UK: Best Practice - Flex appeal.

UK: Best Practice - Flex appeal. - The 'one size fits all' benefits policy is being overtaken by a more flexible option, tailored to suit individual needs.

by Fiona Jebb.
Last Updated: 31 Aug 2010

The 'one size fits all' benefits policy is being overtaken by a more flexible option, tailored to suit individual needs.

Judy Ginsberg is set to buy more holiday from her employers so she can spend more time with her kids. Given the overtime his job requires, Dale Higginbottom seems more likely to sell some of his. Somewhat closer to retirement age than either, Bob Relph wants to bulk up his pension provision. Karen Roberts, more than 20 years his junior, would rather buy childcare vouchers.

Different people have very different priorities at different stages of their lives. Hence a growing number of British companies are adopting flexible or cafeteria benefits schemes, programmes which allow staff to make a trade-off between perks and may also permit a salary waiver in favour of increased benefits. Niche marketing, it seems, extends to employees as well as customers. After all, someone deep into their fifties is more likely to be interested in efficient pension provision than a 25-year-old buying his or her first house. As Martha How, a senior manager at Coopers & Lybrand, puts it, a flexible benefits scheme is about catering for an employee's 'age and stage' rather than running with a 'one size fits all' benefits policy.

As with so many management ideas, the flex concept comes from the US where schemes are more established. In the UK, tax laws are less benefits-friendly and the rising cost of healthcare less of an issue. Even so, experts estimate there are between 80 and 100 schemes currently up and running in the UK. Numbers are growing fast, particularly within professional services firms.

Price Waterhouse, Ginsberg's employer, was the first UK accountancy firm to move onto flex last year - but it didn't maintain the lead for long. KPMG swiftly followed suit, and both Arthur Andersen and Coopers are now planning a similar move.

So the numbers bods are clearly convinced that there are good reasons for showing a little flexibility. Jill King, HR director of the southern business area for KPMG, says the firm adopted flex not just 'as part of our approach to becoming an employer of choice', but also to underline the company's culture. 'It is in tune with how we are trying to manage people. We give them responsibility and expect them to make decisions so they ought to be able to do it with their benefits too. It's about empowerment.' 'Flex is about motivation, morale and retention,' expands How, whose company is not just a flex adopter but a flex adviser too.

While others focus on the pull of a scheme which highlights to employees exactly how much the company is spending on benefits (often as much as 30% of total pay), How also emphasises the push of recent tax changes.

'People often start talking to us,' she says, 'because they are looking for an exit strategy for profit-related pay. PRP was a great wheeze but unfortunately it's going. People's pay is going down and they don't like it. On its own, of course, flex is not an answer. But PRP is causing people to look (again) at benefits structures.' The best example, she says, is the company car. 'It used to be a great idea but now you're taxed to death on them.'

Tax changes may not be the only thing pushing employers to adopt flex. The need to harmonise terms and conditions when companies merge can also be a factor, since matching overall allowances for staff of the same rank can be easier than matching benefits item by item, line by line - an exercise which can cause dramatic pay inflation or deep discontent. With the PW/ Coopers merger looming, How will presumably get first-hand experience of this soon enough.

While PW's scheme includes pension provision, to date two out of three UK flex adopters have excluded pensions, according to a recent survey by pay consultants Watson Wyatt. In these cases, the existing pension scheme usually runs alongside the new flex arrangements. The survey's authors suggest this may be because pensions are such a complicated area; others argue that not allowing employees to flex on pensions is a vestige of the same paternalism which stipulates that certain core benefits (such as life assurance) must be included in an individual's package. Here the ability 'to flex' is confined to taking out higher levels of cover.

Whatever the reason behind the exclusion of pensions from most UK flex schemes, the Watson Wyatt survey shows that the benefits most frequently offered in such programmes are healthcare insurance (found in 70% of schemes), the ability to buy or sell holidays (57%), 'perk' cars (55%) and dental insurance (43%). Health screening, permanent health insurance, critical illness cover and life assurance are also regular features as are childcare, 'business need' cars, private fuel and store vouchers. The majority of schemes allow staff to take a cash alternative, if that is what they prefer.

Most companies embarking on a flex programme prefer to start with a fairly limited range of benefits and add to it year on year. Scottish Hydro-Electric, which introduced flex for 1,000 of its 3,500 staff in 1996, is fairly typical in this. Having conducted a feasibility study which explored employees' attitudes towards current benefits and their wish list for the new scheme, the company introduced a programme which offered employees critical illness and private medical cover, dental insurance, financial counselling, holiday flexibility and private pension contributions. A year on, the financial counselling was dropped due to lack of interest and replaced by air miles, explains compensation and benefits adviser Mary Robertson. The company is currently in the throes of designing the benefits range for year three.

So far, private medical cover, trading around holiday entitlement and critical illness insurance have proved the most popular options.

Any feasibility study will also entail detailed calculations about how to price the options and establish the value of the allowances that are to be offered to staff. Early schemes tended simply to allocate to members of staff a sum equivalent to the amount the company had been spending on benefits to date. To top this up, however, more recent programmes usually allow an element of salary sacrifice, ranging from 20% of salary in PW's case to a theoretically possible 100% at KPMG.

While flex schemes are not particularly tax-efficient, there can be substantial savings on national insurance when it comes to pensions or various vouchers, for example, and this can have an effect on the way these benefits are priced to individuals. Although childcare vouchers are safe for the time being, retail vouchers are to lose their NI exemption as from next April.

