What are the drivers for the uptake of flexible benefits? Jane Lewis
outlines the advantages and pitfalls, and sets out a six-point guide to best
Although the take up of flexible benefit programmes is still minimal in the
UK – only between 5 and 10 per cent of companies currently have formal schemes
in place – there is no denying that the momentum is growing. Evidence suggests
that between 50 and 60 per cent of British companies are actively looking at
offering a more flexible benefits package to their employees over the next few
The drivers are many and varied. When the first ‘flex’ schemes hit the UK in
the early 1990s, the main demand was from organisations "which just wanted
to be different", says Marcus Underhill, head of flexible benefits
consulting at Mercer Human Resource Consulting. The strongest uptake was in sectors
such as IT, telecoms and consultancy, where "the age profile was much
younger and there were very real pressures of retention".
Offering a ‘personalised proposition’ was a very good way of facilitating
employee loyalty, he says – and that still remains the case. A tailored
benefits package can be key to attracting and retaining high performers.
Many companies have also found a strong financial incentive for making the
move. Although offering flexible benefits is no longer a tax-efficient strategy
(the Government removed that NI loop-hole in 1999), it still provides what one
supplier coyly terms "a cost management opportunity". Underlying this
is the shift between a defined benefit plan (a potentially open-ended
arrangement financially) and a defined contribution plan.
According to Underhill, the former typically costs an employer some 18 per
cent of an individual’s salary, while the latter is usually fixed much lower at
around 10 per cent. Thus, providing an allowance per head allows companies to better
predict and control their benefit costs.
The logical consequence of what Richard Stewart, head of Partridge, Muir
& Warren’s employee benefits practice describes as "setting a cap in
monetary terms", is that you need the flexibility to make the most of it.
"In today’s low-inflation environment, companies are looking to
leverage better value from their benefit spend," he says. Having flexible
benefits have also proved a boon to organisations involved in mergers and
acquisitions. "When two benefit environments are coming together in one
organisation, flexible benefits are a good way to achieve ‘benefit
harmonisation’ – they can reflect the best of both without increasing
But the momentum of offering flexible benefits goes far beyond straightforward
cost issues. It is also a cultural movement that taps directly into the
strategic HR preoccupation of building agile, fluid organisations. Flexible
benefits reflect and enhance "the flexibility of an organisation to
change", says Underhill. They show a targeted approach, a recognition that
"we want to spend the right money on the right people and different people
within an organisation have different needs".
"People are looking for fresh ideas," says Stewart.
"Companies are trying to modernise and refresh their benefits." It is
perhaps no coincidence that the movement towards greater flexibility is taking
place in a climate in which many final salary pension schemes are being wound
Broadly speaking, there are two kinds of flex solutions on offer. The first,
referred to by some practitioners as ‘true flexible benefits’ are
employer-sponsored or paid. The second, dismissed by some as the grotty end of
the market are ‘voluntary benefits’ in which employees are offered a raft of
discounted products or services for which they must stump up themselves. These
often take the form of an online shopping portal, with products ranging from
insurance and health plans through to holiday discounts and cut-price CDs.
But as Alistair Denton, managing director of Motivano – which offers an eHR
platform consisting of products from more than 140 different suppliers – points
out, this kind of voluntary solution is tailor-made for companies which, for
whatever reason, are not yet ready for a wholesale move to flex. "It
provides a kind of half-way house," he says.
Here, Personnel Today offers a best practice guide to choosing and
implementing the right kind of flexible benefits plan for your organisation.
1 Planning and design
The first step towards planning a flexible benefits programme starts at a
strategic level. You need to ask broad questions: what difference would a move
towards flex have on strategic issues like retention, the shape of the
workforce and an organisation’s ability to remain competitive? How would it
encourage certain behaviours and discourage others? Some companies – water
company United Utilities, for example, which introduced flex this year – claim
the scheme is a "good motivation tool", promoting decision-making
skills in employees.
The key point, says Denton at Motivano, is that "you’ve got to
understand what you are trying to achieve". And to do that, you need to
canvas opinion from the top, perhaps by setting up a decision-making working
group of senior executives.
