software offerings, there is far less paperwork, and much more online delivery to employees, who are responsible for keeping their own records up to date online.

And the greatest facilitator in this enhanced take up of flex has been technology.

"The administrative costs of the earlier paper-based schemes and the exorbitant costs of the early technology platforms, were the biggest deterrent to employer take up," says Jim Aitken, marketing director at employee benefits consultancy Chase de Vere. "But it is the increased presence of the company intranet, and wider availability of PCs in the workplace that has enabled employers to run online flex and voluntary benefit schemes quite efficiently. This has continued to evolve with the availability of off-the-shelf software that small companies can afford and implement quite easily."

With this huge choice of platforms, employers have also become more aware of the need to look beyond the functionality of the technology, and recognise the importance of establishing corporate requirements, conducting employee attitude surveys, feasibility studies, and identifying the scope and design of flexibility required. All these need to be considered first before deciding which platform provider should be used.

Increasingly, employers are relying on the services of employee benefit consultancies and other intermediaries with the expertise to handle the process, from business case to operation.

Voluntary benefits, paid for by the employee, are often used to establish the basis of a flex system. Today’s flex market is identified by a large and constantly expanding range of benefits which can be flexed, with far more lifestyle than insured benefits, such as childcare vouchers, home computer initiatives, even cycle purchase schemes. The range of available lifestyle products extends to small purchases like CDs.

But has flex retained its original purpose as an aid to staff recruitment and retention?

Lisa Page, a senior consultant in flex benefits at Aon Consulting, says: "It has helped to give employers more compelling reasons for doing things. In the current employment market they may ask ‘do we want to retain more people?’ and ‘do we need to recruit?’ It is the flexibility of these schemes that allows them to tailor benefits to suit their current staffing needs."

Another new trend which most experts believe will grow is likely to be allowing employer pension contributions to be sacrificed for additional salary, for example to finance graduate debt, build a home deposit and maximise the available mortgage.

Webster at PIFC Consulting says: "The removal of the link between earnings and maximum permitted pension benefits will drive further growth in salary sacrifice, which flex can accommodate well in the right circumstances.

"The fact that some senior executives may require alternatives to company pension contributions pushes the growth of total reward strategy, which flex can also accommodate well."

The key to maximising the value of flex lies in its communication to the end users. New research from benefits consultancy Thomsons Online Benefits (TOB) has shown that employers which have already implemented flexible benefits found this one of the biggest challenges.

The study showed a consistent lack of structured evaluation following the introduction of flexible benefits. This included the fact that when asked how they measure the success of their flexible benefits schemes, the majority of respondents (53.5 per cent) relied on success measured by ‘general feedback’.

However, there was evidence that employers with flexible benefits schemes in place are getting better value from their spend on benefits. And this year Employee Benefits’ own flexible benefits research found that 55% of those offering flex said it aids recruitment while 43% said it is more valued than traditional benefits.

TOB managing director Michael Whitfield says: "These results demonstrate that the spread of flexible benefits in the UK is finally living up to the hype. This is largely due to the fact that the cost of web-based technology has reduced. Its ability to mass produce benefit administration makes flex an affordable option even for SMEs."

And that represents another emerging trend, through the removal of the main barriers to entry, such as reduction in cost of technology, reduction in cost per head of administering flex systems, significant NI savings through growth of salary sacrifice for benefits like childcare vouchers and home computers, and the ‘keeping up with the Joneses’ factor. A combination of these means it is now possible for smaller firms to implement flex on a cost-neutral basis if costs are spread over one, two or three years.

But perhaps the most significant change in the brief history of flexible benefits is the shift in responsibility from employer to employee.

Whitfield says: "When speaking to employers we are also seeing a shift away from paternalism towards a culture where employees are encouraged to take responsibility for their own decisions so that they choose their package and working patterns according to their own lifestyle."

Aon’s Page adds: "With modern flex systems people have far more autonomy over their choice of benefits, with far less involvement on the part of their employer."

Case Study: Motability Operations

Motability Operations, which specialises in sourcing and delivering motoring services to disabled people, employs around 600 people in London, Bristol and Harlow.

Originally, the company offered its employees a benefits package that enabled limited flexibility around holidays and pension contributions. As the scheme was paper-based, it was administration heavy and meant restricting employees to one opportunity to flex their benefits each year.

Last April, a new online scheme was launched, with the key objectives of recognising and rewarding achievement – rather than age or length of service, improving benefit choice, recognising diversity of lifestyle, and providing employees with knowledge and confidence to take responsibility for their benefits.

Motability Operations selected Thomsons Online Benefits to act both as its adviser and technology provider. During the feasibility study, a survey of employees showed that 92 per cent wanted more choice over their level and selection of benefits; 86 per cent wanted to vary their choices as they got older, and 82 per cent wanted to change their benefits as their lifestyles changed.

Under the new scheme, the core range of benefits, which can be flexed up and down, include pension, private medical insurance, holiday, critical illness insurance and life assurance. Additional options include dental insurance, travel insurance, childcare vouchers, discounted roadside recovery membership, season ticket loans, gym membership and car hire.

Motability Operations succeeded in eliminating manual benefit administration processes, enabling employees to make their benefit selections online, and introducing more opportunities to flex on a quarterly basis in line with lifestyle changes.

The take up of flexible benefits was boosted from less than 50 per cent to 80 per cent.

HR manager Deborah O’Kelly says: "By reviewing our benefits package and providing an online facility, not only have we made administrative efficiency savings, but we are also more flexible.

"Employees now recognise the true value of their package, for example giving all employees – irrespective of their seniority – private medical insurance. This has certainly impacted our ability to attract and retain employees."