Research: Structure of flexible benefits schemes

How flexible benefits plans are structured has altered in recent years, but the perks on offer are largely unchanged, says Debbie Lovewell

Over the past few years, the industry’s view of what exactly constitutes flexible benefits has shifted and evolved. Several years ago, the widely accepted definition of a flexible benefits scheme was that it was a formal plan run for a set contract period where staff could opt into and out of employer-paid benefits, select employee-paid benefits, or take cash.

But this definition has now become looser, with a number of employers introducing flex schemes that are structured around tax-efficient benefits, such as childcare vouchers and bicycle loans, which employees can take up via salary sacrifice.

This type of salary sacrifice-based plan is now the most popular way of structuring a flexible benefits scheme among our respondents, with many choosing to offer either a “formalised plan to staff that is communicated as a whole and run for a set period of time” or “tax-efficient benefits through salary sacrifice, promoted as part of a cohesive flexible benefits package”.

More than a quarter (28%) of these respondents said they structured their plan using salary sacrifice.

Such schemes are attractive because of the savings employers can make on national insurance contributions (NICs). These can then be put towards the cost of implementing and running the scheme, in many cases, enabling flex to be offered on a cost-neutral basis.

Enabling employees to trade up and down the value of their current benefits to pay for other perks, rather than giving them a flex pot to spend, also allows employers to offer a flex plan at little cost to the organisation. This is now the second most popular way of structuring a flexible benefits scheme, used by a quarter of respondents.

In some respects, the benefits offered flexibly have changed little over the past 10 years. In 1998, two of the top benefits around which employers permitted a degree of choice were medical insurance and holidays. These still remain in third and fourth place in the list of benefits respondents offer within flex.

Back then, dental insurance was also commonly offered flexibly, but this perk was less widespread than today. That may be attributed, at least in part, to the changes that have taken place in the National Health Service (NHS), and the difficulty many employees now have in sourcing NHS dental treatment.

Ten years ago, company cars were also one of the top benefits for which a number of employers offered choice. This perk now hovers around the halfway mark, offered by 20% of respondents within flex. This change may be largely cost- and tax-driven, although an increasing focus on environmental issues and the introduction of corporate manslaughter legislation may also be contributing factors.

The government’s agenda is also behind the rise of childcare vouchers to become the most popular perk offered within respondents’ flex schemes. This is perhaps not surprising, considering the savings on tax and national insurance contributions that are up for grabs when the perk is paid for via salary sacrifice.

What has changed significantly is the number of respondents that offer childcare vouchers through flex. Five years ago, less than half (43%) of respondents included the perk within a flexible benefits scheme. This figure has now more than doubled to 91%.

The proportion of respondents offering their top benefits though flex appears to have increased across the board over the past five years. Although buying and selling some annual leave has dropped from first to third place in terms of popularity, the percentage of respondents that include it within their flexible benefits scheme has risen from 54% in 2004 to 75% this year.

This general move may reflect employers’ increased desire to give their staff sufficient choice within flex.

Although flexible benefits schemes are designed to offer employees a greater level of choice around their benefits package, and enable them to tailor perks to suit their individual circumstances, some employers still feel a duty of care to ensure their workforce is covered by certain perks. So even if they offer a flex scheme, some employers specify that staff must purchase a core minimum of cover on some benefits.

More than one-fifth (21%) of respondents appear to have made a head start on the pension reforms due to come into effect in 2012 (which will see the introduction of compulsory employer and employee contributions, auto-enrolment and personal accounts) by specifying that staff must make core minimum pension contributions.

On the other hand, employers may offer greater flexibility by enabling staff to flex down some benefits cover and take cash instead. This can help to engage some employees better. For example, younger staff who do not have family commitments may feel they have less need for protection benefits, such as life assurance. Perhaps not surprisingly, holiday is the most popular option to flex down, followed by life assurance and private medical insurance.

Putting together a flexible benefits scheme that offers sufficient choice for all members of a workforce can be tricky. The challenge employers face when constructing a scheme is to ensure there are enough options to provide something for everyone, but not so many that the choice is overwhelming for staff.

The number of benefits that appear in respondents’ flex choices has changed over the years. Three years ago, a bigger proportion restricted choice to fewer than five benefits. Back then, 20% offered fewer than five choices, while 29% provided between five and 10 options. A significant proportion (36%) offered 11-15 benefits, much as in 2009.

The balance has now swung firmly in favour of including more benefits within flex, with the largest cohort (40%) of respondents offering five-to-10 perks. Just 11% now offer fewer than five options.

This trend to offer more benefits may be down to employers wanting to increase benefit choices to meet the differing needs of more diverse workforces.

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Click on the links below for more sections:

Who are the respondents; key findings
Attitudes to flexible benefits
How flexible benefits schemes are administered
Salary sacrifice in flexible benefits
Alternatives to flex plans
Pensions and flex
Crucial communications
Sponsors Comment: Realise the full value of flex