UK: The perks that work.

UK: The perks that work. - The company benefits package is changing, with progressive companies offering a menu of perks to mix and match. But even flexibility doesn't suit everyone.

by Malcolm Brown.
Last Updated: 31 Aug 2010

The company benefits package is changing, with progressive companies offering a menu of perks to mix and match. But even flexibility doesn't suit everyone.

As anyone who has recently switched jobs knows, when it comes to remuneration, negotiating a satisfactory salary is only half the battle.

These days, agreeing the remainder of what is usually referred to as the 'attractive package' is just as demanding. Is there a company car? What are pension provisions like? Private healthcare? Perhaps even a subsidised mortgage? Small wonder that most British companies spend around 20% of payroll on employee benefits. Yet, while employment practices have changed drastically over the last decade, employee benefits have often been slow to keep pace. The upshot is that many companies are only now waking up to the fact that the modern, flexible employee requires a modern, flexible benefits package.

One of the key areas of change in recent years has been in the provision of pensions, with a growing number of companies moving some or all of their staff from the traditional defined benefit pensions to defined contribution schemes.

In a defined benefit or final salary scheme, the pension is calculated by multiplying the salary immediately before retirement by a fraction representing the number of years the employee has worked for the company.

If the deal is, say, one-sixtieth of pre-retirement pay for each year of service, an employee who has 30 years under his or her belt will retire on half of their final salary. Crucially, the benefit is fixed. If the funds in which the pension contributions were invested have performed poorly, the employer will have to pump in more money to make good the shortfall.

For the 1990s employer and employee, final salary schemes have a number of drawbacks. First, they are a hangover from the days when most people had a job for life if they wanted it. Such schemes tend to favour older, longer-serving members of staff at the expense of younger employees who may switch companies every couple of years. Second, defined benefit schemes have always relied on the ability of fund managers to read the stock market.

Thus far most have done a pretty good job and accumulated generous surpluses.

But this may not always be the case: a stock-market collapse or a fall with a slow subsequent recovery could leave employers with enormous liabilities.

Defined contributions or money purchase schemes are seen as a way around these difficulties. With money purchase schemes, it is the contributions that are fixed and the benefits which vary. Contributions are paid into a fund earmarked for each individual and invested to build up a lump sum which is used at retirement to buy a pension. The benefit to employers is obvious - they no longer have a financial Sword of Damocles hanging over them. That in itself may not be enough to convince employers but money purchase has the added advantage that it is also better suited to modern employees' needs. Since individuals effectively have a pot of money that is theirs, shifting from one fund to another as they change jobs is a relatively straightforward matter.

Though the attractions for both sides are obvious, there are potential drawbacks. 'The disadvantage is that everyone in a money purchase scheme is at risk from stock-market fluctuations,' explains Stephanie Hawthorne, editor of Pensions World. 'Their pensions will entirely depend on the state of the stock market when they retire and on the annuity rates.' So employees have to balance the plus of greater flexibility against the downside of uncertainty about the ultimate value of the benefit. They do not know how much the invested contributions will earn, nor what amount of pension the accumulated money will buy when they retire. Thus, the acid test for money purchase is whether the uncertainty surrounding final outcome is outweighed by the advantages of flexibility and portability. If it is, we can expect many more companies to jump on the bandwagon; if not, such schemes will probably be quietly dropped.

Another key part of the benefits package where change is taking place is private medical insurance (PMI). PMI has always been a popular benefit, particularly among senior employees, largely because, with the steady decline of the NHS, they are likely to get much quicker, hassle-free attention from the private sector. At the end of 1995, according to health services consultants Laing and Buisson, there were just over 3.2 million PMI policy holders in the UK, covering more than six million people. Over 60% of those covered would have been paid for by their companies and the numbers are growing. But there is a fly in the ointment. The PMI market as a whole has been comparatively stagnant over the past four or five years. Now premiums are rising as the insurers struggle to cope with medical cost inflation which, because of the high cost of new technologies and drugs, always runs ahead of normal inflation. This leaves insurers in the unenviable position of having to cover rising prices without scaring off customers by jacking up their premiums too fast.

An increasingly popular way out of this dilemma is managed care, a practice that gives insurers much greater control over the whole medical process and enables them to police costs.

