Changing benefits

KEY POINTS

benefits provision has changed considerably over the past decade or so;

making alterations to benefits tends to be a regular activity for many organisations as employers attempt to balance the need to enhance what they offer to recruit and retain employees and meet changes in legal entitlement against the need to keep a lid on escalating costs;

specific recent popular alterations to the typical benefits package include the following: longer holidays, introduction of private medical cover, improvements to company car provision - either by offering a wider choice of vehicle or by increasing the size of the cash alternative - and changes to pensions entitlement;

research indicates that over the past few years the biggest changes have been in the scope of the benefits on offer, and that more employers are offering individuals a degree of choice over some, or most, of the benefits they receive;

three factors are fuelling changes to benefits provision: the intensifying war for talent, the need to control the escalating cost of some benefits and overall provision, and legal and regulatory changes;

there is growing evidence that flexible or cafeteria benefit schemes are becoming more popular;

flexible benefits arrangements recognise that no two people are alike; each one will have different preferences and these will change over time as personal circumstances alter;

among others, flexible benefits can support recruitment and retention by allowing employees to match benefits to their own diverse needs; help to control benefits costs because firms pay only for the benefits that staff actually want; and help improve employees' understanding of total compensation;

aside from these advantages, recent increases in the use of flexible benefits programmes can be attributed to several other factors. Above all, new technology has made administering them - previously one of the biggest drawbacks - far easier and cheaper;

generally, companies offer a set of core benefits plus a range of other benefits from which employees can choose which ones to take up;

however, one of the main problems for employees is that flexible benefits can have disadvantageous tax consequences.

Go back a few years and benefits provision in the majority of UK companies was fairly predictable. Company car provision was based mainly on either job status or job necessity, maternity leave for most women was only the statutory minimum, four weeks' holiday was the norm, and employers' contribution towards childcare costs virtually unheard of. Fuelled by changes to the tax regime covering company cars, provision has switched in many cases to offering cash as a substitute for cars; the majority of companies now provide longer maternity leave than the statutory minimum; an additional week's holiday has been added to the annual entitlement for almost all employees; and motivated by the need to retain staff and encourage women returners, a growing number of firms help to fund employees' childcare costs.

Making alterations to benefits tends to be a regular activity for many organisations as employers attempt to balance the need to enhance what they offer to recruit and retain employees and meet changes in legal entitlement against the need to keep a lid on escalating costs (see figure 6.1 for an example of changes to benefits provision between 1999 and 2001). The annual PABB survey of pay and benefits trends in the private sector regularly reports that many of the companies polled have changed benefits' provision over the preceding year and the number appears to be accelerating. For example, in 2000 more than 41% of surveyed employers had revised provision in the past 12 months, compared with almost 37% in 1999 and 31% in 1998.¹ The 2000 figures revealed that almost half (49.3%) of those making alterations improved existing entitlement, while just under a third (29.3%) introduced new benefits. Specifically, holidays are getting longer, private medical cover is becoming more popular, company car provision is being improved - either by offering a wider choice of vehicle or by increasing the size of the cash alternative - and pensions entitlement is being altered. Interestingly, in more than half (53.8%) of cases, benefits provision was evolving in an unplanned way rather than as part of a clear strategy.

Figure 6.1: Comparison of benefits provision 2001 and 1999

Benefit/allowance	2001 (% of	1999 (% of
	employers	employers
	with provision)	with provision)
Adoptive leave	65	54
Attendance allowances	7	9
Bereavement leave	98	96
Call-out arrangements	54	48
Childcare provision	10	10
Deputising payments	32	40
First-aiders' allowance	51	60
Long-service awards	57	63
Luncheon vouchers	5	3
Mortgage subsidies	6	12
Motor mileage	80	82
Offer company cars	74	82
Permanent health insurance	38	47
Pre-retirement leave	23	31
Private health insurance	63	67
Season ticket loans	38	31
Staff discounts	29	41
Standby payments	33	37
Subsidised canteens	36	42
Subsistence allowances	31	37
Time off for medical appointments	78	78
Plan to make changes to their benefits/allowances package in next two years	33	33
Based on the responses from 90 employers to the 1999 benefits and allowance survey, and 120 replies to the 2001 questionnaire. Comparisons made on a non-matched sample basis.

