Mattioli Woods plc

David Thurlow, Atkinson Bolton Consulting Ltd

Introduction
This guide is designed to give an overview of Flexible Benefits and the practical issues facing companies thinking about taking the plunge.It is also designed to help employers understand some of the solutions that exist and give an insight into how these can improve their benefit structure.

This guide considers the issues from the stance of smaller and medium sized employers.

The background
Before going any further, it is probably useful to define a flexible benefit package. The term is widely used and often misused to describe all sorts of arrangements. If you think about it, most employees will have some flexibility with their current package - they can make additional pension contributions, take unpaid leave or purchase certain discounted products through their employer.

So our definition of a Flexible Benefit plan (or Flex) is much stricter. We mean a formal arrangement where employees are given an allowance to spend on their benefits by their employer from a pre-defined menu of options.

Employees will normally be able to spend more than their allowance and these 'overspends' are deducted from their salaries.

It is useful to set out a few key points that will help put some of the information in this guide in context. Employee benefits are notoriously poorly communicated and suffer from administration problems. Several years ago a survey showed that whilst employee benefits could be worth up to 20% of their total pay packages it found that only about 25% of employees valued the benefits provided.

There is also much more recent evidence to support the view that employees are increasingly valuing choice in their benefit packages and that flexible benefit plans are becoming increasingly popular amongst employers of all sizes.

So, if Flex is such a good idea, then why doesn't every organisation offer it? Before every employer races to set up a Flexible Benefit plan, it is sensible to consider the pros and cons.


The advantages of Flexible Benefits
From an employer perspective, the advantages can be split in to two broad categories, the hard business advantages and the 'softer' human factors.

The business can gain from a Flexible Benefit plan in two key areas. Firstly, there are National Insurance savings to be made on certain benefits by the way that additional employee payments are collected. For example, if the employer makes the payment for childcare vouchers for an employee, the funding is not subject to employer's National Insurance (NI).

So, if a company provides a childcare voucher option of 200 per month for each employee and 20 take it up, the NI saving over one year to the employer amounts to 6,144. Employees save NI too.

Secondly, the business can accurately control their future benefit spend because the payment is made through a monetary allowance as opposed to funding the benefits directly. Anyone paying for a final salary pension scheme or private medical insurance will be fully aware of the lack of control these benefits offer in terms of cost.

For example, consider a private medical plan costing 600 for each employee a year and experiencing inflation at 10% per annum. The additional cost over 3 years for a company employing 80 people is about 30,000 and there is no control - the only option is to keep paying the increases or remove the benefit.

Another key area to consider is the positive impact a more employee focussed benefit structure will have on recruitment and retention rates. Organisations face the challenge of attracting, recruiting and retaining good people.

Expectations have changed and the employer/employee model continues to move to one of partnership for mutual benefit. Flexible Benefits is viewed as something offered by forward thinking employers and is useful as an aid to recruitment.

Once employees are on board, the Flexible Benefit plan engages employees who are involved in shaping their own package and, using one of the new employee management systems, information can be accessed at any time, keeping the value of their package at the forefront of their minds.

Improved employee communication is a key benefit offered by Flex. It offers a good news story that can be continually promoted and the nature of the plan structure allows new benefit initiatives to be adopted on a regular basis. Using an online solution, printing costs and other expenses can be significantly reduced.

There are several 'softer' issues supporting Flexible Benefits. There is no doubt that most employees appreciate choice, although in some cases too much change from a really good fixed benefit plan can cause employees to become worried - Flexible Benefits work well with certain profiles of employees but they are not for everyone.

From an employee point of view, the ability to shape a benefits package that is most relevant to their own circumstances is likely to improve appreciation of the benefits they can access. It also enables them to access a broader range of benefits as a flexible benefit plan can offer a much wider range of benefits and a fixed spending allowance will control the cost to the employer.


The key benefits are listed below.
Tax and National Insurance efficiency
Cost control
Employee choice
Helping with recruitment
Improved retention
Improving motivation
Being seen as a modern and forward thinking employer

These positive factors are often used to consider the financial benefits of implementing flex. An estimate of these over a period of time set against the costs of implementing the plan will provide the basis of a business case for the project.

