Selecting providers for salary sacrifice schemes

While salary sacrifice attains de rigueur status, how employers select their providers can be a fine science, says Vicki Taylor

With salary sacrifice schemes catching on like wildfire and the number of potential suppliers swelling in response, many employers are now organising a beauty parade of providers, either in-house or through a consultant, to ensure they make the right choice.

According to Paul Farrell, head of flexible benefits at Aon Consulting, the growth in the number of providers and variation in the services they offer means most companies are now taking the advice of a consultant. “Most companies don’t want to be arranging a huge beauty parade that they themselves conduct. They usually take the advice of an intermediary,” he explains.

Of course, it is possible to carry out the beauty parade internally. It is really a case of employers weighing up what expertise exists, how much they want to spend and how much time they have.

If they are going to carry out the selection in-house they will need to start by doing two things. Firstly, decide who in the organisation should be involved. Heather Matheson, managing director at consultancy firm HR Insight, says: “HR, payroll and finance will all have a view on how a scheme will work.” Secondly, they must detemine how much administrative support the scheme will need.

Darren Smith, a reward consultant at Hewitt Associates, believes much will depend on the scale of the project. “Most clients administer the scheme themselves. If you [are just implementing one element] it is easy to handle as a one-off initiative, but as [the employer] starts extending the programme, the administration can be burdensome. They may then need to look for an external provider to administrate the scheme on an ongoing basis.”

There are four main scenarios employers can follow. First up is looking for an individual provider (appropriate where a firm is only implementing one benefit through salary sacrifice) and running the scheme in-house. Secondly, they could identify a best-of list of providers (if implementing childcare vouchers, bikes for work and a home computing initiative altogether) and run the scheme in-house.

The entire job could also be outsourced to a third party that will run the administration of the scheme and will have chosen providers for each of the salary sacrifice elements or it could be outsourced to a third party but employers choose all of the individual providers within the scheme themselves.

Whichever route they decide to take, employers should start by doing some basic research before inviting all of the potential providers to discuss their offering. “It involves doing some desk research to start with rather than inviting everybody to the beauty parade,” stresses Smith.

It’s also worth asking other businesses and advisers for recommendations. “Never go into it cold and just pick providers at random. I’d be talking to people to see if they could recommend providers,” adds Matheson.

Once employers have a list of providers, they can either invite them all to demonstrate their offering or send out a tender document with a set list of questions. This may help further with drawing up a shortlist.

“I’d ask a number of questions in terms of their pre-experience in setting up these schemes and the structure of the schemes they have put in place. There’s also the key thing of measuring success – does it work to attract, retain and motivate people?” he adds.

Another vital issue, when deciding if the provider will be doing all of the administration on the company’s behalf or not, is to examine how their infrastructure will fit with an employer’s internal systems. “[Asking] what infrastructure they have in place to interact with the company’s administration systems is quite important,” says Smith. Looking at whether the provider will help to communicate the benefits of the scheme to staff is also key. “[Check] what support the provider can give in terms of communication of the scheme and support for employees, such as helplines,” he adds.

Marcus Brent, reward manager at Norwich Union, set up a beauty parade of potential scheme providers when he and two colleagues from Aviva, Norwich Union’s parent company, implemented a home computing scheme, childcare vouchers and bikes for work through salary sacrifice arrangements for the group’s 27,000 staff.

“We started off with a long list [of potential providers]. We looked at all the possibilities and then selected three to go and meet. We’d already had meetings at our offices, but to really get a feel for the operation we wanted to get out there and visit them to see their systems and how they operate.”

Brent didn’t use a consultant to help manage the beauty parade because of his previous experience of designing flexible benefits plans at another company. However, had he not had this experience Aviva might have used an external consultant.

“The advantage of having done it in-house is we established a relationship with that organisation right from the outset. It’s a direct link into the company rather than through a third party,” he says.

Organisations without such relevant experience might prefer to employ a consultant. Of course, there will be a fee attached, so what are the benefits?

“We have access to all providers and we match up the providers according to the client’s needs,” Farrell explains.

Smith at Hewitt Associates agrees. “One benefit is that we have an independent view of the providers. We also have lots of experience in dealing with them, not only in terms of the benefits, but how they deal with things from an administrative point of view.”

If employers are going to use a consultant, Farrell estimates they can expect a bill of between £2,000-£4,000. This would be for setting up just one aspect of a salary sacrifice scheme in isolation, such as childcare vouchers. And converting a pension scheme to salary sacrifice would cost more because of the complexities involved.

“It’s not a major job, but it’s an important job and it’s important that it is commission-free so that it is totally transparent,” says Farrell. And what should employers look for? “Reputation, trust, and absolute and total transparency in terms of fees and track record,” he concludes.

Case study: BSkyB

BSkyB launched its salary sacrifice scheme, Sky Choices, in March 2005. It offers 11,000 employees a home computing scheme, bicycles and childcare vouchers.

Dev Raval, group head of reward, started by considering two options – a one-stop shop provider that could perform the admin for the whole scheme and an in-house scheme made up of the company’s pick of the providers.

“We researched who was in the market and then put together a request for information (RFI). It means that when someone is replying to us, they are not just sending us their brochure, they are replying against specific questions.”

After the RFI, Raval asked several providers to present their solutions to him and his team. They opted for Grass Roots, which could supply and administrate the whole scheme. Although Grass Roots selected the suppliers within the scheme, Raval believes this was preferable to running it in-house.

Case study: Qinetiq

When Qinetiq, the defence technology and security company, revamped its benefits package in November 2004 it added home computers, childcare vouchers and bicycles on a salary sacrifice basis.

Delivering the best possible scheme for its 9,500 UK-based employees meant looking carefully at potential suppliers. Qinetiq’s group head of reward and performance, John Leighton-Jones, decided early on that a third party should handle the administration of the scheme.

“We looked at the ease of use and their project management skills. Our IT department [also] camped out with their IT [department] and pulled their systems apart to make sure they satisfied our standards of security,” he explains.

Qinetiq opted for Motivano to run the overall scheme, but were able to choose its own suppliers for each of the benefits offered through it.

“We went through a very similar tender process as we did for Motivano. For bikes we chose Halfords, for home computing we chose Dell and for childcare vouchers we chose Sodexho,” says Leighton-Jones.

What is salary sacrifice?

Salary sacrifice takes place when an employee gives up part of their gross salary in return for a benefit. In some government-approved instances, such as with home computing schemes, bikes for work and childcare vouchers, the employee and the employer both make tax and National Insurance savings. With other, non-government approved benefits offered on a salary sacrifice basis, tax and NI is paid on the benefit as usual.