Structuring flexible benefits schemes

Deciding which perks to include in a flexible benefits scheme can be a tricky task for employers, says Laverne Hadaway
There is no secret formula for deciding the optimum number of benefits in a flex scheme. Instead, it will largely depend on factors such as an organisation’s culture and workforce demographics, says Gareth Ashley-Jones, head of flexible benefits at Aon Consulting.

Manesh Patel, head of account management and implementation at benefits provider You at Work, says employers that want to make sure they are offering the right perks in flex schemes should also first consider the proportion of high- and low-paid staff they have within their workforce.

Business objectives to flexible benefits

Organisations in the process of selecting benefits should also bear in mind their business objectives, as well as what they want to achieve through flex.

Martha How, head of reward consulting at Hewitt Associates, says: “If they want a market-leading flexible benefits plan, then that will determine what they choose.”

Savvy employers should conduct a survey among their workforce or set up focus groups to get an idea of which perks are likely to be popular. Patel explains: “Companies may think their employees want this or that, but staff feedback will give them a real idea of what they should be looking at offering.”

But organisations do not have to bend over backwards for their employees to get the best out of a scheme.

“It is not about staff getting everything they want,” says Patel. “It depends on the [organisation’s] criteria for success. Does it want to become an employer of choice and offer benefits to beat the competition? It depends on important factors such as budgets, resources and time.”

The average new flex scheme typically includes seven to nine benefits, up to a maximum of 12 or 13. Ashley-Jones says it is possible for plans to include four to six new benefits in addition to existing perks.

Introducing fewer benefits

The general feeling among consultants is that it might be better for employers to introduce fewer benefits in the first year of a scheme and then add more in year two.

“The big launch in the first year should create a lot of interest and the scheme can grow in year two,” says How. “It is important to engage people and keep the energy and interest of employees in the following years. Employers should be looking to grow their schemes incrementally and hold back some benefits for years two and three.”

Introducing too many benefits at once can cause confusion or simply indifference if the scheme is too complex for employees to understand. “Just be careful not to go overboard,” says Ashley-Jones.” Including existing benefits as well as a dozen new ones is too much. People can be overwhelmed with choice and turned off.”

He also stresses the importance of having a good communication strategy to ensure staff receive clear information.

Generate excitement around flexible benefits

“People tend not to get excited about benefits, but properly designed communications and implementation can generate excitement,” he explains.

So which benefits should be included?

Workplace demographics, corporate culture and available resources will all influence the choice, but there are certain basic or core benefits that most employees will expect.

Most employers will already offer pensions, life insurance, holidays and private medical insurance (PMI), many of which can be incorporated into a flex scheme.

For example, employers typically offer standard life cover of four-times salary, but if this is offered within flex, staff can choose between two and 10-times salary. Similarly, the standard two-thirds salary benefit for income protection can be shrunk to 50% or increased to 75% through flex.

Some benefits, such as childcare vouchers, dental and travel insurance, have a high level of take-up and can be offered as tax-efficient perks, along with cycle-to-work schemes and income protection. In the current climate, staff are likely to welcome anything offering tax breaks.

Salary sacrifice

Salary sacrifice can be used to make tax and national insurance (NI) efficiency of various benefits.

Health and wellbeing, and learning accounts are among the latest perks that are proving popular offerings using salary sacrifice in conjunction with flexible benefits schemes.

For example, health screening often forms the core part of a health and wellbeing account because it is eligible for both income tax and NI savings when paid for by the employer.

Equally, employers can offer training through a salary sacrifice ‘learning account’ arrangement. “The [employer] ought to be paying for the workforce to be learning stuff for work,” says Aon Consulting’s Ashley-Jones. “Learning accounts are about stimulating employees’ grey matter. So an employee might do a PhD in anthropology or a cordon bleu cookery course, or scuba diving, gaining new skills, but nothing to do with their job.”

But in order to qualify for the full tax exemption, the training must be linked to an employee’s role within an organisation, says Lesley Fidler, a tax director at Baker Tilly.