Potential problem areas
It is important to consider the wider implications of using flex for your benefit structure. Whilst employee choice sounds attractive, you will need to revisit your employee documentation to make sure the new plan is reflected in your terms and conditions of employment.

Also, be careful about the effect on State Benefits. An employee electing to spend all of their flex allowance and a large part of their salary on benefits might well drop below important earnings thresholds for a range of statutory entitlements. This can normally be dealt with by limiting the amount of salary that an employee can give up in exchange for benefits and a signed disclaimer from the employee confirming they are aware of the implications of their choices.

On the subject of statutory benefits, there are some more subtle risks that Flexible Benefits can expose. The main issue surrounds maternity benefits - this is not the place to consider the issue in detail but it can be a risk to an employer who allows a member of staff to exchange their allowance and salary for benefits and then departs on maternity leave.

The rules require all benefits to be maintained in full, with only salary being reduced. This means that the employer might be left with high benefit costs to pay each month.

However, it is worth noting that some earning related and means tested State benefits can be enhanced by salary adjustment. Again, this is a complex area that needs to be considered separately.

Another area where caution is required is where benefits are being replaced by the new plan. For example, closing a medical plan might have a detrimental impact on those employees that are mid-claim. Also, it is likely that there will be fewer providers willing to offer their products under a flexible plan and some insurances are likely to cost more.

An experienced benefit broker such as Atkinson Bolton Consulting Ltd, with flexible benefit experience, is important at this stage as more and more providers are now viewing Flexible Benefits as an area for them to become involved in.

The impact on employer and employee tax should also be looked at. Benefits in the UK provided by employers will normally be subject to employer's National Insurance and create an income tax liability for employees.

Not all benefits are treated the same in terms of tax or NI. Some are exempt from employer National Insurance (for example childcare vouchers) and some are exempt from both National Insurance and income tax (for example pension payments).

The key issue with Flexible Benefits is to consider the financial impact on the employer based on assumptions about which benefit might be chosen and secondly, make sure the benefits payments can be accurately tracked and reported at the year-end.

As you can see, the main complexities and risks revolve around the issue of employees sacrificing salary for benefits. These risks can be removed with a good administration platform in place and clear rules and guidance. In our view, this is best done by using a benefit management system rather than trying to do it manually.


Examples of benefits and their tax treatment (assuming payment is made by the employer and any employee 'cost' is obtained through salary adjustment (also called salary sacrifice)

Type Employer National Insurance Employee National Insurance Employer tax liability Employee tax liability*
Pension No No No No
Life cover No No No No
Critical Illness Yes No No Yes
Private Medical cover Yes No No Yes
Childcare vouchers No No No Yes
Computers for employees No No No No
* Normally described as benefits in kind.

Flexible Benefit Design
Each organisation needs to be clear about what is trying to be achieved by introducing Flexible Benefits. Whilst some companies might have specific issues that Flexible Benefits can resolve, for those looking for a modern benefit offering to deliver a more choice to staff, it is often sensible to keep some elements of the existing benefit offering and enhance it with flexibility. This is easier to communicate and less likely to confuse.

Most current research shows that private medical cover is the most popular benefit offered by flex plans, with a range of other insurances following (critical illness cover, dental treatment plans, etc.). Pensions are often left to one side but this need not be the case with modern defined contribution pension schemes, which are ideally suited to flexible benefit arrangements. Flexible Benefits for final salary type pension plans represent more of a challenge.

It is also popular to introduce the option of trading holidays, allowing employees to sell days back for additional cash or flex allowance or to purchase extra days using the flex allowance. There are some obvious risks with allowing this that relate to staffing levels but a sensible limit and management approach can make this work really well.

Nobody knows your staff better than you do. Getting the balance right is the key - too much change may not suit your employees, especially if there is a general level of satisfaction with the existing benefit environment. Perhaps two or three new choices might be a good first step. The ability to buy heavily discounted life and critical illness cover is likely to be attractive where employees have families and have been buying individual policies.

A younger group of employees may accept more of a radical change. Consider the release of some of the pension funding, repackaged as a flex allowance. Give them options to buy computers (exempt for tax and National Insurance under current legislation), subsidise car purchase and private medical cover.

Consider asking your employees about what they want as part of the feasibility work - it shows you value their input and it is a great way of starting to let employees know you are considering a change in benefits.