WHAT'S NEW?

PABB and other research indicates that, over the past few years, the biggest changes have been in the scope of the benefits on offer, and that more employers are offering individuals a degree of choice over some or most of the benefits they receive.

In terms of the scope and the management of benefits, there have been several common additions to benefits' provision and benefits' processes in many companies recently:

Additional benefits - some organisations are introducing a host of new benefits, including critical illness, disability and life insurance, to meet staff needs as part of a more complex, modern benefits structure.

Financial counselling - the most popular benefit introduced over the past few years, with as many as 2,400 companies establishing this kind of service since 1993, according to research commissioned by Hogg Robinson Financial Services and Prudential.²

Communication - the need to keep staff better informed of their benefit provision is reflected in a growing use of the total remuneration statement, which provides employees with a single, personalised document that outlines the value of the pay and benefits they receive.

Flexible, or cafeteria, benefits systems - whereby individuals choose appropriate benefits from a menu - have been much talked about in the UK but rarely put into practice. There is growing evidence that flexibility in the provision of benefits may finally be becoming mainstream company practice.

PABB's 2000 pay trends survey reported that, while only 5% of companies polled currently have a flexible benefits programme, 30% are considering establishing one. Similarly, although Hay's 26th annual survey of benefits, published in October 2000, found that only 6% of firms operated a formal flexible benefits scheme, the management consultancy is confident that the long-awaited growth of such arrangements is set to gather pace: "Our latest research and our discussions with clients suggest that flex may be an idea whose time has now come."³ Indeed, another Hay survey reported that 35% of the HR professionals surveyed expect their organisations to offer a "pick-and-mix" benefits system by 2005.⁴

The Industrial Society claims that the incidence of flexible benefits has doubled since 1995, with more than half (53%) of organisations surveyed using such a scheme.⁵ Hewitt Associates surveyed 307 employers on their attitudes to benefits provision and found that the popularity of flexible benefits packages is increasing, estimating that there are now around 200 such plans currently operating in the UK.⁶ Also, consultants Towers Perrin, in its fifth biennial survey tracking the evolution of benefits provision in the UK, reported that "the trend to offer employees more choice continues ... specifically, companies are introducing flexible benefits programmes at an ever greater rate than before" (see "What the surveys say", figure 6.2).⁷

CHANGE IS NECESSARY

There are three major reasons why companies are changing what benefits they offer and how they present them. Scarce labour is a big factor in employers' decisions to enhance their existing benefits offering. Tight labour markets are producing two-tier employee benefits systems in the UK, according to research by internet benefits firm eDefined.⁸ It found that employers in the south east, where labour shortages are most acute, and in the high-tech sector are having to offer highly competitive benefits packages to attract and keep staff. But the same pressure to provide such levels of benefits is dramatically reduced in areas of the country where labour is not in such high demand. These findings reflect evidence elsewhere.

A 1999 IRS survey examining the management of benefits in 132 UK organisations found that the most common aim underpinning their approach to benefits was to promote recruitment and retention. Over 83% of respondents said this was the case, with the perception being that benefits have a major bearing on attracting employees and generating loyalty.⁹ Companies in the survey believing that benefits provision aids recruitment and retention included Asda, British Airways, Burger King, Halifax, Matalan, Prudential Assurance, McDonald's Restaurants and Railtrack.

Since 1998, Towers Perrin's biennial surveys of benefits have reported that recruitment and retention is the main factor influencing decisions about benefits, with many organisations believing benefits provision differentiates them as an employer.⁷ Indeed, 55% of companies that had flexible benefits programmes had established them to improve recruitment and retention. Hay Management Consultants also points to the "intensifying war for talent" as being a major factor in moves towards flexible benefits systems.³

Certainly, the potential of a flexible benefits programme to aid recruitment and retention partly informed the decision of First Direct, the telephone and online banking division of HSBC, to pilot such a scheme at its Hamilton call centre when the site opened in 1998. Before the centre opened for business, the HR department undertook in-depth research on the probable popularity of flexible benefits as a recruitment and retention tool (see case study 2, Case studies).

