Victoria Furness discovers that far from being seen as a drain on resources, flexible benefits could help employers reduce their spend on benefits
All the macro economic indicators would suggest that now would not be a good time to roll out a brand new flexible benefits programme, given the capital costs involved in planning, training, communicating and administering such a scheme. So it’s surprising to hear Andrew Erhardt-Lewis, a senior manager at Deloitte, argue to the contrary that now is, in fact, the ideal time to invest in flex – and not for any of the ‘fluffy’ HR reasons usually given to justify the business case, but because flex can actually reduce the cost of deploying an employee benefits package to staff.
“Over the last 18 months, I’ve seen a lot more conversations [about flex] initiated through finance,” he notes. “So while flexible benefits might traditionally have been seen as an enhancement to the employee proposition, now it is [often] considered as a cost-saving measure.”
But what exactly is a flexible benefits plan? Matt Waller, CEO of Benefex, a flexible benefits provider, defines flex as: “an efficient means by which you can provide employees with increased choice for benefits they receive without increased cost or headcount.” So unlike traditional benefits packages, in which employees are given a range of perks – which they may (or may not) use – a flex benefits plan lets employees choose what benefits they want and trade those they don’t.
Flexible benefits have grown in popularity in recent years for a whole host of reasons. They’re popular with HR departments, as greater employee choice often translates into more engaged employees, which can help in the recruitment and retention of staff. With many flexible benefits programmes offered via an online platform, there’s usually a reduction in the administration and management of benefits too.
But the biggest benefit of flex – as far as the finance department is concerned – comes from the tax and NI savings that can be made if a flexible benefits plan is integrated with a salary sacrifice plan. Under flexible benefits the employer pays for the benefits, which therefore reduces the tax and/or NI on certain key perks. Allowing staff who are not in the flex scheme to take up the flex benefits via salary sacrifice – under which employees agree to waive a certain amount of salary in return for some form of non-cash benefit – reduces that employee’s contractual pay, thereby lowering the income tax and NICs due from the employee and employer. Tax breaks occur when the cash is exchanged for an employer-paid benefit-in-kind that is not taxable or liable to NICs.
The savings can be substantial for employers. Take the example of pension contributions, if an employee agrees to contribute to their pension through a salary sacrifice scheme, the employer saves 12.8% on NICs (the employee will also make a saving, which will vary by tax band). “This can be a huge winner for employers, so if every employee puts in £100 a month to their pension scheme, the employer will save about £150 a year on NICs for each employee. So for a company with 1,000 employees, that’s a £150,000 annual saving straightaway,” explains Gareth Ashley-Jones, head of flexible benefits at Aon Consulting.
NI savings on pension contributions typically generate the biggest saving for employers – in most part due to the higher take-up of pension than other benefits – but they’re not the only perk that can reduce an employer’s NICs. Others include childcare vouchers, bikes-for-work, workplace canteens, training, mobile phones, car parking at work and health screening. Holiday trading can be another advantageous benefit for employers, Ashley-Jones points out: “With [work-life] balance, people tend to buy more holiday than they sell – on average, half a day extra per annum – so you are not paying that half day’s salary or NICs.”
Most employers share some of the money saved on employer NICs with their staff, either directly through a flex fund or by offering other employee benefits. However, Deloitte’s Erhardt-Lewis says: “I’m definitely seeing less flex funds than four years ago.” In some instances, he says employers might “pocket the savings, as they’d rather do that than make people redundant.” In February’s Employee Benefits/Towers Perrin Flexible benefits research 2008, 53% of employers ploughed their savings into funding their flex scheme, but nearly a third choose not to.
Salary sacrifice can be used to buy benefits without the vehicle of a flexible benefits platform, but many in the industry believe that if an organisation is already switching to salary sacrifice and making the necessary contractual changes, then why not roll out flexible benefits at the same time to give employees greater choice in selecting their benefits? There are also some additional ‘softer’ financial benefits associated with flex. One of the latest trends is to integrate a flexible benefits plan with other elements of reward – such as voluntary benefits, flexible working, wellbeing policies and share schemes. “What we’re seeing organisations do is effectively create one single brand and one portal for employees to go to for everything,” says Benefex’s Waller. Total reward statements are also becoming popular, which give a breakdown of the financial value of each element in the reward package.
What both these trends are attempting to tackle is employees’ perceptions of their benefits, “as many don’t appreciate the value of their benefits,” claims Malcolm Bond, head of reward and benefits at PES, a benefits consultancy. Employees that appreciate their benefits package are less likely to look elsewhere, reducing HR bills on recruitment advertising or agencies. Letting employees choose their own benefits also cuts back on wasted benefits expenditure, as they’ll only pick those they plan to actually use.
