Flexible benefits: Scheme structure can be made to measure

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  • The most popular way to structure a flexible benefits scheme is to enable staff to trade benefits up or down depending on the level of cover required. This is offered by 31% of employers, according to the Employee Benefits/Towers Watson Flexible Benefits Research 2010.
  • Other models include offering tax-efficient benefits via salary sacrifice, giving staff a pot of money for staff to spend on perks, or allowing workers to top up their flex allowance using salary sacrifice.
  • Whatever structure organisations choose, they should consider protecting key perks, such as private medical insurance and pensions, by offering them on a core basis.
  • To find the best fit for them, employers should decide what they want the flex scheme to achieve, as well as ask employees for their views.


Flexible benefits schemes are much more varied than they used to be and employers must choose a structure that suits their needs, says Jenny Keefe

Setting up a flexible benefits scheme used to be a simple matter for employers: select a provider, choose a few perks to include and allocate a pot of money for staff to spend. But now employers are confronted with a seemingly endless range of scheme structures to choose from.

Chris Bailey, a senior consultant at Mercer, says: “It has been a dynamic decade for flexible benefits. Initially, flex in the UK was the preserve of large organisations that could afford the consulting and the technology. As both of these have become more affordable, flex is a real option for a much wider range of organisations. This has driven different structures to accommodate different businesses. Innovation in the benefits that can sit in flex plans has also played a part.”

The most popular way to structure a flex plan is allowing staff to trade benefits up or down. Under this model, employers give workers a set of benefits, which staff can either exchange for others or flex the level of cover they receive to create a package that suits their individual preferences. For example, one worker could reduce a car allowance to boost pension contributions, while another swaps a few days’ holiday to increase private medical insurance (PMI) coverage.

Simple to understand

According to the Employee Benefits/Towers Watson Flexible Benefits Research 2010, 31% of employers use this structure, up from 25% last year. Bailey says: “Trade-up, trade-down has the advantage that it is simple to understand from an employee’s perspective.”

The snag is, employees could ditch PMI for retail vouchers. Many organisations design wellbeing schemes to maintain workers’ health and manage sickness absence, so if staff ditch these perks, their health and their employer’s bottom line may suffer. Also, an exodus of healthy staff from PMI could leave only high-risk staff, so pushing up premiums.

To get round this, most schemes that operate a trading structure include a core of compulsory benefits. For example, individuals must take pension and PMI benefits, but can then choose whether to have travel insurance and childcare vouchers. Matt Duffy, partnerships manager at Lorica Consulting, says: “Flex systems can be tailored to only allow benefits within certain areas to be flexed. For example, health-related benefits cannot be spent on lifestyle products. Individuals would not be able to sell PMI to buy retail vouchers.

“Little selling of core benefits is taking place because insurers and employers are averse to the risk created. They would have a worse risk profile, more employer exposure and a reduction in their duty of care.”

One employer doing this is recruitment solutions company Adecco Group. Its staff receive a pension, life and health cover, but have the option to reduce cover to a minimum and use the money to buy extra perks. Hazel James, the firm’s head of compensation and benefits, says: “The structure gives employees a measure of control and choice around the make-up of their benefits package, but it also supports some of our healthy workforce aims.”

Another option is to structure flex around tax-efficient benefits offered via salary sacrifice arrangements, whereby employees give up some of their pre-tax earnings in exchange for tax-efficient benefits, such as pension contributions and childcare vouchers. The aforementioned Employee Benefits/ Towers Watson survey found structuring flex in this way is the second most common flex model, offered by 28% of employers. By paying for such benefits out of pre-tax salary, staff save on tax and national insurance (NI) while the employer cuts NI contributions. This means employers can use the savings to offer flex on a cost-neutral basis.

At least, that is the theory. In practice, it can be trickier, says Andrew Morris, business development director at NorthgateArinso Reward. “Given the economic situation, salary sacrifice is attractive to [employers], particularly when looking at the savings available on pension contributions. However, care is needed. It is not right for everyone. Staff on lower pay and women on maternity leave would lose out. There can be a risk to the business if salary sacrifice is not implemented correctly, compliant with HM Revenue and Customs’ rules.”

Offering a flex fund

A slightly different approach is to offer a flex fund. Here, employers give staff a pot of cash to spend on a menu of perks. In effect, workers get a salary rise, which in these hard times, can be attractive to staff. Usually, there are core benefits that staff must take up.

But a flex fund can be more expensive. NorthgateArinso’s Morris says: “Flex pots can mean much higher engagement and take-up rates if staff are given additional money to spend. Obviously, this means a cost to the organisation. The flex pot could potentially be provided in lieu of a salary increase.”

