A Guide to Flexible Benefits

19 September 2014

A guide to Flexible Benefits and where a Pensions can sit within

What is Flexible Benefits?

Flexible Benefits refers to any employee benefit design which enables the employee to have some choice in the type or coverage of benefits they receive in the workplace. In practice this covers a wide spectrum of employee benefit design. Total reward strategies offer the most extensive flexibility, whereby the employee has a reward “pot” and has complete freedom in how they use it, choosing from a wide variety of benefits with any balance taken as remuneration. Traditional Flexible Benefit designs feature a core range of benefits and allow the employee to flex cover levels up or down to tailor the package to their own circumstances. Popular benefits include pension, life assurance, health cover and holiday entitlement and there are often maximum and minimum levels that an employee must choose within. Voluntary Benefits are integral to Flexible Benefits, these are products and services which are not funded by the employer but can be purchased by the employee through payroll, often on a tax-efficient basis through salary sacrifice. Examples include childcare vouchers and cycle to work schemes. 

Why provide Flexible Benefits?

Flexible Benefits strategies can meet many different corporate objectives. The most obvious is to provide a relevant and compelling reward package across different demographics of a workforce rather than a traditional “one size fits all” approach. It is also an opportunity for the employer to emphasise the monetary value of all of the benefits provided to the employee by providing a Total Reward Statement. 

By converting fixed benefits into a monetary benefit pot, Flexible Benefits can be a convenient way to harmonise different benefit entitlements arising from mergers and acquisitions. For financially oriented objectives, Flexible Benefits are effective at maximising employer (and employee) National Insurance savings through salary sacrifice initiatives and can also manage future exposure to high benefit cost inflation by linking indexation of the reward pot to earnings growth rather than future increases in insurance premiums, particularly relevant in managing Private Medical Insurance inflation. 

Managing Flexible Benefits

Early Flexible Benefit schemes were managed with paper election forms and spreadsheets. However the majority are now managed through technology solutions which enable employees to make benefit choices online and automatically generate relevant reports for payroll and the various benefit providers, as well as providing useful management information for the employer. Technology developments have facilitated multi-channel communication as well as delivered improved flexibility of benefit election, for example, rolling monthly enrolment windows are increasingly replacing a single annual window. Technology has also made it a lot easier to integrate pensions with Flexible Benefits.

Pensions and Flexible Benefits

Pension is often the biggest reward spend after salary. It is tax-efficient for employers and employees and usually one of the most popular benefits with employees. Despite this, pensions have historically been excluded from Flexible Benefits packages, often for practical reasons: incompatibility between flexible benefit and occupational pension scheme rules, particularly DB schemes; co-ordination between employer and trustees; administration conflicts; and concerns about flexibility of pension salary sacrifice rules. 

However, technological and legislative developments mean these issues are surmountable and, for all of the reasons listed above, there is no reason why pension shouldn’t be a central element of any Flexible Benefits strategy. Progressive employers have already taken this step, with some also integrating other saving options such as ISAs, particularly relevant considering the increased flexibility of pensions from April 2015. 

Where pension is included in Flexible Benefits it is imperative that auto-enrolment legislation is reflected in the communication, joining processes and benefit design. As a minimum, eligible jobholders must be automatically joined into the qualifying pension scheme at appropriate contribution levels and any opt-in and opt-out processes must be compliant. Concern as to whether the ability to opt-down to lower contribution rates, or opt-out of pension membership altogether, would be deemed to be inducement have been addressed by the Pensions Regulator, which has reassured that the intention of the legislation is not to restrict flexible benefits packages as long as the sole or main purpose is not to induce individuals to opt-out of a qualifying scheme.

Flexible Benefit strategies are ideal for the modern workplace and pensions can, and should, be right at the heart of them.

For further information, please contact Leeann Ryder on +44 (0) 161 242 5345 or at leeann_o'reilly@jltgroup.com or alternatively contact Lee Thompson on +44 (0) 20 7528 4352 or at lee_thompson@jltgroup.com