Other firms establishing similar arrangements have also seen flex as a way of competing for staff in a tightening labour market. By offering people greater individual choice of benefits through its "Select" scheme, Oracle UK aimed to increase the "perceived value" of the employment package and thereby improve staff turnover and retention in the highly competitive IT labour market.¹⁰ Zurich Life has found that the introduction of a flexible benefits scheme, following its merger with Allied Dunbar (which already operated a flexible benefits programme) and Eagle Star to form Zurich Financial Services Group, has provided a boost to recruitment at its base in Swindon and elsewhere. "It has given us an advantage when we go into the labour market, both locally and nationally," says the company's reward strategy manager Alan Measures.¹¹

The escalating cost of many benefits is a further compelling reason for change. Towers Perrin estimates that benefits account for between 30% and 50% of total salary costs.⁷ Cable & Wireless alone was reported in 1998 to be spending up to £60 million annually on employee benefits.¹² Benefits are largely fixed costs and improvements tend to become a permanent feature of the package for current and future staff.

Towers Perrin found that, since its biennial benefits surveys began in 1992, controlling benefit cost has been given priority by employers over reducing it. The cost of several key benefits, including private medical insurance, has risen substantially in recent years. William M Mercer reported that private healthcare costs would rise by 22% in 1999 due to spiralling "medical inflation" (the cost of providing health cover).¹³ In the past few years, company cars, fuel provision and retail vouchers, among others, have become subject to employers' national insurance at 12.2%. A legal entitlement to four weeks' holiday, plus rights to unpaid parental leave and time off for family emergencies and extended maternity leave entitlement will add further to costs.

Occupational pensions, which are considered vital by employers seeking to be competitive in the labour market, can consume much of the expenditure on benefits, although the level of employer contributions varies widely. In 2000, Oracle UK, for example, was contributing 8% of base salary to the company's pension fund.¹⁰ There are signs of a rise in employers' contributions to final salary schemes, following several years in which fund surpluses enabled many companies to take a partial or full contributions holiday. Already there is a trend toward defined contribution or money purchase schemes and away from defined benefits arrangements because they offer employers greater certainty of costs. Towers Perrin found that 10% of respondents to its biennial benefits survey published in March 2001 were planning to withdraw their final salary plan, and 25% were planning to introduce some form of defined contribution scheme in the future.⁷

Coupled with the escalating cost of providing some benefits, the low inflationary climate is likely to make the true cost of all benefits provision more transparent. Surprisingly, given the amount of money employers allocate to benefits, research suggests that most employers are unable to cost their provision truly. Few companies - just over 30% - responding to the IRS survey of managing benefits reported undertaking an audit of benefit costs.⁹ However, more than one in four participants (43.2%) said they chose the most cost-effective suppliers (for instance car lease firms, pension insurers and healthcare providers) to keep a lid on expenditure.

The lack of understanding of the true costs of benefits is also evident among employees. Towers Perrin's benefit effectiveness index in November 1999 revealed that more than two-thirds of employees thought their benefits were worth less than 20% of their pay. In fact, the average cost to the employer was in the order of 30%.¹⁴

A key feature of flexible benefits systems is their greater ability, after start-up expenditure, to control costs. Among other positive characteristics, Towers Perrin found that employers with flexible benefits systems in place perceived them as providing a mechanism for controlling benefits costs.⁷ Personalising the benefits package means that the employer can enhance the overall offering to employees - something that staff generally desire - at little or no additional cost. It also makes economic sense to spend money on the things that employees actually value. Both First Direct and Zurich Financial Services Group make this point. Mandy Dixon, reward and benefits manager at First Direct, explains that the company saves money on benefits that are neither wanted or needed by staff (see case study 2, Case studies).

Asked whether Zurich Financial Services Group was getting more value for its money from establishing a flexible benefits programme, Alan Measures, the firm's reward strategy manager, replied: "We must be - the choices offered significantly enhance employees' packages but do so in a cost-efficient manner."¹¹

In terms of cost, flexible benefits programmes have the added advantage of making the value of a benefit visible to employees. Improving employees' appreciation of benefits is ranked as the third highest priority by employees participating in Towers Perrin's latest biennial survey of benefits (March 2001).⁶ Alan Measures at Zurich Financial Services Group explains that "flex established a cash value where this was hidden before".¹¹

Bulk purchase of some additional items can mean that overall benefits provision is enhanced without incurring substantial extra cost to the employer and enabling employees to realise substantial cost savings that they would not be able to receive as individual purchasers.