The challenge for employers is to calculate the correct sum, he adds. “When setting up a flex fund, one option is to identify existing benefits’ value and make that figure available to staff without any new budget. The employer would need to be advised on how best to allocate this spend, as there would be winners and losers if it was split uniformly.”

But Jonathan Bruce, sales director at consultancy Portus, says providing a flex fund can keep costs down. “It depends on the starting position and current benefits agenda, but a flex pot can help cost control because it may help cap any employer funding into sponsored benefits, such as PMI,” he says.

Some employers, such as Centrica, have introduced a facility for employees to top up their flex allowance via salary sacrifice. Julia Turney, proposition development manager at Jelf Group, says employees’ headline salary often comes with no benefits on top. “This model has been adopted by relatively few companies. It is attractive to organisations that wish to have high salary headlines, often as a means of attracting recruits.”

But there are pitfalls to structuring flex in this way, says Turney. “The worker must give up salary to purchase benefits, including compulsory benefits. Does an employer value each individual package, so all employees have a personalised figure, or does it take the gross basic salary and then produce an average cost for providing the core benefits? If it is the former, an employer needs to think about the information it holds to do this and also the time involved to research.”

Salary sacrifice schemes

Elliot Webster, head of flexible benefits at Bluefin Corporate Consulting, says: “Salary [sacrifice] schemes are common where employers want employees to have access to tax and NI-efficient benefits, but are not ready to move to a true flexible benefits model. These are especially appealing for smaller employers that would not be able to offer full flex on risk benefits because they are too small. The employer would need to communicate effectively and ensure no national minimum wage issues occur and also watch out for issues around maternity leave.”

So how can employers decide which structure suits them? “There is no absolute best structure,” says Mercer’s Bailey. “It starts with the needs of the employee base and what, as an employer, they are looking to achieve. They should start the exercise with a robust view of staff needs, what the payback to the business should be and how they are going to measure the success of flex.”

Jeff Fox, head of consulting at Benefex, adds: “The most effective way to identify which structure is best is to conduct a feasibility study to assess which option fits the business strategy best. Employers can also review what their competitors are doing and benchmark against similar organisations.”

Any choice of scheme structure should be informed as much by what employees want as by business aims, says NorthgateArinso’s Morris. “Employee surveys and focus groups help determine what benefits would be appreciated, particularly if the key objective is employee retention. But organisations must be careful about managing expectations. If an employee feels passionately about a benefit and it is not included, it can backfire.”

Just as crucial is measuring results, says Mercer’s Bailey. “One common failing is not building the metrics to measure if flex is delivering what the business wanted it to. Having a hard set of results to assess whether or not flex has done its job is essential if an HR team wants executive buy-in.”


Case study: EC Harris builds flex funds for staff

Property consultancy EC Harris allocates a pot of money for employees to spend on benefits through its flex scheme each year. Staff receive a fund of between £400 to £3,000 a year, depending on their seniority.

The company, which introduced flex in 2005, also allows employees to take any leftover allowance as cash.

International reward analyst Will Boyce says: “A flexible benefits fund gives the employee control of their benefits and allows them to tailor a suite of benefits that matches their lifestyle requirements. The structure means that organisations can manage the scheme simply, as well as being able to better respond to changes in the benefits marketplace.”


Case study: Subsea 7 takes salary sacrifice on board

Undersea engineering company Subsea 7 gives staff a set of flexible perks which they can trade up or down – within certain limits.

Jackie Mann, senior HR manager, says: “The use of preset limits ensures employees maintain a minimum level of cover. For example, we ensure all staff maintain group life assurance of at least twice their salary. This ensures we have something to offer bereaved relatives.”

The organisation also offers a range of benefits offered via salary sacrifice and salary deduction (where payments are taken from net salary). “Wherever possible, Subsea 7 tries to provide all benefits via salary sacrifice,” says Mann. “We look at each new benefit with our employee benefit consultants to assess whether it is appropriate to use the salary sacrifice mechanism.”

Benefits offered in this way include pension contributions, private medical insurance and dental insurance. Mann adds: “The only benefit we do not currently offer on a salary sacrifice basis is our restaurant benefit, which allows employees to add funds to their cashless account for food in the company restaurant.”


Click on the links below for more sections:

Flexible benefits: Interview with Steven Bevan of The Work Foundation

Flexible benefits: Corporate wraps

Flexible benefits: Benefits take-up boosted by flex

Flexible benefits: Linking flex with incentive schemes

Flexible benefits: Profile – BG Group

Flexible benefits: Will flex scheme be a good fit?