Whilst Flexible Benefits plans differ from company to company, there are some similarities and a typical might look like this:

Flex allowance of 10% of salary, used to provide the following:
Stakeholder pension - core benefit of 3% of salary
Life assurance - fixed at 2 x salary plus options to flex up to multiples of 3 or 4 times
Long-term disability cover - core of 50% of salary plus options to flex up to 65% or 75%
Critical Illness cover - units of 10,000
Spouse/Partner Critical Illness - units of 10,000
Private medical cover - 3 levels of cover
Dental plan
Childcare vouchers

Depending on your requirements, there is no reason not to include other benefits like cars, health screening, etc. In fact, there is merit in trying to think of non-standard benefits that might help to make more of a connection with your staff and customize your plan to suit your organisation.

See also

About Atkinson Bolton Consulting Limited
Atkinson Bolton Consulting Limited provides employee benefit services to businesses throughout Cambridge, the Science Parks and East Anglia specialising in the design and administration of Reward and Benefit Schemes and flexible employee benefit arrangements.

Employers seeking to implement leading edge employee benefit packages or gain greater value from their existing benefit spend can deliver highly automated benefit solutions to their employees utilising the latest technology solutions. As independent advisers, we have strong relationships with a number of product providers, enabling our clients to gain access to exclusive rates and terms.

Atkinson Bolton Consulting Limited also provides bespoke wealth management and financial planning services for individuals, specialising in the complex needs of company directors and senior executives.

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For many years it has been my belief that when investing, no single asset class, and certainly no single geographical area (equities), is best from one year to another, let alone from one economic period to another.Indeed, the figures bear this out in quite a startling way. The difference between 10,000 invested on 1st January 1997 until 31st December 2004 in the worst performing asset class/geographical area each year compared to the best is over 65,000! Unfortunately, as neither I (nor I suspect you) have a crystal ball, it is difficult to always achieve the very best returns from one year to the next.

However, by using ABC Model PortfoliosT which use five major asset classes (cash, commercial property, corporate bonds, overseas equities and UK equities) I believe that it is possible to mitigate the risk of being in the wrong place at the wrong time.

I also recommend that all investors should rebalance their portfolios to the latest recommended percentages once a year. One of the benefits of this rebalancing is to take advantage of excess growth when it is spotted (in other words take profits out of such areas) but also invest more into areas that have suffered a loss, at the same time. The figures for doing this over a period of time also bear careful scrutiny.

I do not put the ABC Model PortfoliosT together on a whim. I carefully consider the correlation between different asset classes and between different aspects of those asset classes (for example, within corporate bonds there are many different risks within collective investments, some of which are investing in almost Government grade debt (lower risk) whilst others are investing in very high risk debt.)

One must not forget, diversification only reduces risk if all of the funds react differently - if they all go up and down at the same time, no reduction in risk!

It is also vital to take into account the investor's individual circumstances. For example, whilst most of us have a residential property in the form of our homes, some investors have significant amounts of commercial property. In this situation, one would not incorporate further commercial property investments into their Portfolio. Equally, many investors have only UK equity exposure, with the exception of a small amount of cash. This is just as risky and I strongly recommend that, unless the individual is prepared to accept such a high risk, changes are made to portfolios towards the Model. There may, of course, be periods in life when am investor does not have an ideal balance within their portfolio of investments, perhaps because they are buying a commercial property for their company to work from or because, when they are first saving, they are likely to have more of their funds in cash. The old saying holds true - 'Don't keep all your eggs in one basket!'

Simon Gibson is a Director of Atkinson Bolton Consulting Ltd, specialising in Individual Wealth Management.
0845 458 1223

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generally succeed where the communication of the new plan is effective and the technical delivery of the new benefit structure runs smoothly.Without getting both right, the value of the new arrangement will be unfulfilled. Of the two, communication with staff is often not given the right amount of attention and is the most likely cause for the plan being less than successful.

A simple communication plan with staff consultation, background notes and access to good information is the way to keep employees involved and engaged and to avoid some of the more negative views that might creep in.

It is important to use a plan to make sure the key elements happen at the right time. Each stage should deliver an output that will allow you to move to the next stage. A typical project plan might cover the following areas:

Stage 1 - Feasibility
This is really important and should be used to achieve a number of objectives, including acceptance of the potential costs and resource issues. It is also the time to make sure any assumptions are checked and problems resolved. This stage should include an assessment of benefits and consider employee attitudes and perceptions.