"You need to analyse the objectives of change," adds Stewart.
"It could be that you just want to improve value, but don’t want a major
overhaul. At the other end of the spectrum, you might decide you need a
completely new approach."
If you do decide to take the plunge, the next step is to establish the scope
of the scheme by sketching out what Stewart calls "the shape of the
solution". Try to assess its impact in terms of planning and
specification. Ask how it will operate and what processes will be affected in
terms of payroll and HR systems. Some clients, Stewart adds, have found the
process of studying the impact of flex a useful way of taking a fresh look at
processes and data in their organisations.
Two key decisions you need to make at this point are how much to spend on
each employee, and what you will and won’t put into the flexible scheme – in
other words, which benefits will remain core.
It is important to bear in mind the many "cultural dynamics" that
could result from this decision, says Underhill. Around half of all flexible
schemes now operating in the UK don’t include pensions for instance, because
they’re considered too core not to be a defined contribution. Similarly,
"if you decide to make holidays flexible, allowing people to swap
entitlement for extra pay, for instance, you must consider that sickness rates
may go up". The imperative of maintaining a healthy workforce also leads
many companies to keep medical insurance and healthcare schemes as core
The issue of how much to spend per employee is so critical, that as a rule
of thumb, Underhill recommends "spending 80 per cent of your time" on
this issue and "just 20 per cent working out what you will include in the
flexible benefits package". Clearly performing a detailed cost analysis at
this stage is crucial – and may yield surprising results. One of Underhill’s
clients eventually decided against including holidays on its flex scheme, when
it discovered that such a move would expose it to a £3m additional cost. Many
of the firm’s employees, who had fallen into the habit of not taking their full
holiday entitlement, had not been claiming payment in lieu.
Organisations which have embraced the flex approach have taken many
different routes towards calculating the size of an individual’s flexible
allowance. At online grocer Ocado, for instance, each employee gets 500 points
– about £500 – to spend on benefits in the Pick Your Own range in addition to
Nonetheless, says Underhill, many companies find "the cleanest
way" is to calculate an individual’s allowance as a percentage of their
salary. Lloyds TSB, which next month launches a flexible benefits package for
its 70,000 staff, plans to introduce an allowance of 4 per cent of basic
salary, which staff can either take as cash or spend on flexible benefits. They
can also use up to 50 per cent of their salary topping up their benefits.
In common with many organisations, Lloyds TSB has divided its flexible
benefits into three categories: ‘health and wellbeing’ (allowing staff to buy
private medical insurance, screening and dental cover); ‘leisure and lifestyle’
(including the chance to buy or sell five days holiday and options on childcare
and retail vouchers); and ‘protecting your future’ (allowing staff to increase
their core contributions on pension and life assurance as well as adding new
options such as personal accident and critical illness).
To enable it to shape its package, Lloyds ran a series of employee focus
groups and a phone survey. Getting employee input at this stage is crucial to
establishing a viable flexible package that will actually be used, say the
experts. "It is important to canvas widely," warns Paul Watson,
managing director of online benefits provider 4th Contact. "Take a
cross-section of staff, ask what they like about existing packages and what
they might like to see in a flexible package. Get some feel for what motivates
employees and for what is possible."
It may well be that some requests are impossible to meet, says Underhill.
But while you should obviously consider them all, if you do reject suggestions
he urges companies to give good feedback on why they were not taken up. And, as
Denton at Motivano points out, even if the budget is not in place to include
all suggestions, companies can improve the "width and depth" of their
offering by considering adding some benefits on a voluntary basis.
2 Choosing the right partner
The success or otherwise of any company’s flexible benefit scheme depends to
a large extent on the choice of provider, and the list of options is growing
rapidly. At the top end of the corporate market, the ‘traditional’ benefits
consultants – Towers Perrin, Mercer and Watson Wyatt, for example – have been
joined by representatives from the Big Five accountancy companies. The
mid-range market is also well serviced by middle-tier benefits consultants –
Partridge Muir & Warren, for example. At the lower end of the scale are
traditional insurance brokers and around 8,500 independent financial advisers
and a new breed of supplier offering an ASP solution, such as Motivano.