Legislation and regulation make up the third major influence on changing benefits provision. The Working Time Regulations 1998, for example, introduced a minimum annual level of paid leave (four weeks from November 1999). In terms of regulation, tax on company cars has been altered significantly over recent years and this has led to considerable change to what is often deemed to be the most valuable employee perk. Over the past five years (1995 to 2000) the PABB annual review has reported that on average more than 16% of companies surveyed had made changes to their car policies in the preceding 12 months.¹⁴ Offering staff a cash alternative to a company car is one major development in this area. A 1999 survey by IRS found that 34% of employers now give staff this option.¹⁶ By way of an illustration, in 1999, staff at 3M UK had the opportunity to decline a car if their annual mileage was under 6,000 miles. In return, they were paid approximately £450 a month for 48 months, with these payments subject to tax and national insurance. This arrangement is renewable after the four-year period.

The anticipated changes to benefits provision in organisations are summarised in figure 6.3 (below).

Figure 6.3: Anticipated changes to benefits and allowances packages in 28 organisations

Organisation	Planned change
Ayrshire & Arran Acute Hospitals	All policies, including those on special leave, travel, lease cars, family-friendly working and other general terms and conditions (eg, attendance, performance, on-call and standby payments) are currently being reviewed.
Belfast City Council	Harmonising terms and conditions and conducting a job-evaluated pay and grading review as a result of moves towards single-status.
Business Health Group	The organisation is currently expanding and aims to change its approach to reward. Over time, it plans to increase the range of benefits on offer.
Cadbury Schweppes (head office)	A shift in emphasis towards total reward. The company will try to harmonise remuneration and benefits with its other UK businesses. The firm wishes to ensure it remains competitive and administratively efficient. There is already an element of flexibility with regard to, for example, annual leave, cash for cars and private health insurance.
CCL Industries (Scunthorpe)	Improve paid maternity leave and introduce paid paternity provision to bring policies in line with other top companies.
Cheltenham & Gloucester	Move from contributory to non-contributory pension scheme in line with that of the Lloyds Group.
Co-operative Insurance Society	Revising long-service awards to recognise additional years' service. Improve family-friendly policies, eg maternity provision. This was agreed as part of annual pay negotiations with the recognised trade union.
Department of Health	Currently reviewing pay and rewards system to take account of civil service modernisation and changing business needs.
Electronic Imaging Solutions Service	Flex certain benefits such as private medical and permanent health insurance. Introduce pension scheme for all staff, as required by law (will not be a stakeholder scheme).
Hampshire County Council	Introduce flexible benefits package in recognition of the fact that individuals' personal circumstances influence their benefit choices.
HLB Kidsons	Introduce flexible benefits policy to attract and retain staff, allowing employees to tailor their packages to their own needs.
Kingston upon Hull City Council	All allowances are to be reviewed due to implementation of single-status agreements - including job evaluation.
Lloyds TSB Bank	Plan to introduce flexible benefits system.
Mace	The introduction of flexible, voluntary benefits is being considered to reflect the work/life balance.
Makro	Cash option for company cars in light of recent tax changes.
Norfolk Constabulary	Currently revising policies covering special leave and time off for public duties. This is part of a continuous process of policy updating.
One 2 One	Reviewing benefit providers. Reviewing communication of voluntary benefits. Establishing a criteria list for new prospective providers. The company is looking to offer the best benefit package available in marketplace, and to make employees aware of the value of their benefits.
P&O Cruises	Looking to introduce flexible benefits package (self-service) to include both financial and non-financial options as a way of improving recruitment, retention and motivation.
Proudfoot Consulting (Europe)	Introduce flexible benefits package.
Prudential	Introduce flexible benefits package to improve recruitment, retention and competitiveness.
Royal London	Increase holidays; extend private medical insurance to all employees; introduce a bonus scheme; introduce "trust time"; and increase sick pay. Changes in response to removal of flexi-time and reduction of overtime rates.
Scala International (Woodford Green)	Moving from company cars to a car allowance scheme as the former needs a great deal of administration. Additionally, insurance costs are rising and the company would like more flexibility, as the minimum contract hire period is three years.
Scottish Equitable	Stakeholder pensions to be available from April 2001.
Smart 421	Introduce a range of flexible insurance benefits that cover critical illness etc. Improve family-friendly provision.
Superscape UK (Hook)	Flexible benefits currently being investigated.
The Leeds Teaching Hospitals	Group personal accident insurance (GPAI) to be offered to all staff. The nature of the service the organisation provides highlights the potential risk to staff, and these contingencies are covered by separate arrangements. But after a review, it was felt appropriate to offer GPAI at lower-than-market rates to employees.
Twyford Bathrooms	Establish new pension scheme following divestment from parent company.
Wales & West Housing Association	Reviewing adoptive/parental leave, mileage allowances and long service awards as part of annual review and as a result of management/employee feedback.

