Childcare vouchers are promoted as a cost effective way of improving employee retention, but are there hidden costs? Sarah Fletcher asks what the scheme really means for UK businesses.

As government statistics show 40 per cent of organisations blame childcare problems for the poor return rates of new mothers, childcare vouchers are growing in popularity as an apparently cost effective way of encouraging parents to return to work. As the vouchers are exempt from tax and National Insurance payments, parents should find this more affordable; but is it this straightforward?

Professional services firm PricewaterhouseCoopers (PwC) hugely improved retention rates by launching the scheme. Only 40 per cent of female staff rejoined the company after having children. As a consultancy, most PwC staff do not work from a central office so the business had to look at alternatives to office-based creche facilities. The introduction of childcare vouchers increased the maternity return rate from 40 per cent to 89 per cent between 2000 and 2006. Sarah Churchman, head of diversity at PwC, says: “They assist in the retention of talent and employees have complete freedom of choice in what childcare works best for them.”

Nina Waters, HR Manager of the British School of Osteopathy, also saw improvements in retention rates. She identifies the scheme as a way of competing better with the private sector: “We’ve been trying to identify ways to retain staff, particularly women, in our clinic. As they can earn more in private practice, the trend has been for staff to stop working for us when they have children.” However, because the organisation pays for the vouchers, financial constraints have thrown up a potential problem; although “It is a really popular benefit to be able to advertise when recruiting new staff and it sends a strong message of commitment”, Waters adds: “on the negative side it is a long term commitment and not particularly cheap. We have made the commitment for staff with children under age five only, and it’s a payment per member of staff rather than per child.”

Could this be seen as discrimination against those employees that don’t qualify for childcare vouchers? According to Sean McSweeney, Employee Benefits Consultant at financial advisers Caversham Buchanan, it depends on how the programme is introduced: “The majority of employers provide a childcare voucher scheme on a salary sacrifice basis so are not providing any “additional” benefits to employees who have children. If an employer actually “funded” the scheme, then there may be an issue with “non parents”. Employers should be mindful that there are a number of other benefits which can be introduced on a similar basis, which can appeal to a wider range of their employees.”

However, because of the rules governing vouchers when bought through salary sacrifice (when the employee purchases them from their pre-tax salary) staff not using the scheme do lose out financially. Although the company is not directly handing the employee money, childcare vouchers are exempt from tax and National Insurance (NI) contributions so by “buying” childcare vouchers out of their salary the member of staff pays less tax and NI overall than a colleague who is not using the scheme. HR Manager Iain Young points out that this is unfair as “why should a married couple with children get a tax advantage over a childless couple?” Lynn Hebb, HR Manager of Strategic Thought, Risk Management specialists who have served NASA and Boeing, has experienced feelings of resentment among staff who don’t qualify for vouchers: “Those who don’t have children don’t really care, or in some cases feel that they should be getting some sort of equivalent … There is a little resentment among those who will not benefit at all.”

The salary sacrifice scheme also favours higher earners. As employees who buy childcare vouchers from their salaries pay less tax and NI, this benefits workers who are in higher income brackets and so pay more tax. McSweeney says, “My experience is that the majority of staff who take up the childcare voucher option are men. Often it makes financial sense, particularly if it is the mother who perhaps works part time – higher rate tax payers save more because of the tax relief.” Whilst a basic rate tax payer can save £962 per year, an employee in a higher tax bracket sees their tax and NI bill slashed by up to £1,195.

Low paid employees also may not be able to buy the maximum weekly allowance of £55 of childcare vouchers per employee because, as Julia Roberts at Leap Frog Day Nurseries explains, their voucher order “must not take them below the national minimum wage”. HR Manager of Racal Antennas Jo Guy says “The only time when these vouchers would not be cost effective for an employee would be if they are on a relatively low income and receive tax credits, as their basic pay is affected. Also, if they are below the minimum level for Statutory Sick Pay and Statutory Maternity Pay that would also be affected, but usually the people who are paying for childcare tend to be the higher paid employees anyway.”

Is it financially worth it for the company?

Lynne Currer, Project Manager of Accor’s childcare vouchers service, says “Employers will make NI savings of around £370 per year for every employee who takes £55 per week in childcare vouchers”. Director of childcare vouchers provider Allsave UK Catherine Maddox explains how to make the scheme cost effective for employers: “The scheme should cost less than five per cent on the value of vouchers or it’s a waste of employer NI saving. Provided the fee rate is low there will be a good return on investment. Employer Net savings should be up to £242 per employee per annum or you’re paying too much.”

Paula Miles, HR Officer at Black and Decker, says: “One of the major considerations was the cost of implementing the scheme. In order to gain buy-in from senior management we had to bring their attention to the fact that the scheme could actually save the organisation money – a huge selling point! There were some initial set-up costs around having our payroll provider accommodate the changes in our payroll system and having lawyers review documents, however hopefully these initial costs will be outweighed by the money the organisation can save going forward and the benefits the scheme will bring to employees. If budgets allow, I would encourage people to use an external employment lawyer to assist with drawing up the policy and associated documentation.”

