Get flexible

Flexible benefits represent a potentially massive area of growth and continue to be a hot topic among providers, consultants, employers and HR departments alike.

A flex plan allows employees to vary their pay and benefits so they can manipulate them in a way that suits their individual needs.

Flex differs from voluntary employee benefits, which are, put simply, bulk discounts organised by employers with external providers. In this scenario the employer merely acts as an effective gatekeeper to discounts – the cost still comes entirely out of employees’ pockets – but under a true flexible benefits scheme the divide between pay and benefits can often become a grey area.

Most schemes contain a core of benefits – holiday entitlement, life assurance, private medical insurance and the like – while many can include any number of peripheral rewards from childcare vouchers and dental insurance to retail vouchers and even pet insurance.

What are the advantages of offering such a myriad of employee perks? It is easy to summarise as far as the employee is concerned, the most obvious one being level of choice.

In a flex scheme an employee can choose where benefit funds are directed, giving them the power to spend an assigned pot of money on benefits which best suit their personal requirements, thereby optimising the value of their benefits provision.

Prudential’s director of employee benefits services Martyn Phillips explains: “Through flex I have the opportunity to enhance the value of my benefits package by making the most out of what my employers provide for me.

“I can also select the package that is of greater personal value to me – that is, tailor it to my personal circumstances – and moving on from that, I can alter it as and when my personal or work circumstances change.”

A further benefit of such choice is the ability for employees to ensure they are not suffering from “double cover”, whereby couples can often find themselves insured by both their employer and their partner’s firm.

Double cover can be a waste of resources for employers.

Hewitt Associates’ consultant Martha How illustrates: “Flex does not presuppose that employees are the same. For example, I qualify for medical cover from my husband’s employer and he qualifies from my employer.

“That is a pointless waste of money both for the employee and the employer. You can apply that to almost any benefit. You can apply it to holidays, you can apply it to life cover, you can apply it to any manner of benefits.”

Flexible benefits also offer employees the opportunity to choose from a selection of discounted commodities, insurances and services, brought about by their employer’s bulk-buying power.

These can be enjoyed through the convenience of a virtual “one-stop shop”, Phillips adds.

He says: “I may be spending a lot of time going out finding my annual travel insurance or buying dental insurance, and so forth. “Here is an opportunity to do it through one place. And at the same time I may get access to what you could describe as exclusive deals – there will be things that won’t be available to me on the high street.”

Another major advantage for employees is being able to appreciate the total value of their benefits provision and thus gain a clearer perspective of their own financial situation.

Alexander Forbes’ marketing director David Marlow says: “Employees should be able to get a proper view of where they actually stand financially.

“One of the problems for many of us is that we do not necessarily regard financial planning as the most exciting subject and perhaps there are things that we deliberately avoid because we see them as complicated.

“One of the advantages of flex systems is it brings your benefits together in one easy-to-see view, and so hopefully it encourages people to take a more active role in managing their finances.”

The advantages for employers
Invariably, proponents of flexible benefits will come up with an even longer list of advantages for the employer and will include a number of financial incentives.

One of the greatest financial attractions of flex is the power to avoid future cost increases. Traditional employee benefits often include a promise on the part of the employer to honour a particular service or cover, regardless of cost increases. A flexible benefits plan, on the other hand, stipulates a specific monetary value which cannot be exceeded, safeguarding the employer against significant price increases in the future, such as recent rising medical costs.

How explains: “With flexible benefits you can stipulate a specific value per annum, unlike traditional cover in employment contracts. So, one of the advantages of flex is it doesn’t necessarily tie the employer into escalating future benefit costs.
“It is quite a relevant point considering medical costs have gone up dramatically in the last five years.”

Tax and national insurance savings can also be made for the employer on pension contributions if the flex scheme incorporates a salary-sacrifice arrangement.

But flex really comes into its own in ensuring employers get the maximum value out of their benefit spend, while also enabling employees to fully understand the total value of the rewards they are receiving. This mitigates the danger that an employer might find its workforce completely ignorant of the benefits being offered and the amount of money they cost.

Entegria’s director Pat Wynne says: “Flexible benefits allow companies to get the maximum value out of their benefit spend. It does that by enabling individuals to shape the benefits into the sort of package that suits them at their time in life.

“Most employers have a certain amount of spend they can put on benefits. Flexible benefits enable them to avoid waste and enables them to better target.

“Certain types of benefit are of no value to an employee, so enabling them to take that value and allocate it ensures the employer is going to get more bangs for their bucks and it can enable its employees to be more settled with their benefits package.”

Flexible benefits can be of use to HR departments which are aiming to promote their companies as employers of choice or striving to recruit and retain key personnel. In sectors where the employment market is particularly competitive, adopting flexible benefits can sometimes be an essential way of matching or bettering competitors.

Aon’s head of flexible benefits Paul Farrell says: “Every organisation wants to be regarded as up there with its peers or ahead of its peers and an employer of choice. It allows a company to be up there at the leading edge of reward.”