FLEX THOSE BENEFITS?

Flexible benefits arrangements recognise that no two people are alike; each one will have different preferences and these will change over time as personal circumstances alter. Some flexible benefits schemes enable individuals to maximise their cash, which may be particularly popular with younger members of staff, while others may value the system's opportunity for them to enhance their pension contributions or to help towards the cost of childcare.

We have already mentioned some of the advantages of operating a flexible benefits programme (see figure 6.4 for a summary of the pros and cons of flexible benefits). The March 2001 Towers Perrin biennial benefits survey reported the following perceived advantages of flexible arrangements by employers:

employees are able to match benefits to their own diverse needs (93% of respondents);

help recruitment and retention (85%);

improve employees' awareness and understanding of benefits (83%);

improve employees' understanding of total compensation (82%);

reinforce cultural change (75%);

improve employee motivation (72%); and

address the needs of dual income families (70%).⁷

Figure 6.4: Pros and cons of flexible benefits programmes

	Pros		Cons
	can help to control cost of benefits provision		administration and management complex and time-consuming
	more cost-efficient way of providing benefits		high start-up costs
	can aid recruitment and retention		may require third-party support/facilitation
	can improve visibility of benefits' value to employees		require extensive and regular communication with staff
	employees can benefit from savings of bulk purchases		disadvantageous tax consequences for employees
	benefits match individual need		staff may require specialist advice to avoid making wrong selections

Aside from the advantages, recent increases in the use of flexible benefits programmes can be attributed to several other factors. Above all, new technology has made administering them - previously one of the biggest drawbacks - far easier and cheaper. Oracle UK's "Select" system is administered online, for example, making it much more cost-effective.¹⁰ The company's compensation and benefits manager, Chris Wilson, explains: "The biggest barrier to flex is scheme administration - so you need a good system. At Oracle the emphasis is on online form completion. The paper-free system allows external benefit suppliers to undertake much of the scheme administration with information passed straight from the individual to the supplier, thereby avoiding a heavy administrative burden for the company."

The advantages for Oracle of the online provision are several:

it allows for easy updating of personal price and benefit information;

it directly feeds data into the company payroll system;

it provides updated information direct to suppliers; and

it supplies management and cost information and ad hoc reports.

For employees, the computer-based system also has a number of benefits:

easy access via the intranet;

online form completion;

links to benefit and supplier information;

details of tax and National Insurance liability; and

a financial planning tool for making decisions now and in the future.

Also, the rise of flexible benefits systems can be linked to the development of a much more consumer-oriented society, in which people are comfortable making their own decisions on what is best for themselves and their families, and expect a wider choice of services as well as the items that they require. In addition, a whole generation has entered the workforce that expects to be able to make a personal choice over aspects of their lives, whether at work or outside.

Flex in practice

Trends in reward management explained that total flexibility of benefits is rare. Many companies offer only limited flexibility within the overall benefits package. Towers Perrin has classified the following four broad categories to define the type of benefit flexibility on offer:

1.Standard, fixed package of benefits with flexibility limited to the specification of individual benefits, such as the level of employee pension contribution. There is no scope for additional voluntary benefits.