McSweeney advises that the cost of implementing and running the scheme should be “usually in the range of five to eight per cent of the total cost of the vouchers … Most employers cover these administration costs and the costs themselves are usually less than the employer’s National Insurance saving.” Despite these financial benefits, Iain Young found that “Senior management see it as an unnecessary administration function but then they were not trying to stretch budgets to meet childcare costs.” According to Carol Harrison, HR and Training Manager of technology firm RTC North, administration costs are low: “The investment from the company is very small; it only takes five minutes per month to oder the vouchers.” She adds: “The cost of issuing new contracts was just a time cost for me to amend their current contracts in order to show their new annual salary minus the salary sacrifice. It literally took minutes. There was no initial set up charge to the company and we only pay a monthly administration charge [to the organisation providing the vouchers] of about £150 to run the scheme.”

Are childcare voucher providers worth the expense?

Jo Guy argues that hiring a company to provide childcare vouchers is an expensive waste of money: “We chose not to use a childcare voucher provider but to produce the vouchers ourselves. We have a relatively small number of people using the vouchers and felt that we could easily administer it ourselves and therefore save the company even more money. Not many people seem to realise that companies do not have to use an outside provider, but there is a small paragraph in the inland revenue guidelines which says that companies can run their own scheme. I really did not see the point of paying just to get some vouchers produced and sent directly to the employees. It is still the company’s responsibility to set up the scheme and get it approved by the Inland Revenue, so why then let someone else take a cut after you’ve done the hard work?

“By producing the vouchers ourselves we have saved the usual seven per cent commission fee charged by the external childcare voucher providers, thus saving the company the full 12.8 per cent not contracted out and between 9.3 and 12.8 per cent contracted out National Insurance payments.”

Despite the additional cost, childcare providers can administer and manage the scheme, which takes some pressure off an already stretched HR department. Miles used an external provider when launching a voucher scheme in the company: “We needed to ensure that the introduction of the scheme did not create an administrative burden to anyone. As a result we decided to opt for a managed service from the voucher provider which means that employees enrol via them rather than ourselves.”

How do you improve your participation rate?

Nik Kellingley, project manager at the National Day Nurseries Association, says “on average employee take-up is around 3.6 per cent of the workforce.” Jane Heyes, HR Manager of IT specialists Quest Software, found that she could improve these figures by involving senior management in the scheme: “Around six per cent of our UK employees have joined the scheme … this is above the average percentage participation rate. Once the scheme had been up and running for a few months I asked for participant feedback and all was extremely positive. I involved management from the outset to gain their support.”

According to Lynne Currer, “Another crucial factor which affects the popularity of childcare vouchers is the internal communications strategy; a good childcare voucher provider will offer clients a range of marketing material geared towards their internal communications culture.” Iain Young warns that employees must be well informed or they could avoid the scheme because they don’t realise the benefits: “Ensure staff get a good briefing of why they should join the scheme if they have children. Some parents still thought that this was some way for the company to get money out of them.”

Miles argues that good organisation is crucial: “I think one of the fundamental reasons why the project was a success is that that we formed a project team from the outset. In addition to myself (I was managing the project), there were colleagues representing payroll, HR systems and benefits. Where necessary we involved and solicited input form HR colleagues at the various sites. In addition, we kept our employees involved in the process via our employee forum, who were also encouraged to contribute to the development of the scheme.”

How long should it take to launch the scheme?

Catherine Maddox at Allsave UK says that the time it takes to launch the scheme “varies enormously from one organisation to another. A good length of time is two months from the launch to the employees receiving the first vouchers.” This is certainly true – whereas it took Carol Harrison “about two weeks to put everything in place and have the scheme up and running”, Miles found that introducing the scheme to Black and Decker stretched out to four months:

“One thing I would say is that it took a lot longer to introduce than I had first anticipated; in fact we had to push back the launch date a month. It is important to understand the impact that introducing the scheme may have on other areas. For example, we are a multi-site organisation. Introducing the scheme in our corporate head office was relatively straightforward; however there were implications that we had to consider at our manufacturing sites. We have a number of temporary employees at our manufacturing sites, so we had to consider whether they would be eligible to join the scheme.

“In addition, we had to consider the implications on payments such as shift allowances. Also, many employees do not have access to a computer or the internet so we had to consider this when determining what type of voucher (paper or electronic) we would go for. In addition, a lot of research had to be carried out into the impact on our benefit offering.

“The only weakness I would identify is the fact that we didn’t appreciate how long it would take to investigate the feasibility of introducing a scheme and then implementing it. It was frustrating to have to keep pushing back the launch because issues were still outstanding.

“When we started the project, we wanted to have the voucher scheme in place for the school holidays, so we picked 1st June without thinking about what factors we would need to look into and the associated work involved to develop and implement the scheme. Some of the factors we had to consider were the impact the scheme would have on other benefits such as pension, bonus etc. Some of this involved a large amount of research and liaison with third parties. Also, the work involved with putting together the policy and salary sacrifice agreement took a lot longer than anticipated.”

So is it worth it?

The risk of complaints from disgruntled employees that don’t gain from childcare vouchers is a small price to pay against the scheme’s proven benefits. The programme significantly improves staff retention and is financially lucrative. With such perks, this childcare strategy is sure to gain in popularity across UK organisations in the coming months.