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The
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Responsible
adults? With extra holiday, retail vouchers, concierge services, pampering days and even Christmas turkeys on offer, employees enjoying a flexible benefits scheme could be forgiven for choosing these sexy flexi benefits over the more traditional perk of a healthy occupational pension. While fully flexible schemes are still relatively rare in the UK – it is estimated that around 200 organisations offer them – their popularity is set to soar with the advent of new technology allowing smaller firms to offer their employees flexibility at a reasonable cost. A recent survey said around two-thirds of small to medium-sized enterprises were considering flexible benefit schemes. But cheaper technology is not the sole driver. Mark Ashton, who heads the flexible benefits team at Deloitte & Touche, says mergers and acquisitions are also playing their part. M&A activity often increases in times of economic slowdown as companies seek to reduce development costs by linking with strategic partners and faltering firms are snapped up by rivals at bargain prices. The flex angle comes from integrating workforces. “After mergers, companies initially have to deal with the front line business issues of production, sales and marketing. They then come back to the people issues and flexible benefits are a good way of integrating two different workforces,” says Ashton. The rise of defined contribution schemes at the expense of defined benefit schemes is also behind flex’s new prominence. The transition from the financial security provided by DB schemes can often be made smoother for employees by the addition of flexible benefits to a DC pension scheme. Linked to this is the recruitment and retention of key staff. Sue Sneddon, development manager at Scottish Equitable, says: “Employers are recognising that it’s a very competitive market and the days of people coming in and idling the hours away have long gone. “Employers are looking to get the best out of their staff that they possibly can. Involving employees in choosing the benefits that are right for them at their particular stage in life has a very good motivational element attached to it and helps encourage staff loyalty.” With the increase in popularity of flexible schemes comes more choice for employees. The economic slowdown has meant that, while increases in salary are off the table, increased choice and flexibility in benefits has become a useful tool for employers. Richard Morgan at Watson Wyatt recognises this trend. He says: “We are finding that the popular benefits are the ones that save employees money on things they would be buying anyway.” Sainsbury’s vouchers and discounts on Virgin Wines are just two examples he raises. “Traditionally, flexibility meant insurance. Things like dental insurance and critical illness insurance are still very popular but I think it is moving more towards consumer goods,” he continues. So are empowered employees likely to neglect their pensions? Eamonn O’Connor of Gissings says, from his experience, the signs are already there. “If you give employees the choice of having a pension, not having a pension or having a smaller pension contribution and some other benefit in its place, I think there will most definitely be a diminution in pension take-up.” There is reason for optimism despite this. Gissings 2000 Employee Benefits Survey found that while pensions were the second most common employee benefit received, they held the “number one place as the most highly sought after benefit for men and women of all ages, regions, incomes and marital status”. But, adds O’Connor, increased flexibility may not be a bad thing. “Ideally you need to make a scheme as flexible as possible. If your employees are culturally in tune with the message you are giving out – that they are in charge – you should respect that and leave them to it.” NAPF spokesman Andy Fleming feels that the amount of flexibility is up to the employer but that pensions need to be part of any scheme. He explains: “There is a responsibility which falls at least partly on employers to make sure that employees are aware of the importance of saving for retirement. The government has taken it slightly further by proposing annual pension statements which everyone will ultimately get. There’s nothing wrong with companies offering these benefits but our concern in general is that people wouldn’t be saving enough.” Ultimately, flexibility offers employers the chance to manage the diversity of their staff. Lying somewhere between empowered employees and paternalistic employers, is the possibility of offering a core package of a pension, life assurance and, perhaps, critical illness cover, coupled with flexibility in benefits over and above that. Effective communication is another buzz phrase that crops up time and again. Pension provision doesn’t need to suffer if the benefits of saving for retirement are properly explained to employees. Ashton at Deloitte & Touche says: “Flexibility could lead to employees trading their pensions for benefits but conversely flexible benefits also allows them to put more into their pension. You must have better communication about what is required to fund an adequate retirement. “Flex gives an opportunity to do that because when you implement a flex plan it means everyone is focused on remuneration package and benefits. It means you’re forcing people to make choices and if you educate people and communicate effectively what they have to do to fund a retirement, they stand a very high chance of receiving the right information at the right time.” Richard Morgan also believes communication to be key. In his opinion: “At the start of most flex projects what tends to happen is you start some sort of dialogue with employees to see what they think about the current benefit package. You almost always find that employees don’t understand what they have got and sometimes don’t even realise they have certain benefits. They know they have a pension scheme but don’t know an awful lot about it. “With flex, you really have to communicate well and educate employees to a higher degree than before. One of the reasons for this is that employers are a little worried that employees could make bad decisions, so they go the extra mile to give them the extra information they need to make good ones.” This communication has been facilitated by technological progress. Off-the-shelf intranet front ends to admin systems means that the flex scheme is constantly in front of the employee, allowing communication to continue on a regular basis rather than as a one-off push at launch. Scottish Equitable’s Employee Protection Menu, for example, is aimed at SMEs and is web-based. Sue Sneddon says: “There is a need for smaller companies to be able to introduce an element of flexibility for their staff because they face exactly the same business issues as larger companies, such as staff recruitment and retention. Web-based technology helps deal with the day-to-day administration and communication with the members but you still have the benefits of employees being involved in choosing the package that is right for them.” Deloitte & Touche offers an off-the-shelf package for which employers only need Powerpoint skills to create an interactive communication package for flex on a company intranet. On the horizon is virtual flex. Watson Wyatt is currently working on a system that reduces the admin burden considerably and could open flex up to even smaller firms than at present. “You can actually avoid the vast majority of the admin and the systems and the cost of flexible benefit plans and open the door to many more benefits by getting the employee to deal directly with the provider,” says Richard Morgan. One example he gives is critical illness insurance: “Before, you had this big flex admin system costing the employer several hundred thousand pounds. In fact, there’s a much easier way of doing it. There are insurance companies that will create a site for you, so that the employer links directly into the insurance company. It’s maintained and kept up to date by the provider, and employees can apply for benefits online. The provider then sends a report back to the company saying ‘these people have signed up, please send me X pounds out of their pay’. It makes it much simpler for employers to implement.” Morgan calls this “virtual flex”. He
says: “It looks and feels the same as a normal flexible scheme but
you avoid the need for a back end administration system.” With such
systems just around the corner, the future for flex looks assured.
The range of options available to employees is certain to increase
and the move from DB to DC schemes means employees – particularly
younger ones – will start asking whether they really need to put
so much into their pensions when so much else is on offer. Certainly,
technology has been the instigator, but for pensions providers and
advisers worried about the future, it also offers the answer. Go
forth and communicate.
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