Hewitt Associates’ How also points out there is legislation covering learning at work provided through salary sacrifice. She gives the example of a part-time Master of Business Administration (MBA) course costing £1,200 a year.

The employee may be able to pay £100 a month via salary sacrifice, but the course provider will want to be paid in a lump sum up front, so there are practicalities to consider.

How suggests some of these may be challenged by HM Revenue and Customs (HMRC), so employers need to be careful and take advice.

Car leasing, car parking, bus passes and cycle-to-work schemes can also be offered through salary sacrifice.

Employers should bear potential take-up in mind when selecting which perks to offer.

For example, while bikes-for-work often appear popular with employees, it can be a struggle to get take-up above 1%.

Usually, salary deductions for the cost of the bike are spread over 12 months. So if, for example, an employer buys a bike for £360 and the employee pays £30 a month, tax and NI free, to use it, it effectively costs them £20 a month. It may also be possible for employers to negotiate a corporate deal with a bike supplier and get safety equipment thrown in.

The only downside is staff cannot necessarily own the bike outright. Any purchase must be based on a transfer value between the employer and the employee. Other benefits are not necessarily so tax and NI-efficient, or even much cheaper than staff members could obtain for themselves. They may simply be convenient, for example, in the case of annual travel insurance.

Pre-paid cards

Discounted goods and services, retail vouchers and pre-paid cards are usually popular with staff. The advantage of prepaid cards is that no debt is incurred because employees load them before they use them. For every £100 they spend at a participating retailer, such as Sainsbury’s, £5 is added to the card. Or staff can use the card to pay for petrol at Asda and get 4.5% cashback.

Deciding which benefits to include in a flex scheme might seem a daunting prospect for employers, but looking for quality, not quantity is a good philosophy to adopt.

Key Lessons on picking perks:

 – The number and type of benefits to include in a flexible benefits scheme depend on a range of factors, such as the employer’s objectives, corporate culture, staff needs and the resources available.

 – Employers should not introduce too many benefits at once because staff will be overwhelmed by choice. Some benefits should also be held back and introduced in the scheme’s second and third years in order to maintain a high level of energy and excitement among employees.

 – Many benefits can be introduced through a salary sacrifice arrangement. Tax and national insurance-efficient benefits include pension contributions, holidays, car parking, health screening, cycleto-work, childcare vouchers, bus passes and learning accounts.

 – Other flexible benefits that remain popular among employees include retail vouchers, pre-paid cards, travel insurance and the ability to buy and sell holiday.

Case Study: TD Waterhouse

Non-advisory stockbroker TD Waterhouse introduced a flexible benefits scheme in July 2007 after recognising that flex was prevalent in the financial services industry. The firm has major bases in Leeds and Manchester and a small office in London. The average age of its 550-strong workforce is early 30s.

Anne Burnett, compensation and benefits manager, admits that instead of conducting research into what its employees wanted, the firm looked at what its rivals were offering.

“We wanted to stay ahead of the game and ensure we hold our position in terms of our competitors,” she says.

“We wanted to continue our existing benefits and offer others. We were looking to offer more tax and national insurance breaks,with a focus on offering savings to our employees.”

Traditional benefits offered by TD Waterhouse included pensions, share incentives, private medical insurance, childcare vouchers, home computers and long-term disability cover based on 60% of salary. All were incorporated into the new scheme alongside a range of other benefits, including retail vouchers, pre-paid cards, canteen cards, a cycle-to-work scheme, and the ability to buy and sell holiday.

Two years on, the firm continues to monitor take-up but has not felt the need to make significant changes to its flex scheme so far.

Click on the links below for more sections:

Flexible benefits: Interview with Marianne Hugget of The Work Foundation

Flexible benefits: Structuring flexible benefits plans

Flexible benefits employer profile: White and Case

Flexible benefits: Selecting the right perks

Flexible benefits: Measuring return on investment

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