Flexible benefits – not so flexible

A cloud of confusion currently hangs over the world of flexible benefits. It is not clear what the term actually means, and what HR departments have to provide in order to claim they have a truly flexible plan.

According to the Chartered Institute of Personnel Development (CIPD), flexible benefit schemes (also known as ‘cafeteria benefits’), are “formalised systems that allow employees to vary their pay and benefits package in order to satisfy their personal requirements”.

More specifically, employees are in a flex plan if they are allocated a sum of money each month by their employer, which can be taken as cash, spent on pre-arranged benefits, or used in addition to salary for benefits, explains Martha How, head of reward at HR consultancy Hewitt Associates.

She says: “A flex plan is one that values an employee’s total reward – both cash and benefits funding – and gives an employee a free choice as to how it is spent. So, if your base pay is £50,000 and your benefits funding is £10,000, what you’ll see is £60,000. You could take that £60,000 as cash, or you could reduce that amount in exchange for benefits.”

However, according to providers of such schemes, the concept of flexible benefits has moved on, and today many of the companies that claim to have such a scheme in place are offering staff something quite different to the original definition.

Richard Doig, regional director and total reward specialist at Heath Lambert Consulting, says: “If you asked me to define flexible benefits, I’d say it has to be a budget to spend on pre-selected benefits. Is that what’s going into UK companies as flex now? No, it isn’t.”

Incomplete plans

And it’s not just the occasional company offering a scheme that bears little resemblance to the traditional flex model – a significant number of firms are providing incomplete schemes labelled as fully flexible, insists How. “Among companies of 2,000 staff and above, I would say around two-thirds offer pure flex. The other third would profess to having a flex scheme, though in reality they have a more restricted type of offering,” she says.

And providers tend to agree with this. Business improvement consultancy Grass Roots Group says that just one or two of its clients operate a pure flex scheme.

Paul Bartlett, the group’s head of employee benefits, says: “The whole notion of what a flex scheme is has blurred over time.”

Today’s flexible schemes

So what does a flexible benefit scheme look like today? One key difference is that the pot of cash or benefit fund is no longer in place, in some cases replaced with money generated via salary sacrifice.

The tax and National Insurance savings available under salary sacrifice can be significant, although it is important to remember that not all benefits operate this way, so there is far less flexibility here and far more restrictions than under the traditional flex operation. The root of this problem may lie in the ease with which a company can create its own version of ‘flexible benefits’. For instance, adding a pension scheme with variable employer contribution levels, allowing staff to vary the amount they put into the scheme and in turn control the level that they receive, can apparently justify calling a plan flexible.

Doig explains: “Most employers want to add flexibility to their package. If you put a pension scheme in, you are allowing employees to choose the level at which they contribute, so people are saying they have a flex scheme when really they only have a group personal pension, and there is no budget or choice of other benefits.”

Some providers claim that this shift in meaning and design of flex has been driven by employers tightening their belts and wanting more for their money.

“Companies are asking for cost-neutral benefit schemes. While they are willing to make benefits flexible, they are no longer keen to put money into a pot for staff,” adds Doig.

Pseudo-flex

The losers in all of this are the companies that have gone to the time, effort and cost of providing a genuine flex plan, only to see potential recruits lured elsewhere by a far less flexible and generous package masquerading as flex.

Alison Dalley, head of reward at Fujitsu Services, where a traditional flex scheme is on offer, says: “I think it’s a shame for the potential employee who doesn’t necessarily fully understand the difference between real flex and pseudo-flex. Certain expectations will not be met.” As with so much these days, it boils down to cost. Without condoning the use of ‘pseudo-flex’, it’s easy to see why companies see it as a cost-effective alternative to a traditional flexible scheme.

Traditional flex plans can also throw up legal complications around the benefit funding – the pot of cash provided to staff in a flex scheme must be new money, as opposed to a portion of their existing salary. Tom Potbury, senior associate at law firm Pinsent Masons, explains: “If you have a flex scheme where employees have a pot of cash taken from an existing salary to spend on perks, but they have lost the ability to take that money in cash, it becomes legally very difficult.”

So perhaps it is a combination of this legal issue, and the perceived extra cost, that is largely responsible for putting some employers off providing a true flex scheme.

While flexible benefits have moved on and changed shape, the title hasn’t, and though many schemes look quite different today, a great many employers remain happy to claim that their scheme represents true flexible benefits.

As the economic crisis continues and less money is allocated to HR departments for benefits, this trend will persist, and evidence would suggest that flex, in its original form, will eventually become more or less obsolete.

Case study – Kwik Fit Insurance

Kwik Fit Insurance offers a traditional flexible benefits scheme, supplied by flex provider Motivano. Staff are allocated a pot of cash to spend on a set of benefits, and they can also choose to draw money from their salary to top up this spending.

Having the flex scheme in place comes at a cost for the company, but according to senior HR co-ordinator Elizabeth McVeigh, the expenditure is justified, with the plan helping to retain staff within a competitive industry. She says: “We have always viewed flex as a way of offering the best benefits we can. We want to keep people at the organisation.

“It is a great motivator. People are starting to ask us questions about flex – they talk about it throughout the year. This in itself keeps people motivated, and it is a good recruiter as well, as we talk about the package at interview stage.”

McVeigh admits to being frustrated that other companies claim to have a flex scheme without giving staff the level of choice offered by Kwik Fit Insurance, but adds: “More and more people are getting an idea of what a flexible benefits scheme actually is, which helps.”

Mark Eaton
Director, Personal Group

“When putting a flex scheme in place the most important thing to complete is a feasibility study. Consult staff, and work out whether it’s it the right move for you. It’s very important to give yourself enough time. You could do a voluntary plan in about three months but you couldn’t do a flex plan in this time. As a provider, I wouldn’t be comfortable putting a scheme together in such a short space of time, it would be putting undue pressure on us and the employer.”

Martha How
Head of reward, Hewitt Associates

“The difference between a successful flex plan and an unsuccessful one is how good the communication is – that’s a really big issue. It’s not just about how it looks but how it relates to the user.”

Alison Dalley
Head of reward, Fujitsu Services

“You must spend time telling staff about flex, and getting them engaged. Build their understanding. A lot of it becomes very confusing, so educating the workforce will make or break the flex scheme, no matter what you put into it.”

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