Flexible benefits can also offer solutions to certain operational difficulties that arise from business mergers and acquisitions.
In these situations, How suggests: “It is the single most powerful way of integrating or harmonising the terms and conditions of employment.”

She continues: “Flex can be massive cost-saving tool for the integration of terms and conditions. It is the reason why probably 50pc of the flex schemes in the market have gone in.”

When firms with different employee benefits merge there are inevitable conflicts and complications, but making benefits consistent over both sets of employees can help. A flex scheme can do this by putting in place a total value of reward that is used across the newly altered workforce.

How suggests imagining two banks that are set to merge. One of the company’s employee benefits might require £5000 per year for mortgage subsidy, £2000 for annual car allowance, 25 days of holiday entitlement and £2000 contribution every year towards a DC pension scheme.

The second bank’s benefits might entail £1000 in annual mortgage subsidy, £4000 in car allowance, 28 days in holiday entitlement and £5000 every year towards a DB pension scheme.

She says: “If you look at the variability in terms and conditions and assume these two banks are merging and they are both managers of the same branch – and you are probably going to have joint managers of the branch and you are certainly going to have employees from both banks working side by side – how tenable is it to have that variation in terms and conditions?

“Not only is it not tenable in personal terms but the employer can run into legal problems with discrimination legislation. If you leave those terms and conditions and you don’t use flex as a vehicle for integration, you tend to gravitate to the highest cost alternative of each of those benefits, which is the most expensive pension and the most expensive mortgage subsidy, etc.

“That is because employees will want to know why they are getting a smaller car allowance, for example, than some of their colleagues. It is pretty difficult for line management to argue against that because most employers want to be fair and equitable. So, costs tend to gravitate up rather than down.

“Under a flex framework you can add up the total of each of those sets of figures and say: ‘We will pay up to this total value but employees can choose how they take it’.”

Flexible benefits have other practical uses for employers. Many have already used flex as a means to sweetening the bitter pill that comes with final salary pension closures. Adopting a flex plan continues to be a strategy worth considering for employers who have recently shut their defined benefit schemes or are planning to do so.

BUPA Group Risk communications manager Nicola Cohen says: “Introducing flexible benefits when a final salary scheme has been closed is often a good way to offer a sweetener to employees. It can be a way of saying: ‘We can’t afford to do this anymore but we can do this’.

“A flexible benefits scheme is a very visible way of providing benefits and you can reap the rewards of motivating people that way.”

Wynne agrees: “Quite a number of companies have seen flexible benefits as a way of easing the transition from defined benefit to defined contribution. They have taken the opportunity to mitigate or to facilitate that transition by bringing in extra flexibility.

“In some ways it masks the pain of the change. We at Entegria have certainly seen the demise of final salary as being broadly correlated to the growth in flexible benefits.”

Why are some employers holding back?
While the number of employers offering flexible benefits has increased over recent years it is far from widespread.
This year’s annual reward management survey from the Chartered Institute of Personnel and Development (CIPD) found that while the current proportion of UK employers they surveyed planned to introduce a flexible benefits scheme was 14pc, the percentage of firms adopting a new voluntary benefits scheme was much larger at 25.

“Our research shows limited interest in [flexible benefits],” CIPD concludes. “Instead, there is more interest in voluntary benefits.”

What puts off employers from adopting flexible benefits when they seem to offer so many advantages? The initial investment of time, money and resources certainly appears to be a common one.

Farrell says: “I think the only disadvantage – and one has to be open about it – is that there is some pain involved in establishing flex in the first instance.

“There is an investment needed financially and in terms of resources, not to mention a commitment to communicate to employees from the board level downwards.”

Yet, How argues the disadvantages that are often associated with flexible benefits have “eroded with time”.

She says: “The big disadvantage five or 10 years ago was that administration was burdensome and quite costly. Setting it up and the project costs could be very complex.

“They are less so now because the costs of administration have come down. There are many more providers in the market and they are much better.”

Farrell argues that most employees currently not adopting flexible benefits are simply putting it off.

He says: “The tide of flexible benefits has really only taken off in the last three-to-five years and people are busy doing whatever they are doing as far as their own business and profit plans and so forth are concerned.

“Very often you can build a robust financial case for introducing flex, as well as all the operational and cultural advantages.
“I think the only reason for not doing it, primarily, is just to put it off – that is, until some time when you might have more time and ability to do so.”

Punter Southall senior consultant Steve Charlton agrees that not every employer is ready for flexible benefits, and for many he believes it will prove a step too far.

He says: “There are a lot of consultants who will try to sell an entire range of completely new flexible benefits. I think many employers are not quite ready for that yet.

“I think consultants need to get back to basics and think along the lines of a slowly, slowly approach. Perhaps, look at introducing a voluntary package or total reward statements.

“This would at least get employees thinking about the total value of their package and start revealing what employees need and what they want.”