Importantly in the current economic climate, flexible benefits can cap the cost of benefit provision and reduce an organisation’s exposure to fluctuating prices, points out Ian Luck, employee benefits director at accountancy firm Smith & Williamson: “Take life insurance, where finance directors have very little control over the cost of the benefit,” he says. If it’s up to individuals to pay for extra cover, he says, “that member is taking on some of the liability for any spiralling costs associated with that benefit”.
But while there are obvious savings to be made from implementing flex, it’s not always easy to build a watertight business case for doing so, especially as many of the benefits of flex (engaged employees, improved retention and so on) cannot be simply translated into hard, financial cost savings.
That’s not to say organisations haven’t tried. The obvious starting point in calculating the return on investment (ROI) of flexible benefits is to calculate the amount saved on tax and NI; 61% of employers already do this, according to the Employee Benefits/Towers Perrin Flexible Benefits Research. Employers can add into the ROI calculation the cost of paying an employee – or several – to manage the benefits system in instances where an online flex platform is replacing a paper-based system, and any changes in benefits costs (for instance, if transferring private medical insurance for an employee’s family from the core to the flex package).
More difficult to measure though are the intangible costs. “In terms of retention levels and a reduction in turnover levels, you’re really putting your finger in the air,” admits Paul O’Malley, worldwide partner at HR consultancy, Mercer.
Lavinia Newman, CFO of Benefax, disagrees. “We measure employee engagement from take-up rates, the impact and perception of the employment offering from employee feedback, retention from exit interview data and we’re currently working with a number of clients to measure the flex impact on productivity,” she claims.
But then again, does it really matter what impact flex has on employee retention and recruitment when, in most cases, using salary sacrifice to enable employees to pay their pension contributions through flex on its own delivers a return on investment in the second, if not, first year of implementation? According to Newman, “92% of our clients’ [flex] schemes break even within year one.” Aon Consulting’s Ashley-Jones has seen similar results: “ROI is normally cash positive in year one and in projections over five years. You can stack up savings because there’s a recurring return year-on-year with pension salary sacrifice.”
Deloitte’s Erhardt-Lewis estimates ROI for pensions salary sacrifice in 12 months and flex implementations at around 18 months. “That’s under one main assumption: that the company absorbs or keeps the employer NI savings for themselves,” he adds. But what if there were no employer NI savings – would flex be worth it then? There has been much speculation in the industry lately that HM Revenues & Customs (HMRC) might remove some of the tax breaks associated with benefits. After all, the same government is still in power that withdrew tax breaks on the home computing initiative (HCI) in 2006 and, last year, removed the NI exemptions on holiday pay funds within all sectors, except the construction industry. There are further fears that pensions could be excluded from salary sacrifice schemes, following the introduction of personal accounts in 2012.
Such concerns have had an impact on employers, with 8% of those surveyed in the Employee Benefits’ flex research admitting it had deterred them from introducing a flex plan. But those working in the industry are less anxious. “For pensions and childcare vouchers, which are big savings tools, HMRC has said over and over again that if it’s properly structured and all the rules are followed, it’s quite safe,” says Erhardt-Lewis.
Aon Consulting’s Ashley-Jones is philosophical on the point: “If salary sacrifice and NI savings go in three years’ time, you’ve done well out of it in that time. And anyway, there will always be softer elements of flex, which are still very attractive regardless of the cash benefits.”
This is ultimately the point about flex: it’s an effective way of managing benefits spending in the short and long term, but it’s an equally effective HR tool in aiding recruitment and retention, particularly when tightly integrated with other benefits policies, such as flexible working and total reward statements.
The financial return may not be as quick to calculate or as easily achievable as the tax and NI savings associated with flex, but in the long term, the “fluffy” benefits of flex do add up and have a vital role to play in how competitive one organisation is in relation to another†
†
Executive summary
• Unlike a traditional benefits packages, in which employees are given a range of perks which they may (or may not) use – a flexible benefits plan lets employees choose what benefits they want and trade those they don’t.†
• Flexible benefits can cap the cost of benefit provision and reduce an organisation’s exposure to fluctuating prices,†
• Tax and national insurance (NI) savings can be made if a flexible benefits plan is offered via salary sacrifice.†
• A trend is to integrate flexible benefits with other elements of reward, such as voluntary benefits, flexible working, wellbeing policies and share schemes.†
• Flexible benefits are popular with HR departments, because greater employee choice often translates into more engaged employees, which can help in the recruitment and retention of staff.
†
†
†
Source: Aon Consulting
†
Source: Employee Benefits/Towers Perrin Flexible Benefits Research 2008
†
Back to ‘Employee Benefits Report For Financial Directors – June 2008’
†