Amanda Stainton, a reward strategy specialist at cdatransform, has been involved in the design and implementation of UK-wide flexible benefits schemes. In this article, she reflects on that experience and considers some of the practical aspects of such an implementation.
As organisations continue to strive to find their USPs in terms of the employment proposition to both attract and retain staff, their thoughts are increasingly turning to flexible benefits schemes as a way of differentiating themselves from the rest of the pack.
However, it is also often the case that, in addition to the ‘employer branding’ attraction of such plans, there are other business focused reasons why organisations move to a more flexible approach to benefits, some of which can mean, usually in the longer term, a direct cost saving to the company.
According to a recent CIPD survey, some 13% of organisations surveyed are looking to bring in flexible arrangements within the next year. So, what are the main reasons for implementing flex plans?
Improved recruitment and retention
As more and more organisations offer flexibility it will be important to simply keep up with, as well as keep ahead of, the competition. This could either be by introducing a flex scheme in the first place, or by being innovative with existing schemes.
Typical standard scheme criteria are:
Now we see an increasing number of successful schemes encouraging employees to suggest additional benefits that they would value, with companies committing to evaluate these against their own specific criteria, such as those above.
Improving understanding and appreciation of the existing and future reward package
Often, when asked a direct question about the benefits currently received, employees will ‘forget’ items such as holidays (particularly those above the statutory minimums), life insurance, etc. Placing a value on these and then, in effect, asking employees to buy them back really opens their eyes to the relative cost and value to both themselves and the company, enabling them to make discerning choices about the make up of their package.
Reinforcing a culture of individual responsibility and involvement
In most other aspects of organisational culture we have moved away from paternalism, so why not in benefits? Individuals should be making choices and taking responsibility for their own package in terms of insurances etc. The fact that the cost of excessive claims on insurance products can get passed on in the shape of increased premiums does change individuals’ perspectives.
However, employer responsibility must remain an integral part of any scheme. For example, a key question often revolves around the treatment of pension. Is this something that employees should be allowed to forgo for more cash, holidays etc?
The answer to this often depends on the prevailing culture in an organisation, and within many schemes pension remains a fixed benefit, although the pension scheme itself has flexible contribution levels.
Managing company costs for the future
Within a flexible benefits scheme, if benefit costs spiral, employers have a choice to make about whether to increase spend to match that increase in full or in part.
Employers must have a clear understanding of costs both now, and in the future, so they can plan for increases to the fund on a confident basis.
Equalising the costs of value of benefits provided
Too often some of the ‘traditional’ benefits offered to employees are of no use to them, so whilst the single person entitled to full family private medical cover costs that company less in premiums, the value to the individual of that element of their package is much lower than to the married employee with children.
Being able to offer everyone the same notional ‘value’ so that they can choose whether to take the option, purchase something more relevant to their circumstances, or just take additional cash, equalises the cost to the employer and the benefit to the employees.
So, there are lots of clear and understandable reasons for going down the flex route. However, such approaches are not without their challenges…
The problem areas tend to revolve around:
1. The overall design
One particular area that exercises decision making can be whether to include salary sacrifice as an additional way for individuals to increase their fund, which they would then use to select benefits. Allowing individuals to give up some of their base salary to supplement the fund does add further complexities.
Consideration must be given to the impact on final salary for pension purposes and, indeed, taxable salary for contribution purposes, the salary to which pay increases would be applied and death benefit calculated, etc.
If employers decide to pursue this approach then it has to be done on a permanent and irrevocable basis. This is because if there is any indication that it could be changed back into cash again in the future, the individual could still be taxed on the cash and the benefits.
Obviously, they can return to their pre-flex salary level by electing to receive part of their inflated fund as cash, and it would be advisable to restrict the amount of salary they can sacrifice to demonstrate employer responsibility.
There is also some protection in legislation, which covers the need to ensure that any proposals that could potentially reduce the amount paid in cash are formulated in such a way as to ensure that such deductions are lawful.
2. Tax, NI and VAT implications – all of these need to be considered very carefully and, above all, explained clearly. It is as well to make certain that the relevant internal and external experts are involved from the start to ensure there are no last minute hitches.
3. Impacts on the employment proposition – contract, offer letters, internal and external job adverts etc – all of these need revising beforehand for future recruits, role changes etc
4. Administration – this can be hugely complex for organisations both large and small. A clear administration process is critical, with selection forms kept as simple as possible, together with an appropriate means of recording selections for internal purposes as well as informing benefit providers of those covered.
Schemes covering upwards of 4000 employees are likely to require one or two full-time administrators. Nowadays, the use of intranet and Internet technology lends itself to the systemising of these processes.
5. Communications – what I see as the lynchpin in terms of success or failure of the scheme. Do not underestimate the almost perverse impact that giving freedom of choice can have on each and every employee. You have taken away the comfort zone that existed whilst they took the benefits that the employer offered.
Now, even more than before, communications must be as comprehensive as possible, yet simple. The information provided must be capable of being used by employees and, often, their partners to enable informed decisions to be made about how to allocate their fund.
Make sure that the key messages are clear – if the scheme has been designed so employees can simply buy back what they already receive, then make sure this is spelt out. Be extremely clear about what circumstances can trigger a change in selection, usually significant life changes – marriage, childbirth, etc – or reward changes that substantially increase the size of the fund.
Experience suggests that it is necessary to almost go for communications overkill (though much depends on how many benefits there are in the original launch scheme and how complex they are).
Set up and advertise help lines for people to call with their queries, resource up the admin team, invest in external help, particularly for ensuring that your scheme is legally and tax compliant. Work closely with benefit providers and test out all documents and forms with teams from across the organisation before ‘go live’ day!
I believe more flexible approaches to benefits will continue to grow in popularity as organisations review their reward strategies and find innovative ways to make a difference.