Flex should be the final sacrifice

1 June 2010 Corporate Adviser

It may not be quite up there with floating duck islands being legitimate parliamentary expenses, but the idea that flex is too expensive is one of the myths of our time. Zone in to some of the responses to a survey carried out by Mercer in December 2009, and it is clear that for a substantial proportion of employers, flex is too pricey.

That survey, of 1,700 employers, found 60 per cent of organisations that did not have flex said it was on cost grounds. Yet it also showed that that view can be misguided and that it is possible for employers to profit from flex. Of employers that Mercer surveyed that did offer a scheme, 60 per cent said it was costneutral and a further 30 per cent said that flex has cut reward costs – presumably because of National Insurance (NI) contributions savings.

Flexible benefits schemes have been attracting an increasing number of employers over the last decade, according to an October 2009 survey by Hewitt Associates. The poll of 120 UK organisations found that 43 per cent of UK companies run or are rolling out flexing benefits schemes, compared with 17 per cent in 2003. The consultancy estimates 600 flexible benefit schemes exist in Britain.

But while flex has established itself in certain corners of the economy, will this growth continue in 2010? Yes, according to Jonathan Bruce, sales director at benefits consultancy Portus Consulting. “As UK plc moves out of recession, flexible benefits will help employers offer competitive benefits packages, improve their focus on people and control costs,” he says.

The fear, however, is that employers will slash the budget for flex to head off losses caused by the recession. So are the arguments in favour of flex as valid in today’s difficult economic environment as they were when those first schemes were put in place? Advisers have one key prize to dangle: by incorporating salary sacrifice schemes into flex schemes, employers can save on employer NI contributions. “It is all about making sure that flex stays as relevant in a downturn as it is in boom times,” says John Puddephatt, senior consultant at Mercer.

“Where employers can’t increase pay, they can still add new low-cost benefit options. There may also be perks that help both the employer and employee at difficult times such as buying additional leave. It suits employees who want to improve work-life balance.

It also means employer NI savings, because it reduces the employee’s salary.”

Flex can also smooth the path for cost-cutting measures. Paul Brown, senior consultant at Towers Watson, says: “Recent changes have centred around cost-cutting, including reducing income protection terms or introducing private medical insurance excesses. The organisation can scale back funding, but still make the higher-value option available through flex at the employee’s expense.”

It is important to bear in mind, though, that salary sacrifice will become less attractive to high earners after 2011, because of changes to tax relief on pensions for those earning more than £130,000 and there are fears that this threshold could be brought down even lower in the June emergency Budget. The outgoing government had also hinted at clamping down on higher-rate tax relief on childcare vouchers, although the risk here seems to have receded.

But advisers can turn this situation to their advantage. Brown says flex can help organisations promote alternative rewards to senior employees.

“Increases in high earners’ tax burden - the personal allowance removal, the new 50 per cent income tax rate and pension tax relief restrictions -encourage companies to provide alternative rewards. This could mean cash alternatives to pension, tax-free benefits in place of salary or medium and long-term savings. Flexible savings products are now at the forefront of benefit design.”

Technology has transformed the way flex is administered. A key to this is XML, which lets employers and employees interact with the same data, regardless of what system they are using. “Integrated solutions improve clients’ experiences across multiple systems,” says Staffcare chief executive Phil Hollingdale. “Examples include straight-through processing of loading new joiners from the HR system to the flex system, and new employees enrolling in the pension plan using flex system enrolment forms. Single sign-on can also improve the employee experience, by removing the need for employees to remember multiple usernames and passwords.”

“The look and feel of flex platforms is changing to be more in line with transactional sites, such as Amazon, which are well-known and easy to navigate”

Flex systems are also now becoming a more global affair. Driven by the rise of globalisation and international mergers, providers have designed platforms that can operate across national boundaries. Mercer’s John Puddephatt says: “Different taxation regimes mean that flex is only prevalent in a limited number of countries, for example the UK, Ireland and Spain. But benefit management software is in demand on a multi-country basis. Providers are responding with multi-currency and multi-language systems.”

An offshoot of these advancements is that schemes are becoming more flexible. In the past, workers had to pick flex options at the year’s start.
Now technology affords employees more freedom, says Nick Thomson, Ceridian’s director of small and medium-sized enterprises. “An increasing number of schemes allow open enrolments, so employees can flex up and down throughout the year, rather than being caught in an annual renewal structure.”