To date in the UK the most popular managed care technique has been the preferred provider arrangement under which insurer, company and medical service provider enter into what should be a mutually beneficial tripartite agreement. The essence of the deal is that the company, in return for competitively priced premiums, agrees to send employees who need treatment to specialists and hospitals nominated by the insurer. Everyone benefits: the company because of the lower premiums; the hospital because the company is putting more business its way; and the insurer because it gets a degree of influence over procedures and costs in return for the guarantees of continued business that it provides for the hospital.

But, for all its allure, there may be limits to managed health care.

Doctors in the UK jealously guard their freedom to exercise clinical judgment and, if insurers really start flexing their muscles by, for example, insisting on setting clinical protocols or benchmarks for good medical practice, the medical profession might feel they have overstepped the mark. The insurers would argue that they were only trying to ensure that the best procedures were cost-effective. The doctors, however, would suspect that cost considerations, not medical efficacy, were paramount. There is also the paradox, highlighted by William Laing of Laing and Buisson, that while business people may approve of managed care wearing their company hats, they may be markedly less happy with it as patients if the management becomes heavy-handed. In the US, it is not uncommon for patients to be directed to preferred hospitals a considerable distance from where they live or work. Business people who have signed up to PMI precisely because they feel they do not want to endure the privations of the NHS are unlikely to accept being pushed around.

Perhaps on the grounds that prevention is better than cure, an increasing number of companies are also subsidising their employees' physical well-being. It is estimated that more than 1,000 UK companies now offer some sort of on-site fitness facilities, which may be run directly by the company or by outside specialists. Even those that don't provide facilities will often have arrangements with local health centres, allowing employees to join at reduced rates.

One element of the benefits package, however, remains resolutely unchanged - the company car. Of the two million new cars registered last year, nearly half were company cars, despite the fact that successive chancellors of the exchequer have steadily chipped away at tax breaks so that the corporate car is now more or less tax-neutral. 'The company car culture is as entrenched as it ever was, certainly in the minds of employees, if not employers,' says Roger Down of benefits consultancy Watson Wyatt. 'There's no indication of people being weaned off cars. For most employees, it is broadly a tax-neutral perk, but what people like about still having a company car is that it means hassle-free motoring. If anything goes wrong with it, it's fixed without any inconvenience to you or any direct cost to you.'

This stubborn attachment to company cars is clearly demonstrated by a recent Watson Wyatt survey, which showed that over 95% of the 440 organisations polled still provided them. Just under half offered a cash alternative - allowing employees to take the money as a supplement to salary - but only about 10% of employees given the option took it up. One key reason for this may be that the cash sums on offer were not nearly enough to enable staff to buy a private vehicle equivalent to their company one.

'The levels of cash simply aren't seen as being sufficiently generous to tempt the majority away from the company car,' says Down. 'There are two reasons for this. First, if it's offered as a free choice, companies won't want to put their costs up so they'll be offering an amount of money that keeps their position neutral, but what that translates to for the employee is still something that's not enough to run a car of the same quality. They don't have the purchasing clout of the companies who, of course, get discounts on the cars they buy. That purchasing clout applies to the vehicle itself, to insurance and to finance.'

Experts, puzzled by the company car's enduring popularity despite the fact that the system has few financial attractions for either employer or employee, suggest that the next major shift in company car provision may be the use of employee car ownership programmes. Under these, the employees are given financial help to buy a car privately but in a way that uses the employer's muscle to ensure a good deal. They are helped with additional arrangements on maintenance and insurance so that the vehicle feels like a company car, but the deal is structured to avoid the benefit-in-kind income tax charge on the employee and the employer's Class 1A National Insurance Contributions charge.

Offering a cash alternative to the company car is about flexibility within benefits, but more progressive companies are now designing packages so that there is flexibility between benefits. Employees are being asked to choose their own benefits from a menu and may trade in unwanted parts of the package either for more cash or for credits that they can spend on other benefits on the list. According to a survey in Employee Benefits magazine, one in 12 companies now offer flexible benefits and a further 20% are examining the possibility of developing such a strategy. If the idea catches on, it will almost certainly encourage employees to take a much greater interest in the detail of benefits and to start weighing up their value. In fact, there is evidence that some of the pressure for change has actually come from employees who are beginning to recognise the drawbacks of the fixed benefits system. People who have working spouses, for instance, don't see any benefit in having two company cars - one from each partner's employer - or, for that matter, two lots of family medical cover.

