Oct 3, 2010


Approaches to flexing some of the main traditional benefits, ie cars, holidays, pensions, private medical insurance and insurance benefits, are considered below.

Add a note hereFlexing Company Cars
Add a note hereFlexible car schemes are extremely common, and offering employee choice is the norm in many sectors. However, some employers operate a flexible car scheme independently of their other flexible benefits because car replacement does not coincide with the flex plan renewal cycle and because most staff are not eligible for a car.
Add a note hereThe main types of flexibility that can be introduced are as follows:
§  Add a note hereTrading up. Employees are able to obtain a more expensive vehicle by making a personal contribution (or by declining other benefits).
§  Add a note hereTrading down. Employees are able to trade down to a cheaper car and receive additional cash and/or benefits.
§  Add a note hereTrading out. Employees are able to decline a car and receive cash or other benefits in lieu.
§  Add a note herePersonal leasing. Employees are given access to a personal contract purchasing (PCP) arrangement. Access may be targeted towards employees who have traded out of the company car arrangement and/or individuals who are not entitled to a company car. (To avoid a lease car becoming taxable as a benefit in kind, arrangements with the leasing company may need to be kept to an arm's length relationship.)
Add a note hereTypically, companies will place limits on the extent of trading up or down. Employees who trade out will normally be required to have a car insured for business purposes, and the employer may impose conditions on its age, specification and maintenance.
Add a note hereA major practical issue concerns what happens when the employee leaves. For example, if he or she has traded up then, to the extent the employer's extra costs have not been fully recouped, these may be deducted from the final salary payment.

Add a note hereFlexible Holidays
Add a note hereOffering buying and selling of holidays is relatively straightforward and is a part of many flex plans. Some employers may offer only one choice of buying or selling, reflecting existing entitlements and their business circumstances. For example, in some public sector organizations, where holiday entitlement is already 30–35 days, only trading down is allowed.
Add a note hereThere are cost implications to allowing the buying and selling of leave, as follows:
§  Add a note hereEmployees who buy extra time off save payroll costs (including national insurance). However, this needs to be considered in the light of any consequential increase in overtime or temp costs.
§  Add a note hereOffering holiday selling generates a cash cost in terms of extra pay and employer's NICs. This may be offset by higher productivity and/or lower overtime or temp costs, assuming that employees are currently taking all their leave.
§  Add a note hereMost employers impose limits on flexibility and many require line manager sign-off. There is normally a lower limit of at least 20 days and an upper limit of 30–35 days.
Add a note hereIt is important that flexible holidays dovetail effectively with other HR policies, for example flexitime. Care is also needed to ensure that employees who sell holidays do not abuse the sick pay system.

Add a note hereFlexible Pensions - Defined Contribution
Add a note hereIt is relatively easy to flex defined contribution or 'money purchase' plans (including group personal pensions and stakeholder pensions) because the employer contribution is a clearly denominated sum of money. The following approaches are available:
§  Add a note hereTrade-up. The employee has the option to receive a higher employer contribution in lieu of salary or other benefits.
§  Add a note hereTrade-down/out. The employee has the option to sacrifice some or all of the employer contribution and receive cash or other benefits instead.
§  Add a note herePersonal pensions and stakeholder pensions. The employee has the option to have the employer contribution paid into his or her private pension plan.
Add a note hereEmployer pension contributions are not subject to employer or employee national insurance contributions. Hence, taking an additional employer contribution in lieu of salary is more NI effective than the employee making additional voluntary contributions (AVCs).

Add a note hereFlexible Pensions - Final Salary
Add a note hereMost organizations choose not to flex final salary pension schemes. This is partly due to pricing complications and partly due to the communications challenge. Pricing is complicated because the cost of final salary pension provision depends on:
§  Add a note hereindividual factors such as age, sex, health and rate of career advancement;
§  Add a note heremacroeconomic elements such as investment returns, salary inflation, etc;
§  Add a note herehow long the employee stays with the organization and the reason for leaving.
Add a note hereNotwithstanding the above, a number of organizations have flexed final salary schemes with varying degrees of success. Often a fairly simple approach is taken with a fixed cost being associated with a particular accrual rate. This is easy to explain and is intuitively fair. Nevertheless, this approach will lead to winners and losers and may impact on long- term company costs.

Add a note hereFlexible Private Medical Insurance
Add a note hereFlexibility may be provided by allowing employees to:
§  Add a note heresell cover for family members;
§  Add a note heresell cover for themselves;
§  Add a note herebuy cover for themselves (if not already provided);
§  Add a note herebuy cover for family members (if not already provided).
Add a note hereMany employers do not allow selling of cover for the employee unless he or she is covered under another policy. This reflects: 1) the need for employees to receive prompt treatment and return to work, and 2) a need to restrain flexibility to avoid 'selection' risks and cost increases (see below).

Add a note hereFlexing Insurance Benefits
Add a note hereWhen flexing insurance benefits, it is important to recognize that offering flexibility can push up premiums due to 'adverse selection'. Selection is the process whereby people who expect to claim on insurance policies are more likely to take out cover than others. In a traditional group insurance policy where all eligible employees are covered, the risk of selection is quite low; if, however, employees are given a choice of cover, the risk of selection increases.
Add a note hereSelection is a particular problem where there are cross-subsidies. For example, in a healthcare scheme the insurer will consider the demographic make-up of the population and the claims history to date, but for a large population will normally charge premiums on a per-head basis. However, older or less healthy employees are more likely to claim than others and hence for them the policy is arguably more valuable. Consequently, if employees are given a choice over their cover, healthier employees may opt out and older and/or less healthy employees remain in the scheme. This will, over time, drive up costs.
Add a note hereSelection is a potential problem for flexible benefits plans and can apply to all forms of insurance. If an insurer judges the selection risk to be high, it may push up the premiums, impose restrictions on cover or even refuse to cover a scheme. Therefore most flex schemes impose limits on the frequency and extent of choices.


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