If you are considering using an IT system to run the plan, you should assess your IT environment, including PC availability, software availability (e.g. browsers, electronic document readers) intranet use and Internet access. Equally important is to look at the source of employee data and make sure the impact on payroll processing is clearly thought through and documented.
Timescales are fundamentally important and these need to be addressed.

Finally, administration issues need to be addressed. You will need to consider how benefits are currently administered and what will change when the new plan is introduced. For example, you will need to look at your current processes for handling new entrants, leavers and other events that effect benefits (maternity leave, promotion, etc.) and investigate how you currently interface with benefits providers and advisers.

Outcome of stage 1
For the feasibility stage, the outcome should be a documented summary of the key changes that your organisation intends to implement that can be discussed and debated internally by the decision makers. It is also sensible to give employees some idea of the key changes being considered.

Stage 2 - Planning and Specification
The specification will formally set out the details of the new arrangement, including the benefit offering and the implementation plan.

The specification should include a section with details of a structured programme of communication from 'sign off' until launch date aimed at raising interest and awareness. This might include flyers to employees, group presentations and individual employee meetings. The importance of getting this part right must not be underestimated. A communication plan might include a telephone help line service, internal help desk or launch workshop to include product providers and systems demonstrations.
It is also important to include training for internal staff or existing third-party administrators so that all parties are fully conversant with the new plan.

Outcome of stage 2
A full project plan specifying the details of the benefit changes, the timescales and process changes. A communications plan should also be included.

Stage 3 - Implementation
Once the specification has been approved, the next stage is implementation. This should be carried out in accordance with the specification document. In our view, there are two key factors in a successful implementation.

• People - the team at the organisation need to be committed to the new plan or it will not work.
• Time - things cannot be rushed. The specification will have a note of key dates but it is easy to let things slip and be too rushed at the end.

Outcome of stage 3
The end of the implementation stage should result in employees enrolling for their new benefits and these benefits going live once the enrolment period has finished. Following that, the employee data will need to be checked and delivered to payroll and benefit providers, according to the specification document. There are bound to be employee queries and manual adjustments that need to take place, so make sure time is set aside after the 'going live' date.

Stage 4 - Administration, Support and Maintenance
Once installed and operational, a benefits system will produce much of the basic information required in order to run the plan. Whatever others might say, technology rarely represents a panacea for the range of problems that a complex communication and administration process presents.

The reality is that processes are human and technology offers tools that allow part or all of these processes to be automated. Successful technology needs to be incorporated into processes to succeed.

You can choose to administer the plan in house or outsource to a third party, such as Atkinson Bolton Consulting Ltd. The cost of outsourcing is easy to identify and this can then be compared to the cost of using internal resources.

An IT solution will come with technical support and it is now common to find systems that are offered across the Internet. These newer solutions offer few technical installation issues (as they use an internet browser) and good access for employees and administrators.

As well as the monthly administration, the plan should be monitored and reviewed using employee feedback and details of the benefit take up rates. It may be that a benefit does not prove popular and might be removed at the end of a year and replaced by another.

An example of administration tasks include:

• Submission of monthly membership data between your plan and the benefit providers
• Submission of monthly data to your payroll provider.
• Submission of year-end summary data for 'benefit-in-kind' calculation purposes.
• Processing of new entrants and leavers
• Processing of lifestyle events - employees who change their benefit selection on marriage, birth of a child, etc.
• Processing of claims (retirement, illness, incapacity, death)
• Processing of employee detail changes (address, names)

Summary

Flexible Benefits plans look like continuing to increase in popularity as employers strive to deliver better benefit structures. Technology solutions now exist to deliver this style of plan to organisations of all sizes and it makes sense that a benefit package that engages employees and provides sound business benefits is likely to become a defining feature of companies that are willing to adopt modern practices.

However, it is also important to say that the benefit package is not likely to be the only reason behind the wellbeing of a workforce.

A recent survey showed that the four main reasons why employees were attracted to new employers were because they were offered more salary, a more interesting job, career advancement and being closer to home. Benefits came next. Getting a balance of all of these areas will be the key to a more successful and productive employees.

David Thurlow, September 2003