2.Standard, fixed package of benefits with flexibility limited to the specification of individual benefits (as above), but with additional benefits, such as health club subscription, that have the advantage of being bulk purchased by the employer available through the scheme.

3.Package offering basic level of benefit that can be altered only slightly. For example, individuals may be able to buy or sell certain benefits, such as holiday, while retaining the core benefits provision. Additional benefits may also be available (as in 2).

4.Fully flexible package within statutory limitations, so individuals can tailor their own arrangement.⁷

The consultants found that definition 1 was the most popular in the UK, with 63% of employers surveyed offering a standard package with choice limited to the specification of certain benefits; 22% have a system that resembles definition 2; 10% definition 3; and 3% definition 4.

The companies with flexible benefits programmes already featured - Cable & Wireless, First Direct, Oracle UK and Zurich Financial Services Group - all differ in the level of flexibility they offer employees. For example, First Direct's "Plus" scheme offers eligible individuals flexibility over the following: Lifecare cash benefit plan; critical illness cover; private medical insurance; emergency insurance cover such as car breakdown service; travel insurance; cinema tickets; health club membership; nursery hours; bus and rail travel passes; and retail vouchers. Some core benefits, such as deferred items like pension, sick pay and car allowances, and others that are not strictly remuneration, such as holidays, are not flexed under the scheme (see case study 2, Case studies).

Oracle UK's benefits arrangements also provides staff with a set of core benefits - holiday, life assurance, long-term disability insurance, pension employee counselling and helpline, and personal accident insurance - and a choice of flexible benefits. The flex element of the package includes: additional pension contributions, cash (any "points" not used to purchase benefits can be converted into money), company car, childcare vouchers, critical illness cover, dental insurance, health screening, life assurance for partners, and private medical insurance.¹⁰ According to Chris Wilson, Oracle UK's compensation and benefits manager, the core benefits were chosen "as those that a responsible best-practice employer should provide as a minimum for professional people and their families".

Choosing what to include and what to leave out of the Flex system at Cable & Wireless was a key concern. Human resources manager Russ Watling explained to IRS in 1998 that: "We wanted to make it meaningful so we had to incorporate the most expensive benefits, such as pensions, healthcare and annual leave. There were some that we had to exclude. For example, staff already had access to a company-funded employee assistance programme which was entirely confidential and so not suitable for inclusion."¹²

Zurich Financial Services Group makes seven benefits available for flexibility: holiday entitlement, childcare vouchers, pension accrual rate, BUPA health insurance, health-screen, dental insurance and car parking.¹¹ Menu items at the financial services company are chosen on the basis of suitability for flex. Company cars, for example, are covered by a separate procedure as they are not replaced every year.

Costing benefits

Flexible benefit items tend to be costed in similar ways at each company. Each of the seven benefits eligible for flexibility at Zurich Financial Services Group, for example, is given a cash value - based on the actual cost to the company as charged by the supplier, the nominal salary cost of taking extra leave, or in the case of pensions, the rates calculated by independent actuaries.¹¹

At Cable & Wireless, the programme is designed to be cost-neutral. There are no prices attached to the flex items to "incentivise" certain choices and discourage others - benefits such as life cover and healthcare are priced according to independent actuarial assessment of risk, while others, such as annual leave, are charged according to a simple calculation based on annual salary.

How flex works

Under the Select scheme at Oracle UK, every permanent member of staff is allocated a number of benefit points, which they can exchange for a range of flexible benefits. Hence, individuals can mix and match their provision to come up with the package that best suits their needs. The benefit points are calculated on an individual basis, taking into account the existing value of their contractual arrangements. Irrespective of the benefits staff choose, the points they use or the contribution they make, their base notional salary remains unchanged for pension contributions, salary reviews or other purposes. If employees do not allocate all their benefit points, these can be converted into cash to top up basic salary. All staff who participate in Select also have the opportunity to review their benefits package annually and change most of their benefits every year, although there are some, such as a company car, where staff must keep their selections for longer. (First Direct's system operates is a similar way, see case study 2, Case studies)

At Zurich Financial Services employees are given "funding" which reflects the financial value of the benefits they would have been eligible for without flex, and can "buy" the desired benefits either through this entitlement, by giving up a proportion of their salary or by trading in other benefits. Individual choices are fixed for one year; at the start of the flex year, they receive a "flexible benefits confirmation statement", which then forms part of their employment contract. A record is also kept of "shadow pay" - basic salary levels before any alterations caused by flex - which is used to calculate pension, bonus, sick pay and overtime. Under certain circumstances, choices may be amended during the flex year. These include "lifestyle changes", such as the birth or adoption of children, marriage, divorce, death of partner/dependant, and other discretionary events.