Remaining inflexible in such circumstances can send out the wrong messages, says Peter Jauhal, remuneration specialist at Hay Management Consultants.

It can appear that the company doesn't mind wasting money and that it is not really concerned about meeting its employees' needs. One company he worked with was handing out valuable pension benefits, yet most of its employees were clearly not planning to stay with the business for any length of time. 'The arrangement was actually a demotivator because they could see this huge amount of money being spent on their behalf that was of no value to them. The message that sent to employees was, "We don't really care what you think. It's what we think you should have".' The overriding principle with benefits, says Jauhal, should be that the perceived value of the benefit to your employees should be greater than or equal to the cost of providing that benefit. 'Clearly with a normal benefits scheme, you might have some benefits costing much more than their perceived value to employees, and that is where you get wastage occurring.'

Price Waterhouse has just introduced a flexible benefits scheme for its staff. Its pay and benefits manager Paul Sheffrin believes that to be successful, schemes must be aligned with the broader company strategy.

Traditional fixed benefits schemes have often been put together ad hoc, with businesses introducing individual benefits either to attract staff or, as was originally the case with cars, because they made good sense from a tax point of view. 'They were never introduced for what should be the right reasons - because they were consistent with the business strategy or because they met the needs of the employees.' The Birmingham Midshires Building Society which launched a flexible benefits package for its 2,000 employees last October is unconventional in this respect. This, explains Claire Pulley, the project director responsible for introducing the scheme, was because the company believes that if it offers its customers choice, it should do the same for its staff. Thus employees have a core of key benefits and a flex fund which allows them to spend part of their entitlement on anything from extra holidays to critical illness cover.

A flexible package gives the company an opportunity to rework its benefits strategy so that it is consistent with the overall business strategy and meets employee needs. But introducing flexibility isn't some sort of panacea.

'You shouldn't just take your existing benefits and put them in a flexible benefits package,' explains Martin Caley, administrative director for employee benefit schemes at Sedgwick Noble Lowndes. 'You should examine the benefits being provided to see if they're still relevant bearing in mind the change in the company's culture and what they are trying to get out of their staff.' Roger Dolphin, a partner at Watson Wyatt, agrees.

When flexibility first appeared on the UK scene, he says, companies did what they had always done with benefits - they adopted a 'me too' approach.

'Given that mindset, people are very happy to phone consultants like me and say, "We're looking at flex, can we talk to you about whether we should do it with you?" My response is that I'd prefer first to find out about your business, the key things you're going to be doing over the next three or four years and what that means in terms of communications, reward drivers, cultural messages and so on.' Only once that is understood is it time to talk about whether a flexible package is the answer. 'If, once we understand all that, you decide you do want to go flexible, then we know how to design it because we know what we're trying to achieve. You cannot just do it in a vacuum.'

Expert advice: based on in-depth case studies, Reward Strategies, a 400-page report prepared by Market Tracking International and published by Management Today, explores the major trends in remuneration models. Price: £450. Call Claire Wiggins on 0171 413 4288 or fax her on 0171 413 4138 for more details.

CHILDCARE POLICY - SO WHO'S LOOKING AFTER THE KIDS?

Many blue-chip companies, British Airways, BP and the Midland Bank among them, provide childcare schemes as an employee benefit, with provisions ranging from creches to childcare vouchers. The consensus is, however, that this is a tricky area. Schemes which work well in a town or small city may be less appropriate in larger urban areas.

Fiona Cannon, head of equal opportunities at the TSB and chairwoman of the pressure group, Employers for Childcare, says the new government is committed (as was its predecessor) to developing a national childcare policy. Part of that will involve looking at the role employers should play. She will be telling the Government that there is now a trend among progressive companies to move away from seeing childcare as a benefit and instead to examine ways in which more flexible working arrangements can be found, enabling parents to be both worker and child-carer. 'The arrangements will vary from company to company but could involve things like job-shares and term-time working.' One of the key problems with simply giving people money to fund their own arrangements, says Cannon, is that they can't always find the quality of child care they want.

'It's a never-ending circle.'.

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