Over the last ten years, the adoption of flexible benefits has rapidly grown to become one of the key ways to reward and engage employees, with 58% of multinational companies now offering flexibility over benefits, and with a further 24% who would like to do so.* 

This guide looks at how flexible benefits work and why employers use them.

The advantage of flexible benefits over a traditional benefits package is simple – it gives employees more choice. In all areas of life when we are involved in the decision-making process, we tend to value the outcome more, and it is no different with benefits.

That said, there are still challenges in making sure the benefits programme is right for employees and the differences between successful and unsuccessful flexible benefits programmes are wider than ever.

So what are flexible benefits?

There is no categorical definition of a ‘flexible benefits’ as opposed to a ‘standard benefits’ package – the types of benefit package sit more on a spectrum, rather than as discreet rungs on the ladder. Ultimately, it is a question of how much choice you want to offer your employees around the types and levels of benefits they can access. That said, there are several components that make some schemes more flexible than others:

  • The presence of a ‘Benefit Allowance’ or ‘Flex Pot’, which is a percentage of salary of fixed value on top of pay and benefits which the employee can put towards the cost of their elections; 
  • The option for employees to sell company-funded benefits, as well as ‘buy’ benefits using their own salary – the most popular of these are selling annual leave entitlement and reducing insurances;
  • Processing all benefit elections via salary sacrifice, tax law permitting, meaning that all benefits become employer paid and the employee agrees to a new lower salary. The advantage of this is that the employee may save tax and National Insurance (NI), while the employer may also save NI. 

Very few flexible benefits schemes are truly flexible, where every benefit is optional. The majority of schemes are built on the foundation of ‘company-paid’ benefits, where the employer provides a minimum level of core benefits, which employees cannot deselect, at least not for a cash alternative.

Ultimately, flexible benefits enable employees to tailor their package to suit their needs and lifestyle. The amount of choice offered should depend on the employee demographic and affordability for the company offering them – there can be such a thing as too much choice!

Why introduce flexible benefits?

There are many reasons why employers seek to introduce flexible benefits. Here is a summary of the most cited advantages of having flex:

1. Increased employee engagement

Many people find engagement difficult to define, but it is always quoted as one of the key concerns for companies and HR professionals and is usually recorded each year through opinion surveys. For us, it is about implementing initiatives that make your employees active promoters of your company.

The results suggest that flexible benefits have a significant impact on engagement. After launching its international flexible benefits scheme, our Client bwin.party achieved high engagement across its locations, including 96% login rate in the UK, and 98% in India, with an average of 1.5 flex selections made per employee.

Like many other factors quoted as having a positive impact on engagement, we would suggest that it is the employee’s involvement in the process that engenders these results. bwin.party, for example, used a range of communication methods to engage employees prior to the launch of their flexible benefits scheme.

2. Direct cost savings

The second most important impact of flexible benefits for many employers is the direct cost saving available through its introduction. There are several areas in which costs can be reduced through the implementation of flexible benefits – National Insurance Contributions (NIC) savings made through salary sacrifice, salary savings through the purchase of additional holiday, and reduced benefit premiums where flexible benefits facilitates harmonisation.

For each company, the business case for flexible benefits is different and dependent on exactly what you are moving to and from. For example, pension salary sacrifice introduced as part of a flexible benefits programme will achieve a far greater direct cost saving than if it is in place as a standalone initiative already.

Savings made through implementing flexible benefits can go towards offsetting the additional costs of resourcing, setting up and administering the scheme. For example, when DAC Beachcroft implemented their flexible benefits programme, they achieved an annual £120,000 in National Insurance savings.

3. Harmonisation of benefits

As mentioned above, flexible benefits are a great tool to support harmonisation of benefits and even wider terms and conditions.

There are varying degrees of harmonisation, from “employee choice” to “formal consultation.” An area of concern for employers may be managing the expectations of employees whose benefits have been reduced. Implementing flexible benefits allows the significant advantage that employers are able to offer the same benefits options to all employees, while allowing them in most cases allow them to return (maybe at their own cost) to the position they were in previously.

The introduction of a flexible benefits programme post-harmonisation gives employers the opportunity to re-engage their employees with their benefits. When Barbon Insurance Group implemented their flexible benefits programme after harmonising benefits across their divisions, they saw pension take-up triple and a 13% increase in employee satisfaction.

Harmonisation of benefits also creates an opportunity for cost-saving. Re-benchmarking benefits or gathering usage and opinion statistics from employees can help identify areas of over-coverage that can be eliminated, while retaining the benefits employees value most, whether for all or selected groups of employees. When Bibby Financial Services re-brokered their benefits prior to launching a new flexible benefits scheme, they were able to achieve a £58,000 saving from existing premiums.

4. Reduced attrition and 5. Improving recruitment

According to our latest research, improving retention, engagement and recruitment are the top reasons employers give for providing pension and benefits to their employees.** Increasingly, more and more companies are using flexible benefits as their means of competing for talent and showing their existing employees the value of their current benefits package.

For example, since launching its flexible benefits programme, our Client Samsung has seen a 3.65% reduction in attrition rates. By carrying out extensive research with employees over what they wanted from their employee benefits package, Samsung were able to involve their employees in the process and ensure they were being offered what they really wanted.

Employers are also using their benefits package as a key tool for recruiting new talent. The proportion of companies who communicate their benefits package to potential employees during recruitment has risen from 58% to 70% in the past year.***

*Global Employee Benefits Watch 2014
** Employee Rewards Watch 2014
*** Employee Rewards Watch 2014 & 2013