Flexible benefits schemes are structured systems that allow employees to choose the benefits that suit their particular circumstances from a selection provided by their employer. Organisations have introduced such systems as part of a wider move to more flexible working, and in recognition that employees have differing wishes and needs at different stages of their lives.
Many employees do not fully recognise the total worth of the benefits their employer provides, and the move to a flexible benefits scheme is one way to highlight the full value of the remuneration package. This may also benefit the employer through increased employee retention and reduced recruitment costs.
Some of the reported advantages of introducing flexible benefits include:
- giving staff a sense of control
- enabling dual-career couples to choose complementary benefits and avoid duplication
- employers being seen as recognising the diverse needs and different life stages of their employees
- the provision of benefits becoming less contentious
- employees appreciating the true worth of the benefits package
- improving staff retention and helping to attract new talent
This guide explains the key steps in defining a strategy and implementing a flexible benefits scheme. Organisations are also advised to seek advice on the tax implications for both the organisation and the individual.
A flexible benefits scheme, also known as cafeteria benefits, is a structured arrangement of cash and benefits that offers choices to employees, enabling them to meet their personal needs. Schemes typically include a core package of pay, holiday and pension, with additional flexible options to a value designated by the scheme. The more comprehensive schemes may also include voluntary benefits, which are purchased and paid for by employees. Flexible benefits are usually funded by the organisation, so any organisation wishing to introduce them will need to think carefully about the financial viability of doing so.
Define the Strategy
Before developing a strategy for flexible benefits, it is important to question whether the organisation needs such an approach. Planning and implementing a full flexible benefits scheme requires the input of time and money, so it is important to be clear on the reasons for taking this route, especially in times of uncertainty or austerity. It is worth considering the following:
- What is the market offering for the industry the organisation works in?
- Is the context of the existing reward strategy fully understood, and does a flexible benefits scheme provide a good fit?
- What is the motivational and financial value of the existing reward package?
- What does the organisation hope to gain by implementing a flexible scheme?
- Have employees been asked what they like and dislike about the existing approach?
- Could a focus group or staff survey be used to investigate this area?
An organisation might determine that simple changes to the existing package of benefits will meet its objectives. For example, allowing employees to buy and sell holidays, making additional payments into their pension scheme, and using salary sacrifice to buy childcare vouchers may provide a simpler route to improving staff perceptions of the benefits package. The provision of an annual total rewards statement can also raise staff awareness of the value of existing benefits. If a flexible scheme proves to be a good strategic fit, it is important to allow plenty of time to research, plan, implement and communicate with employees.
Decide on the Form of the Benefits Package
There are a number of key issues to address at this stage. An organisation needs to determine:
- whether it will design the scheme in-house or use a consultant
- its policy for providing core benefits
- its mix of core and flexible benefits
- how it plans to administer the scheme
- how employees will select or purchase benefits
- the benefits that are on the menu
- the enrolment process
- the enrolment period for existing employees and for new recruits
- how it will promote the scheme to employees
- how it will evaluate the success of the scheme
Design and Administer the Scheme
An organisation can either design and administer the scheme in-house or outsource the process to a specialist company. A hybrid approach is also possible, where a consultant helps design the scheme but it is administered in-house using the organisation's own staff.
The in-house approach requires the allocation of staff time and budget. As most organisations now adopt web-based administration solutions, it is important to consider whether the organisation has the technical ability to develop its own scheme, or whether it would be better to use one of the many existing programmes. Realistically, the latter may only be an option for very small and simple schemes. Many of the computerised systems used to administer such schemes include an option that allows employees to model their own choices, which can simplify the process.
An organisation may decide to use a consultant to identify appropriate benefits suppliers. One advantage of this is that consultants should already have contact with many suppliers and may be better placed to negotiate discounts. A number of consulting organisations will take on the whole process of design, implementation and administration. Many have their own administration software or work closely with the producers of one of the many administration packages. An organisation may benefit from a consultant's ability to negotiate good rates for insurance and pensions, and from their existing relationships with retailers. Consultants may also be willing to distribute and analyse employee opinion surveys, handle focus groups, and design and implement the communication process. It is vital to fully understand the cost implications of each of these routes before making a decision.