There’s also been a leap forward in features and usability. Alastair Denton, managing director of flexible benefits provider Motivano says: “The look and feel of flex platforms is changing to be more in line with transactional sites, such as Amazon, which are well-known and easy to navigate. Soon there will be a shift to allow employees to configure their own workspaces, so they can receive daily feeds on flex offers, pensions and shares data.”

On the communication front, the hottest topic is segmentation. This is where providers tailor marketing to grab the attention of different ages and demographics. Puddephatt says: “More employers understand the importance of life-stage segmentation to deliver targeted messages to better aid employees’ understanding of the benefits.”

Another trend is using social media to generate a buzz about schemes. Flex providers offer a plethora of vodcasts, podcasts and e-zines. Alastair Denton at Motivano says: “The boom in social media tools provides a cost-effective channel to communicate flex to the workforce. The use of online video has also been interesting, with some clients providing visual communications and involving the senior management team. For example, CEOs can talk directly into camera about the flex scheme, instead of writing an email.”

“More employers understand the importance of life-stage segmentation to deliver targeted messages to better aid employees’ understanding of the benefits”

Providers have also spotted the potential for harnessing the educational power of online tools.

These allow employees to, for example, calculate benefits’ values or work out potential savings from pensions salary sacrifice. Brown says: New flexible benefits developments focus on financial education. Systems include tools to model different financial investments, including pension options and benefit choices’ effect on net pay. This is important for employees, as the Government increases individuals’ tax burdens.”

Tomorrow’s flex will be mobile says Denton. He argues that providers are gearing up to integrate flex platforms with the mobile phone world. “Mobile phone technology plays an important role at the moment. A flexible benefits application will definitely be introduced within the next few months, allowing employees to make their benefits choices through their smart phones.”

Providers are also racing to create corporate wraps. These portals will cater for employees’ every financial need, allowing them to switch between tax advantageous financial products and plan their financial future. How they interact with existing flex packages remains to be worked out, although the industry may develop a variety of approaches to the issue.

“We see the corporate wrap and flex markets coming together,” says Hollingdale. “Corporate wrap is really an extension of flex, with the addition of banking and investment products. Product providers are interested in corporate wrap to enable them to manage an employee from cradle to grave, keeping their assets, built up over a lifetime, within their suite of products.

“The new solutions the providers are coming to market with will need to integrate with clients’ existing flex schemes. Even if the client doesn’t have flex today, the wrap solution will need to be able to communicate with the company’s existing benefits. If not, employees will have a clunky experience with some benefits covered on the provider’s wrap and some communicated elsewhere, perhaps by paper.”

Wraps are likely to appeal to small employers that want a cheap solution. Brown says: “We are now seeing benefit providers offering employee portals in the hope of securing a combination of insurance and investment products with employers. This is a clever strategy, and could be attractive to smaller companies that are happy to commit to one provider for, let’s say, their stakeholder pension, corporate Isa and general savings account. But I think bigger companies will still want to look for best-in-class solutions, and different providers for each individual benefit.”

Portus’s Bruce says: “There is currently a momentum of noise about corporate wraps, and how they could link to flex in the future. At present, this is focused on software, so it will be interesting to see if it develops into a practical corporate offering with any critical mass.

“It’s also worth mentioning that even if you have the best technology it will not work without the best consultancy, advice and effective communication planning and delivery. As a result, we have seen an increase in companies educating their people to help them exercise their choice of benefits and be motivated to do so, particularly as employers recognise the importance of securing and retaining employees’
engagement within schemes.”

So what lies ahead for the market now the new government is installed? Tobin Murphy Coles, director of flexible benefits at Lorica Consulting ays: “Taxes have simply got to increase and VAT will be the new Government’s target. It will increase, by at least 2 per cent. This won’t affect traditional flex options, but it might affect bikes for work or shopping discounts.

“The real danger is if benefit related tax breaks, such as salary sacrifice, get called off. That would be a massive problem, although it will be a brave government that puts up NI and takes away salary sacrifice. No one has mentioned it, but, frankly, I have not heard anyone ask either. But assuming NI does go up and salary sacrifice isn’t changed, there will be increased enthusiasm about salary sacrifice.”

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