Employee Benefits flexible benefits supplement 2006 – Feature: The hidden costs of flex

Case Study: Loyalty Management Group, Adecco

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The thought of returning cap in hand to the board to ask for an extra £10,000 to get a flexible benefits scheme underway is a scenario that HR and compensation and benefits managers will want to avoid. A failure to properly plan for flex, however, can see these fears realised. To avoid running into unforeseen costs, the first step for employers is to examine whether flex is likely to achieve its aims. So they may choose to conduct a thorough feasibility study or simply evaluate the business case. Annika Haslett, head of flexible benefits for Gissings Advisory Services, says this will provide employers with a clearer picture, which can help to eliminate any nasty surprises. "Broadly speaking, it would be 10% to 15% of the total cost and it does go a long way to providing the design work. It assesses all the risks of flex implementation and looks at financial implications. It’s not wasted money." In the transition to flex, employers should also be aware of the cost implications of going ahead. Marcus Underhill, a consultant at Vebnet, says: "Previously, if you offered someone a benefit, and they didn’t take it on, they got nothing.

As soon as you put in a flex plan, you can now, [depending on the design], be exposed to giving them a cash alternative. That’s the thing most design consultants would balance against any National Insurance (NI) savings." Once an employer has established a strong business case for flex, it is important to shout it from the rooftops, otherwise it may be forced to refresh the message about flex ahead of its scheme launch in order to inspire an apathetic audience. With employer NI savings on salary sacrifice arrangements largely dependent on a good level of take up, communication is crucial. However, according to Matt Waller, principal flexible benefits consultant at Benefex, many employers fail to realise this. "It’s something that [organisations] just don’t budget for. We go into businesses and see they’re spending 20% or 30% of their payroll on benefits, but they’re spending 0.001% on actually telling people about them. It’s just madness."

But Simon Holt, head of marketing for Gissings Advisory Services, argues that employers are increasingly aware of this fact. "You tend to see a lot more about the importance of communication generally in terms of driving the internal brand. Organisations are becoming rather more aware that they can’t just drop something on the business and it will happen." The administration of flex can also throw up further unintended costs, says Waller. "Most businesses are going from five benefits, if that, to, in some instances, 20 benefits. Managing those providers and the administration around them can be an issue."

According to Jacqueline Otten, a principal at Towers Perrin, there is an impact on costs not only in terms of extra human resources required to administer the scheme, but also in terms of the need for a technology upgrade in situations such as the introduction of salary sacrifice pension contributions. She adds that a feasibility study will help shed light on areas that employers will need to address. When shopping for a flex platform, employers are advised to look beyond the enrolment features to examine reporting tools and data admin. Sourcing external help will be a necessity for most organisations. While enlisting a number of different suppliers might enable each one to focus on a specialist area, other employers prefer to opt for a one-stop-all approach, allowing one provider to manage all areas of flex implementation and administration. There is a danger the multi-supplier route may result in a duplication of work, so unless the project is tightly controlled a single provider may be the more cost-effective option.

Consultants are a rich source of expertise, and while the cost will ultimately depend on a number of variables, fees can range from £800 to over £2,000 per day. In an effort to ensure employers are not scared off by the thought of spiralling fees, consultants will often offer their services on a fixed-fee basis. Under this arrangement, consultants will gauge organisation’s needs before negotiating their final fee. Haslett claims this allows employers to avoid unintended costs. "The client knows exactly how they’re going to be charged. We try to approach it in a modular fashion. We have costs that we assign to different tasks and work with clients to understand their requirements and objectives, and flex from there the range of services applicable to them." However, Underhill warns employers to try before they buy, as the peace of mind a set fee brings may come at the cost of service quality. "Ask the supplier ‘if it was your programme, what else should I be buying? What other things should I budget for?’ Quite often I think that dialogue doesn’t happen.

The supplier is worried about increasing the cost and the buyer is trying to get the cost down to a minimum. Just having that open discussion is worthwhile," adds Vebnet’s Underhill. He also recommends that employers focus on take up when dealing with providers and consultants to ensure costs are adequately covered. "With the communications budget, it might be better to incentivise them by take up rather than by fixed fee. It’s one of those things that, if asked, the supplier will offer." Broking fees are another area to look out for. An employer repeatedly returning to the market is likely to incur much higher charges than if they are content to plug on with one good supplier.

Pricing structures for flexible benefits schemes will increasingly come under the microscope with October’s incoming Employment Equality (Age) Regulations. Currently, many schemes include benefits where insurance policies are priced based on employee age. So, employers operating flex plans may find they have to move from an age-related pricing structure to a flat-rate basis, which is likely to drive up costs. Underhill warns employers that they should review their schemes. "You shouldn’t be pricing benefits linked to [employee] age unless you have a clear justification for doing it. You can’t just use cost."

Case study: Loyalty Management Group

Loyalty Management GroupLoyalty Management Group, the consumer loyalty firm behind the Nectar card, rolled out a cost-neutral tax-efficient flexible benefits programme to its 180 staff in January. Gabrielle de Wardener, HR director, was not faced with any unexpected costs following its implementation, because any extras were covered by savings made by switching its group personal pension (GPP) provider from Standard Life to Legal & General. "Because [the provider] rebroked our pension at the same time, a lot of people moved over to the new pension and therefore they covered the cost of the pension due to the commission received." She adds employer National Insurance savings from its salary sacrifice pension arrangement also contributed to the cost-neutral implementation of flex, with the firm able to use these to cover provider administration fees. Savings were also reinvested in employee pensions. But De Wardener warns that although it was not the case at Loyalty Management Group, premiums for some healthcare benefits may be affected by the move to flex. There is an argument that employees may only be attracted to a private medical insurance policy if there is a good chance they will claim on it, therefore resulting in an increase in premiums.

Case study: Adecco Katie Ivie, head of HR business partnering for recruitment company Adecco, believes a strong relationship with providers is crucial to eliminating unintended costs of flexible benefits schemes. The firm, which introduced a flexible benefits package in June 2004 for its 3,500 staff in the UK, used the increased headcount made through acquisition to broker better rates with benefit providers. "You can get it right in the first place if you pick the right provider and consultants, and be clear on your budget. We were very aware up front of the cost of technology and the consultancy [fees] they charged," says Ivie. She adds that employers should also be aware of the implications for scheme administration. "In the beginning and during each flex election there is [increased administration]. We went from three or four benefits to around 15 and these need to be managed on a monthly basis. Flex is always received extremely positively by the business so the results make any additional administration worthwhile." Ivie points out that tax rules can add further ramifications. For example, NI breaks available on salary sacrifice pension arrangements mean that if employers allow employees to flex this entitlement in favour of alternative benefits, the employer may pay more NI.