Finally, there is still room in the market for specialist niche providers.
Manchester-based HealthSure, which majors on healthcare cash plans, is a case
Progress in technology has had a big impact on the profile of benefits managers.
As Underhill points out, four years ago only 20 per cent of companies looking
at flexible benefits planned to combine them with e-solutions. That figure now
stands at 75-80 per cent. So the door has been opened to a host of new
entrants, from the big eHR outsourcers to a host of smaller software providers.
Deciding which partner to go for will clearly depend on individual company
circumstances, the extent of flexibility planned, and existing technological
infrastructure and IT systems. If your budget is tight, but you wish to extend
choice, you may consider going down the voluntary ASP route. And if you are
planning a wholescale move to eHR anyway, it may make sense to include flexible
benefits provision in that deal.
While the robust systems are clearly critical to the success of any flexible
benefit scheme, however, it is a mistake to place too much emphasis on the
technology, says Stewart at Partridge, Muir & Warren. "The issue is
not about technology, it is about humans using systems," he says. But in
common with most other ‘traditional’ benefits consultants, the firm has
invested heavily in technology of its own, which can be tailored to suit the
needs of individual companies. "We’ve built flexible benefits into our
system from the ground up."
3 Contract arrangements
There are two kinds of contracts you will need to consider: those pertaining
to external flexible benefits providers, and those to employees. In both cases,
says Motivano’s Denton, "if you’ve done the planning right, contract
arrangements tend to fall into place".
Key issues to build into contractual arrangements with suppliers are service
level agreements and rollout schedules. You need to ask whether a supplier
"has the ability to deliver what you want tomorrow", says Mercer’s
Underhill, and build that into the contract. Similarly it is important to
clarify who will have responsibility for control of the project and who is
ultimately responsible for communicating it.
When considering individual benefits, it is critical you read the small
print of policies and clarify exactly what a benefit entitles an individual to
receive, says Raman Sankaran, marketing communications manager at HealthSure.
You cannot count on an employee doing this for his or herself. "A poor
benefit is going to reflect very badly psychologically on the employer,"
he says. Conversely, a well-run, useful benefit will reinforce "positive
psychological links" with the employer.
As far as staff contracts go, the essence of flexibility is, of course, just
that, says Sankaran. Since employees should have the power to review and change
their choices on an annual basis "it is very important they are run
contractually on an annual basis."
It is also important "to be very clear how an individual’s employment
contract has been amended by flex," says Underhill. "You don’t want
any type of claim or issues with the Inland Revenue. It is a good idea to check
your scheme, and details of individual contracts, with the Revenue before
embarking upon it."
4 Communication to employees
"Your benefits are only as good as how far you can communicate
them," says Sankaran at HealthSure. Indeed, poor communication is the
principal reason why so many new benefits schemes, launched amid much fanfare,
ultimately wither on the vine.
A surprising number of companies do not communicate any benefits information
to employees beyond the traditional employee handbook provided on day one.
Consequently, many staff fail to have a realistic idea of benefits costs and
who pays for them.
Any communication policy you plan should ensure that employees understand
the basic mechanics of the benefits plan, how it operates and the company’s
position on cost management. In essence it should answer four basic questions,
says Underhill: What am I being offered? How does this differ from what I was
offered before? How can I decide what is right for me and can I make that
choice and do that transaction?
While some employers, such as Lloyds, reported an enthusiastic reception to
its flexible benefits plan among staff, not every company can count on this.
Indeed, staff resistance may offer a significant barrier. Very often there is a
perception that with flexible benefits, companies are giving with one hand and
taking away with another.
It’s important to tackle this value question head on, says Underhill. If it
is clear to employees that the total sum the company is paying in benefits is
actually going down, don’t deny it. Talk up the benefits of a flexible plan at
the same time – Ocado advertised its scheme to employees as ‘a framework to
"Transparency is always better," says Underhill. "If you
avoid the subject [altogether] all you are doing is deferring the pain. In the
current environment, most employees are receptive to bad news, provided they
understand its cause." In unionised workplaces, changes should be
negotiated with unions before they are introduced to non-union staff.
