Flexible benefits plans can help both employers and employees in hard economic times, but any scheme must include the right elements, says Peta Hodge
Most organisations find it hard to take radical, positive action in a recession. But if employers are brave enough, this could be the ideal time to restructure their perks by setting up a flexible benefits scheme or by revamping and existing flex arrangement.
Debby Hannaford, benefits consultant at flexible benefits technology supplier NorthgateArinso, says: 'In these challenging times, staff can be an organisation's most important asset. A flexible benefits solution can help to keep employees motivated and positive, particularly by enabling them to make better use of their income and enhance their spending power.'
But what are the crucial elements to include in a recession-busting flex scheme? The Employee Benefits/Towers Perrin Flexible Benefits Research 2009, published in March, showed 23% of flexible benefits schemes offer staff a flex pot to spend on benefits, with the option of taking some, or all, of it as cash. Clearly, the cash option will be attractive to many workers at the moment.
Benefits inflation
For a scheme to achieve significant employee engagement, a decent amount of cash will have to be put into the pot, but this could be done by offering benefits funding in lieu of a pay rise, says Hannaford.
As with the flex pot approach, a flexible benefits scheme that allows employees to trade down some benefits cover in return for cash is likely to appeal to staff struggling to pay their monthly bills.
The appeal for employers is obvious as it allows them to offer staff additional choice from existing funding, although Brown suggests that without an element of salary sacrifice thrown into the mix, the flexibility on offer is likely to be limited. However, a cheap way of creating at least the illusion of extra choice to any flexible benefits scheme is to add a few voluntary perks to the menu of what is on offer.
Schemes based on trading down benefits levels must be managed carefully because there are several potential downsides. The obvious one is that insurance premiums on risk benefits can be sent sky-high as young, fit and healthy staff opt out, leaving older, less fit and less healthy colleagues behind.
It is also important that, in offering their staff greater flexibility, employers do not forget their basic reasons for providing a benefits scheme. For example, if an organisation offers wellbeing products to help manage sickness absence, employees should not be allowed to opt out to the detriment of the firm's wider business strategy.
Matt Duffy, online benefits consultant at independent adviser Lorica, says: 'It is important, as part of the benefits audit, feasibility study and scheme design, that the flex consultant identifies benefits that should retain an element of core entitlement, to ensure flex helps to achieve the employer's reward strategy and maintain economically- viable insurance costs.'
Salary sacrifice arrangements is at the heart of an increasing number of flex schemes. More than a quarter (28%) of respondents to aforementioned Employee Benefits research now offer such schemes. Their appeal in a recession is they give staff access to discounted products, offer savings on national insurance, and exchange taxable pay for tax- free benefits.
A number of income tax rises will be introduced over the next two years. 'All these increases mean exchanging salary for a tax-free benefit will become even more valuable,' says Watson Wyatt's Brown.
Matt Waller, chief executive at Benefex, adds that as long as employers follow compliant processes, salary sacrifice should be a win-win for both employees and employers.
But he suggests schemes should include certain protections, such as ensuring that any at-risk employees - for example, those who are at, or near, the national minimum wage or lower earnings limit - are prevented from making adverse or illegal decisions.
Cost-neutral
Some flex advisers also allow their charges for benefits broking to be offset against the project cost of implementing a flex scheme. But such arrangements are not really free as the project costs are offset by money earned elsewhere within the contract.
'Whether this is good news for employers and their employees will largely depend on the structure of what is agreed,' says Waller.
'If it is just a mechanism to pay the costs using some other means, then it benefits everyone. If it is used as a means to maximise the commission that [an adviser] can take, as happens with some [advisers], then although being good for an employer, it can be detrimental to an employee.'
Reducing costs
However, such strategies come with a health warning. Hannaford says it is important employers 'do not end up with new rebroked benefits that are less attractive than the original ones, or provide reduced, sub- standard or less comprehensive cover or increased excess limits'.
Brown also warns of the potential danger of short-term premium cuts being followed by future price hikes, as the true cost of the risk is revealed.
'It is always possible to reduce benefit costs even though it sometimes involves a consultation process with employees,' he says. 'We have seen clients introduce pensions salary sacrifice, reduce pension benefits or close pension schemes, reduce the term of income protection cover and switch providers in order to get cheaper premiums.
'For employers, this is a good time for these types of change because employees are more accepting of cutbacks. Using some or all of these savings to introduce a flexible benefits scheme can be a good way to give something back to employees.'
There is no particular right way to structure a flexible benefits scheme in these or any other economic circumstances. An organisation setting up flexible benefits during the current recession, or reviewing existing arrangements, may be motivated by the prospect of short-term or even ongoing cost savings, but in structuring its scheme, an employer should never lose sight of its wider business objectives and the particular nature of its workforce.
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