Admin

It was noted earlier that technological progress in administering flexible benefits programmes has made them more attractive to employers. Outsourcing administration of the scheme can also prevent it consuming too much time internally. The day-to-day administration of First Direct's scheme is contracted out to William M Mercer, which undertakes various activities:

liaison with payroll for taxation purposes;

leavers and joiners administration;

operation of a helpline for staff; and

invoice processing.

According to Mandy Dixon, First Direct's reward and benefits manager, this has several benefits: "The arrangement with William M Mercer works very well as the reward and benefits team is not distracted and pressurised by the considerable administration associated with the scheme: this means we can maintain a strategic overview and develop the scheme."

Zurich Financial Services Group has taken a different approach as the company's reward strategy manager, Alan Measures, explains: "We like to do things ourselves - we are not interested in third-party administration. This minimises cost and means that we can control what's going on now and have complete control over future development."¹¹ Day-to-day management of the scheme has thus been in-house from the start, with the IT function committing itself to building connections to the payroll system to enable flex to run as efficiently as possible. On the whole, the administrative burden lay primarily with the scheme start-up, but once up and running it has operated smoothly. Management time and resources have been invested in communicating how specific benefits work in practice. Also, the perceived burden of calculating changes in employees' tax liabilities has not arisen. This is now done by completing a P11D form at year-end, rather than through the PAYE system.

At Oracle UK, which has also adopted a go-it-alone approach, the introduction and management of the scheme did present problems, says compensation and benefits manager Chris Wilson.¹⁰ "The fact that the scheme has no third-party administrator puts a great deal of responsibility on the company to ensure that management of the system runs smoothly," he notes. But this has been largely overcome by the company's use of new technology and the ability of its online system to feed employees' benefit choices directly to the relevant suppliers.

Respondents to the March 2001 Towers Perrin biennial benefits survey, those which have implemented flexible benefits programmes have tended to build administration of the scheme on to existing systems. This is the case in 45% of surveyed companies; almost a third (32%) use a third-party administrator; and a small proportion (14%) have established new internal systems.⁷

Problems and issues

Communication is considered vital to the success of a flexible benefits programme. Developing coherent, comprehensive and accessible communication ensures that employees understand the details of the scheme and new developments. First Direct held roadshows at all three of its sites when its Plus scheme was introduced. If new products are introduced, the providers visit the three facilities to explain the details of the benefit. Also, team leaders cascade information to employees through HR briefing notes and the bank's newsletter. "We feel that it is important not only that everyone understands how the scheme works but also understands the value of the scheme," says Dixon.

At Zurich Financial Services Group staff are given a detailed manual on flex during enrolment, and a helpline provides a "call centre-type service" to enable employees to make "reasoned, informed" choices. Feedback on the scheme is provided as part of the annual employee attitude survey and through employee forums (consultative bodies).¹¹

Aside from the potential administrative burden of operating and managing a flexible benefits system (and these will increase the more complex the system is), there are several important issues and possible drawbacks of such arrangements. For example, giving people a choice inevitably means that some will make the wrong choices, so specialist advice should always be made available to prevent problems arising, especially as these could have significant long-term financial implications.

One of the main problems for employees is that flexible benefits can have disadvantageous tax consequences. Currently, employees earning more than £8,500 a year are liable to tax on the value of the benefits they receive and this is added to the individual's salary to determine the total taxable value of the remuneration package. Many benefits, such as private medical insurance, have a taxable value, which is based on the cost to the employing company of obtaining it for staff. This means that the taxable value to employees of benefits is the premium paid by the firm on their behalf. For example, say the cost of providing dental insurance is £200 a year, someone opting to take this form of benefit as part of their flexible package would see their taxable income rise by the same amount. Some benefits, notably pensions and holidays, are not subject to tax so reducing these elements to release more cash will lead to a higher tax burden. Also, as taxation is based on historic data, an individual opting to increase benefits one year could find they have not paid enough tax through the PAYE system, leading to higher tax the following year.