Where employers such as KPMG pass on all the NI advantage of flex to their employees, Ian Fitzgerald, payroll controller at Admiral Insurance, another flex adopter, says the £80,000-£100,000 his company saves every year remain firmly in its coffers.

Despite this seeming parsimony, retail vouchers are one of the most popular benefits at Admiral, a testimony to the discounts that corporate purchasing clout can obtain. On retail and childcare vouchers, the discount negotiated is usually around 5%. On bigger ticket items, however, corporate bargaining power goes much further. Cable and Wireless Communications (C&W), for instance, has achieved seriously advantageous terms with the car fleet companies it has selected as suppliers for its employee lease purchase scheme. C&W has also negotiated with healthcare companies so that a well woman check-up, for example, which normally costs £350, comes in at around £150 an employee.

Feasibility studies over, for those companies that press ahead undaunted, a massive communications drive, aimed at convincing naturally suspicious employees that 'different' should not mean 'less', is a must. 'Companies have got to prove to employees that it's not about saving money,' says Lisa Miller at Hewitt Associates, the consultancy which handles the admin for one in four of the flex schemes currently operating in the country.

Question and answer sessions, demonstrations with PC modelling software, helplines, internet discussions, one-on-one consultations, individual letters running all the numbers, flex champions, you name it and companies have tried it in an effort to sell their new scheme. One of the best ways to convince the wary they are not being diddled is to make it plain from the start that hanging onto the status quo is an option.

Pilot schemes can also cause problems: hostility may come from those who have been excluded, as well as from the chosen few. This hostility is generally heightened if the pilot is being conducted only among the company's most senior people, even more so if the scheme is only ever intended to cover benefits for senior managers. To date 75% of flex plans in the UK include senior employees from management grades and above while 48% cover other staff and 32% cover manual workers.

While internal communications is one area which needs to be watched closely, few seem to have had the problems they anticipated with the administration for their new scheme. For companies such as PW or Scottish Hydro-Electric, this is unsurprising since they have outsourced the function. Those who have not, like Russ Watling, C&W's employee benefits manager, say it's not all that complicated if you get your systems sorted. 'We've got it pretty much down to a fine art,' he says. 'It's all computerised and the trick is to get your computer to do all the calculations. We've got two people who specialise in it handling it over a four-week period every year.'

Crucially, says Watling, the scheme, piloted in 1994, is proving very popular with C&W's 12,000 employees. 'We've had a very positive reaction to it. We do an attitudes survey and where the satisfaction rating was 53% in 1993, it was 70% in 1996.' Meanwhile an Arthur Andersen survey concludes that 80% of companies believe flex has met their objective, while a Hewitt Associates exercise asserts that 78.8% of staff are happy with their new flex arrangements. On an individual level, perhaps the response of one of Watling's colleagues, Jenny Waters, is most telling.

'I have childcare vouchers which are really helpful,' she says. 'I do save a little on national insurance and while it may only be a few pounds a month, it has enhanced the company in my eyes. I was offered another job when I came here but the benefits here outweighed anything they could offer ... It was a real selling point - that little bit extra.'

ICL - 'Flex means more in terms of value rather than more per se'

'Unless you have been self-employed, you probably don't appreciate the value of company benefits,' says Catherine Turner, employment director with ICL, explaining the thinking behind the IT company's recent introduction of a flexible benefits scheme.

'Our original objective was twofold,' she explains.'We wanted to find a medium for communicating to individuals what the benefits were, and we wanted to give people the opportunity to choose what they want. It supports the theme of tailoring and relevance to individuals.'

The scheme was launched last year, after various focus groups had been held to help identify which benefits should be included. Once a pilot group of 1,000 (10% of the workforce) had been selected across the group headquarters and down through one business unit, the communications machine shifted into gear. Volunteers were bombarded with fact sheets, individual briefing packs and invitations to briefing workshops. They were also given a helpline number to call in case of difficulty. It was all intended, says Turner, to allay any mistrust while also extinguishing any hopes of 'a gold nugget'. 'There was a human expectation that flex would mean more,' she says. 'It does in a way - but in terms of more value rather than of more per se.'

The ICL scheme allows employees to opt for a higher level of salary with a lower benefits package or a lower level of salary with a higher benefits package. The scheme includes pension provision, life assurance, medical benefits, the buying and selling of holiday time, dental insurance, a critical illness plan and childcare vouchers. Company cars were left off the menu since the existing scheme which offers a cash alternative seemed to be working well. For all entitlement calculations, the company works on the basis of a 'notional' salary, that is, the salary an employee would have received had the flex programme not changed the proportion of overall income being spent on benefits.

The pilot group was given two months or so to make their selection and then invited to sign up. 'The most popular option', says Turner, 'was to increase the accrual rate in pensions. Not many people traded up on holidays. In fact more employees sold holidays than bought them - the problem most people have is finding time to take holidays.' ICL rolled out flexible benefits to all its UK employees in April. Of the original pilot group, well over 90% signed up for flex again this year.

The only change Turner is planning to introduce is a simplification of the flex literature handed out to staff. 'If you look at the booklet, it seems very difficult, a bit too much like a mortgage application. We're looking at making it more user-friendly. It's very difficult to get absolutely right first time.'.

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