Scottish Life’s head of corporate business Mark Polson believes that enhanced communication with employees is the main advantage – if not the obvious one – for employers adopting flexible benefits.

He says: “Better communication aids understanding and minimises questions that people need to phone up and find out about. That is useful for HR departments which spend an awful lot of their time answering fairly basic questions, as opposed to working on more professional aspects.”

But you do not need flex to benefit from enhanced communication, Polson argues.

He says: “Communication benefits are often taken as directly linked to flex. But actually you don’t have to have flex to enjoy those benefits: you can just communicate your benefits better.

“Flex is not necessarily something that is positive in and of itself. It can be useful for some workforces, but what I love about modern benefit entitlement programmes – whether they are flexible or fixed or voluntary – is the communication that comes with it.

“My contention would be to try a really good communication programme for an existing benefits structure which would not cost a fraction of what implementing a flex system would. Employers can then see how they get on. Then they can make an informed decision whether to go that extra mile and adopt flex.”

Wynne, however, contends that the employer’s responsibility for better communication is directly related to the level of flexibility.

He says: “With flexibility comes responsi-bility. Responsibility, that is, from the employer to make sure they communicate sufficiently well – that they enable the employee to make an appropriate, informed choice.

“When a company offers a fixed level of benefits, it has a lower threshold of responsibility because it only has to educate employees on those benefits. If it is giving them the chance to swap and change benefits, then not only does it have to educate them on what they have, it has to educate them.”

Flex: an industry norm?
While the origins of flexible benefits can be traced back to the early 1990s, when companies latched on to the possibilities of maximising National Insurance savings, it is really only in the last five years that comprehensive flex schemes have started to become anything other than a rarity.

The next five years represent a significant period. If some voices in the industry are to be believed, flex schemes will become the norm by the end of the decade rather than the exception. Others are not convinced.

Farrell belongs with the former camp.

He says: “Without question, I expect flexible benefits to be literally the typical way in which all organisations reward employees within five years – small or large firms – because it makes financial sense to the employer and personal sense for the employee.”

Wynne agrees.

“There is no doubt,” he says. “Every survey is showing that by the end of this decade flexible benefits will be the norm. I would anticipate somewhere between two thirds and three quarters of companies, with maybe more than 250 employees, will have flexible benefits in the next five years.”

Polson disagrees, suggesting such a view is too blunt.

He says: “Industry in the UK is just not built like that. I honestly believe flex will continue to grow – and that is great – but whether it will become the norm, I don’t know.

“Flex will expand as systems get better and people get more used to it and so on. But will it become the norm? That is a step too far.”

Phillips expects there to be a continued increase in the use of flexible benefits, although it won’t be a case of all employers using flex at some point in the future.

He says: “There will be probably be a natural ceiling in terms of what proportion of employers will want to use flex, but I don’t think we are anywhere near that ceiling now.

“We might be in certain market sectors. Quite a lot of large FTSE100 employers have got flex schemes. But if you start working your way down into smaller organisations then flex has not penetrated quite as heavily into those areas.

“So, SMEs and companies below the FTSE250 is a potential growth area, because it is becoming more cost-effective to deliver flex for smaller organisations. Similarly, the public sector hasn’t really fully grasped flexible benefits as yet.

“Certainly, here at Pru we are just delivering our first scheme into the public sector. It is a full-blown flex scheme that is one of a very few in the public sector. I do feel there is a growth potential there because they are looking at ways in which they can enhance the value of the deal to employees, but they have got very tight controls over how much they can increase pay by.”

Onus squarely on benefits
Many people in the industry agree that the demise of DB pension schemes has put more of an onus on employee benefits. We have already heard how flexible benefits can be used to take the heat away from final salary closures.

However, might not an increased focus on benefits erode the potential for improved pension provisions in the future? Phillips doesn’t think so.

He says: “I do not think you will see employers funnelling money that they have saved from their DB schemes into other benefits, somehow. I think what they are trying to do is create a better value proposition.

“The move from DB to DC is also part of a more general move in the market place, away from being paternalistic and passing that responsibility onto the employees and giving employees choice around benefits.”

Wynne fears there is always the possibility for the potential for future pension provisions to be compromised. However, through well-constructed flex schemes, more employees will have the opportunity to increase the contributions they pay into pension schemes through salary-sacrifice arrangements.

He says: “I believe pensions is cyclical. There has been a cycle of reduction in pension provision.

“I believe the next cycle will be upwards, aided by better understanding on the part of employees of the cost of pensions.
“We as an industry have a responsibility to make sure the man on the street truly understands what the cost of a pension is and that to get a good pension you need to be putting in a contribution that as a percentage is roughly equal to half your age.

“Through better education people are going to understand just how much money they are going to have to put in to get a good pension.

“I see that with the increase of flexible benefits which allow employees to give up part of their salary to increase their pension, we are going to see individuals voluntarily putting in much higher contributions.”