Organise the Structure of the Scheme
Most schemes stipulate that employees must retain certain core or mandatory benefits. These should take account of tax and employment law requirements, such as the minimum holiday allowance and the provision of staff pensions. Employees may opt out for flexible benefits, for example via salary sacrifice, which take them below the National Minimum Wage. An organisation may decide that certain staff benefits also make good business sense, such as private medical insurance. Typically, however, organisations try to keep the core element of a scheme to a minimum to give employees as much choice as possible.
Decide on the Benefits Menu
Most flexible schemes are launched with a variation of the existing benefits package, but an organisation may decide to start from scratch or extend the options to provide a far wider range of benefits for selection. The challenge is to provide a menu of benefits that satisfies the needs of all eligible staff but which does not confuse by providing too much choice. Some of the most common benefits offered are:
- childcare vouchers
- critical illness insurance
- dental insurance
- healthcare cash plans
- holidays
- pensions
- retail vouchers
- travel insurance
It is important to ensure that the menu is of interest to employees at all stages of their careers and with varying personal circumstances.
Define the Enrolment Options
An organisation needs to determine a process for enrolling on the scheme and for making changes to selections. Online enrolment via an intranet or secure internet connection may be the only feasible option for large schemes, but it is necessary to consider whether all employees have access to the web during their working day. Paper-based enrolment may be the only option where few employees have regular online access in the workplace. The documentation should include a personalised preference form, which typically contains details of the employee's current benefit entitlement, the value of the available flexible fund, and the cost of the different options available. Staff and an administrative process must be in place to handle the returned forms.
Whichever approach is adopted, it is common practice to send a confirmation of the selections, possibly for the individual to sign. It may also be necessary to allow a period of time for reconsideration. Total reward statements may be distributed at a specified time after the selection process has changed, which reinforces the value of the total package and keeps the flexible scheme in employees' minds. Online systems often produce an indication of total value during the selection process. It is also worth remembering that people's circumstances may change — for example, they may suffer a bereavement — and this may then affect the benefits they wish to use. It is advisable to set out the terms of when and how selections can be changed.
Communicate With Employees
Organisations that have adopted flexible benefits have found that effective communication is key to successful employee engagement. It is worth developing a communication strategy that:
- provides an introduction to the plan for all new employees
- drip-feeds information to staff prior to the launch, perhaps via newsletters
- includes a high-profile launch event
- provides a detailed explanation of how the scheme works and the range of choices available
- educates employees about some of the technical tax issues, such as salary sacrifice
- encourages staff enrolment and selection of options
- follows up on employees who do not enrol
- promotes the scheme, once it is up and running, to maintain interest and increase participation
- keeps employees informed of changes to the scheme
The communication methods that may be appropriate include road shows and formal presentations, the corporate intranet, newsletters, bulletins and posters, personal letters to employees, emails, and one-to-one consultations. Giving a scheme distinctive branding has helped organisations to increase awareness among employees. The name chosen should reinforce the key message that the scheme is about giving employees more choice and personal control of the package.
Monitor Take-Up and Develop the Scheme
The most successful schemes tend to be those where the benefits on offer are regularly reviewed. A measure of success commonly adopted by organisations is the take-up rate. At its most basic level, this records the level of engagement from employees with the scheme, but it is worth attempting to look deeper and record the take-up rate for each benefit on offer. Taking these figures at face value may lead employers to miss key employee concerns, and may mean they do not fully understand the perceived value of benefits with a low take-up, such as childcare vouchers, among the individuals who do opt for them. Focus groups or an employee survey can help build a more complete understanding of perceptions.
When developing a scheme, managers should avoid:
- making schemes too complex
- rushing to implement a scheme without adequate strategic thinking and communication
- failing to take account of legal requirements and changes to those requirements
- considering that this is a one-off process, when successful schemes need refreshing on a regular basis
How Professional Academy Supports Your Journey
Designing and implementing a flexible benefits scheme draws on strategic thinking, people management and clear communication — all core management and leadership skills. Professional Academy has over 27 years of experience helping managers develop these capabilities through its CMI management and leadership qualifications. Whether the goal is to strengthen reward strategy, employee engagement or wider people management, structured study provides the tools to lead change effectively. To find out more, explore the CMI management qualifications or speak to the qualification advice team.