Most experts agree that a prolonged, multi-pronged campaign of communication
is the best approach. By receiving employee feedback during the planning phase,
you will have set the ball rolling. You need to hammer home the message of what
the scheme will include, when it starts and how staff can go about taking
advice and enrolling.
The means of communication will depend on individual circumstances. A
shopfloor worker, without PC access, for example, will be generally in the dark
if you concentrate on an intranet campaign. Other options to consider include
posters, mailing information with pay-slips, individual briefings and seminars.
Closer to the scheme’s enrolment deadline, you must consider providing
access to independent financial advisors, helpdesks or helplines to provide
more detailed, individual advice.
Some companies have successfully put their schemes on the map by branding
them separately. Brewery and pub chain Greene King, for example, has branded
its new system Signature, while pharmaceutical giant AstraZeneca has called its
new scheme AZ Advantage.
The introduction of any new policy is always bedevilled by what Underhill
calls "the twin dangers of apathy and cynicism". To counter this, it
is important you set a deadline for enrolment and increase the communication
campaign as that deadline approaches. In most companies enrolment periods
typically stretch from two to six weeks.
Some organisations have successfully boosted enrolment by giving employees
what one expert calls "a form of consideration" in exchange for their
acceptance to the change in their employment contract – this might be by way of
a one-off payment equivalent to their first-year costs of switching to the new
But whichever sweetener you choose, it is likely to have an important
psychological impact. By accepting the payment, they have tacitly accepted the
new plan as part of their employment contract.
A further tactic is to call upon the services of employee champions, trained
in the new scheme and prepared to talk up its advantages. Another option is to
include an enticement.
At market research company Millward Brown, for example, it found that
including flexibility over holidays helped push take up of other online
flexible benefits to 90 per cent.
It is important to monitor the process of enrolment on a daily basis, says
Denton at Motivano. "Check who has enrolled and who hasn’t and report this
back to the management at regular intervals." Keep up the campaign
"so that you’re not just dumping everything at the last moment".
Undoubtedly the process of enrolment is considerably easier among
organisations which have already majored on self-service HR. Filling in an
online form, or accessing advice, is a great deal easier than dealing with
In the short term, the review should be "a process of
reconciliation", says Denton, "making sure all the numbers
add-up". After that, you need a more generic review. In broad terms this
means assessing what’s popular and what has missed the mark. "Get out to
employees and ask what they would like in the future".
Reviewing the impact of flex from a strategic point of view is equally
critical. Question to what extent flex has met the organisation’s original
aims. Have costs been cut? Has retention been improved? Are employees more
motivated to stand on their own feet?
However much you have championed the scheme, it is important to take a long,
hard look at its objective success. Recognise any failings and take steps to
change them – even if this means going through the upheaval of changing
Give the scheme time to settle, however, before you go about making any
really drastic changes. It may take a year or so for the good news about a
particular benefit to percolate through the organisation. There’s nothing quite
like seeing a colleague enjoying the tangible benefits of a well-planned
flexible benefit scheme, to galvanise apathetic individuals into taking action
on their own account.
Some popular areas of benefit provision
– Accidental death and disability
– Critical illness insurance
– Disability insurance for employee
– Disability insurance for spouse/family
– Life insurance for employee
– Life insurance for spouse/family
– Private medical insurance
– Hospital cash plan
– Pet insurance
– Travel insurance
– Dental insurance
– Health/sports club membership
– Season ticket loans
– House/car insurance
– Long-term care
– Group discounts
– Legal services
– Personal contract car purchase
– Pensions (including stakeholder)
– Stakeholder pensions only
– Computer leasing
– Concierge services (eg dry cleaning)
– Childcare vouchers
– Holiday/entertainment discounts
– Financial counselling
– Personal loans, banking and investment facilities
– Equity incentives
– Health screening
– Training and development
– Optical discounts