The pros and cons of flexible benefits arrangements are summarised in figure 6.4.

Figure 6.2: What the surveys say

Salary and related surveys can provide rich pickings for those seeking information on the current state of play with regard to benefit policy and practice. Below, we highlight the most important findings from some of the latest offerings.

Strategic issues

Consultants Towers Perrin's fifth biennial survey tracking the evolution of benefits provision in the UK (March 2001) argues that, increasingly, companies are elevating human capital from a "cost" to an "asset", and are looking to optimise its value by "attracting, retaining and engaging the talent that can design and deliver a winning value proposition in an ever-shifting business landscape".¹⁷

Against this background, employee benefits "have never been more important", Towers Perrin maintains, with many organisations taking a much broader approach to this key issue. Packages are now being considered in the context of total reward, rather than in isolation, it says. Thus provision continues to evolve, with a definite trend towards offering employees a wider choice, both in the range of benefits and the way they are delivered.

Flexibility is key, the survey finds, with many companies believing this helps them in several ways:

build a culture based on responsibility;

recruit and retain staff;

increase employees' awareness and understanding of benefits;

communicate benefits as part of the total reward package;

manage and control benefit costs; and, crucially,

improve business performance.

Hewitt Associates surveyed 307 employers on their attitudes to benefits provision (2000/01).¹⁸ It also found that the popularity of flexible benefits packages is increasing, and the management consultancy estimates that there are now around 200 such plans operating in the UK. A total of 81 survey respondents indicated that they had either implemented a flexible benefits policy, were working on a plan, or were interested in the idea. The percentage of employers with no interest in flexing arrangements had fallen from just short of 30% when the survey was last conducted in 2000 to 23% this time round.

Previous surveys undertaken by Hewitt had found that "catering for the diverse needs of employees" was the main driver for companies flexing their arrangements. Now, the most important reason for moving to benefits flexibility is its perceived value as a recruitment and retention tool.

On the negative side, many employees are frustrated with the administrative burden accompanying flex. However, this is seen as a declining problem as there is now more help available, notably in the form of sophisticated software packages.

Looking to the future, Hewitt Associates says that 51% of those polled plan to expand the range of benefits that can be flexed within the next three years. Organisations are also planning to extend benefits flexibility to a wider population (13%) and improve delivery through web-based enrolment tools (10%).

¹"Pay prospects for 2001 - a survey of the private sector", Pay and Benefits Bulletin 507, November 2000.

²Employee benefits awareness and counselling, Hogg Robinson Financial Services and Prudential (1999).

³Hay survey of employee benefits 2000, Hay Management Consultants.

⁴"Better deal for British workers by 2005", Hay Management Consultants, http://www.haypaynet.com/paytalk/Articles/BetterDeal.htm

⁵"Flexible benefits", Managing best practice 75, Industrial Society (2000).

⁶Employer attitudes to flexible benefits 2001/01, Hewitt Associates.

⁷The benefits package of the future, Towers Perrin, March 2001.

⁸Reported in Pay and Benefits Bulletin 512, January 2001.

⁹"Managing benefits: an IRS survey", Pay and Benefits Bulletin 476, July 1999.

¹⁰"Oracle's software selection", Pay and Benefits Bulletin 500, July 2000.

¹¹"The joy of flex", Pay and Benefits Bulletin 502, August 2000.

¹²"Flexible benefits evolve at Cable & Wireless", Pay and Benefits Bulletin 450, June 1998.

¹³William M Mercer 1999.

¹⁴Benefits effectiveness index, Towers Perrin, November 1999.

¹⁵Pay and Benefits Bulletin.

¹⁶"Benefits and allowances: 2", Pay and Benefits Bulletin 472, May 1999.

¹⁷The benefits package of the future, available from Katie Lapore at Towers Perrin, tel: 020 8895 3272, free.

¹⁸Employer attitudes to flexible benefits 2000/01, available from Hewitt Associates, tel: 01727 888200, price £75.