Sep 30, 2010

PLAN ARCHITECTURE| Flexible Benefits

There are various ways that a flexible benefits plan can be set up. Some of these differences are substantive and others are mainly of consequence in terms of communication and/or administration.

Add a note hereSometimes simple solutions can be the most effective. The key objective is to find a design that meets the business need, is attractive to staff, can be understood by them and that the organization has the resources to operate.

Add a note hereThe four main plan architectures are as follows:
§  Add a note hereindividual plans operating independently;
§  Add a note hereumbrella plan;
§  Add a note hereflex fund approach;
§  Add a note herevoluntary ('affinity') benefits.
Add a note hereThese are considered in more detail below.

Add a note hereIndividual Plans Operating Independently

Add a note hereIn this approach, there is a series of individual flexible benefits and the choices in each benefit impact cash earnings (only). For example, a company might operate:
§  Add a note herea flexible car scheme with choices made on recruitment/replacement;
§  Add a note herea flexible holiday plan with choices made at the beginning of the holiday year; and
§  Add a note herea flexible pension plan where contributions can be varied quarterly (say).

Add a note hereThis is a simple, pragmatic and common approach, which is easy to introduce and administer. The disadvantage is that the impact may be limited.

Add a note hereVariation Around Existing Entitlement

Add a note hereUnder this approach, the benefits offer is still defined in terms of a particular level of entitlement to each benefit (eg 25 days' holiday, a 10 per cent employer pension contribution and a car worth £15,000). 

However, employees may choose to trade up/down/out from their current entitlements and select new benefits from the menu provided. The value of the benefits bought and sold is then aggregated and the net amount added to or deducted from pay.

Add a note hereIn the most simple arrangements, only two or three benefits might be flexible, with flexibility under each benefit being operated fairly independently. In more sophisticated plans, there is a unified approach to communication and to making choices under the plan.

Add a note hereFlex Fund Approach

Add a note hereIn this approach, the employee has a fund of money to 'spend' on benefits. This is sometimes described as the 'cafeteria' approach. The fund might comprise:
§  Add a note heretotal remuneration;
§  Add a note heretotal benefits value;
§  Add a note herea specific flex fund related to grade and/or salary;
§  Add a note herea percentage of salary or total remuneration.

Add a note hereThe flex fund may be presented in terms of points or pounds. Choice will depend on ease of communications, the emphasis of the plan, the overall benefits strategy and the degree of pricing flexibility required.
Add a note hereGenerally, certain 'core' compulsory benefits need to be maintained, for example a minimum level of life insurance. Core benefits might be provided independently or be purchased from the flex fund.

Add a note hereIt is usually necessary to constitute the flex fund in such a way that, as a minimum, staff can replicate their existing package without additional cost. This is typically achieved by giving a big enough fund to 'buy' the existing benefits.

Add a note hereVoluntary ('Affinity') Benefits

Add a note hereSome 'flexible benefits' plans do not introduce flexibility to existing benefits provision. This may be because existing benefits are very limited, are already well targeted or are hard to flex. Instead, employees can be provided with access to a range of new or uprated benefits, which may be available at an advantageous cost to purchase out of their post- tax salary or, in some cases, by salary sacrifice.

Add a note hereThe advantages of this approach are that:
§  Add a note hereleverage is provided by employees to the purchasing power of the employer and/or supplier;
§  Add a note herenew benefits may be introduced at minimal extra cost;
§  Add a note herethird-party suppliers can often provide an 'off-the-shelf' solution;
§  Add a note hereadministration will often be relatively easy and may be handled by the third parties;
§  Add a note hereemployees will save time as well as money if the providers are well chosen.

Add a note hereThe disadvantages are that this approach may:
§  Add a note herenot meet employee needs for flexibility in existing benefits;
§  Add a note herepotentially offer less good deals than are available elsewhere;
§  Add a note hereoffer insufficient employer control where the process is outsourced;
§  Add a note hereleave the employer exposed if the products offered (especially investment or insurance products) prove to be unsuccessful.

Add a note hereVoluntary benefits may be combined with any of the approaches described above. Popular voluntary benefits include:
§  Add a note herehealth: private medical insurance, dental insurance, health screening, healthcare cash plans, eyecare;
§  Add a note hereprotection: critical illness insurance, life insurance, income protection insurance, personal accident insurance;
§  Add a note hereleisure: holidays, days out, travel insurance, computer leasing, bicycle leasing, pet insurance, gym membership;
§  Add a note herefinancial: additional pension contributions, season ticket loans, employee share plans;
§  Add a note herevouchers: childcare vouchers, retail vouchers;
§  Add a note herehome: household goods, online shopping.

Add a note hereSome voluntary benefits schemes have more in common with an online shopping portal than traditional employee benefits.


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