Cutting employee benefits can be hazardous to your business

When cash is in short supply and companies are looking to cut costs, it is inevitable that reward and benefits packages will come under scrutiny. However, all the evidence so far is that most companies have resisted the temptation to take an axe to staff benefits. What they are doing instead, reports Jonathan Fice, a director in PricewaterhouseCoopers’ employment solutions business, is looking very closely at the makeup of the whole combination of pay and benefits.

But this is an area where there are elephant traps all around for employers, even where it looks like a benefit is simply there as a historical accident. “We had an interesting example where two employers each got rid of the staff canteen. One found that they were removing a benefit that was hardly used and not particularly valued by the staff, the other found that they had removed a cherished benefit and had to deal with a storm of protest from staff,” says Fice.

What follows from this is that if employers are thinking about cost savings and not looking at the degree of employee disconnect and disassociation they might generate by removing the benefit, they can find out that they have bought some slight savings at an enormous cost.

“There is no substitute for talking to employees and finding out what really matters to them,” he says ­ which is where salary sacrifice plays extremely well. Since individuals are reluctant to give up pay, if they want a benefit so much that they are prepared to sacrifice headline salary to achieve it, then that is a good indication of the value staff place on a benefit.

Value for money
Another area employers are looking at is benefit procurement and ensuring they get as much bang for their buck as possible. “There are normally a number of suppliers who will sharpen their pencils in a downturn, so employers are looking around and re-pricing the component parts of their benefits package,” says Fice.

One benefit that employees almost universally treasure only fractionally less than pension provision is private medical insurance. Second behind PMI is childcare vouchers, with the latter almost always being provided through salary sacrifice.

However, Fice points out that Gordon Brown dropped a bombshell on this benefit at the 2009 Labour party conference when he announced that, with effect from April 2011, tax and National Insurance relief on childcare vouchers in salary sacrifice schemes would be withdrawn for most people. At present, people can have a maximum of £243 per month free of tax and NI in childcare vouchers.

Dudley Lusted, head of corporate healthcare at Axa Health, points out that there are two approaches to PMI. The one with all the bells and whistles is targeted at senior managers and used as a major retention tool. It costs around £500 per employee per annum for corporates who can buy with economies of scale. By comparison, Lusted points out, for a husband and wife buying PMI privately, the total cost including tax would be around £5,000 for the same benefit ­ in other words, getting PMI through the company is ten times more cost-effective.

The other PMI benefit is targeted at getting immediate treatment for employees who are off sick for any reason. The treatment is about speeding up the process of getting the employee back to work by paying for access to say, an MRI scan, or physiotherapy, without having to wait for the NHS.

“Employers could buy this on their own, but then either the employee has to pay tax on what could be quite a big bill ­ as a benefit-in-kind ­ or the employer has to pay the tax for them. That makes the self-paying approach very expensive,” says Lusted.

Salary sacrifice
Kim Honess, head of flexible benefits consulting at Watson Wyatt, says that while it is hard to get reliable statistics, most companies are now running salary sacrifice options for a range of benefits, with the big supermarkets, the oil majors and financial services companies leading the way. In addition to childcare vouchers, cycle to work schemes are almost exclusively salary sacrifice arrangements. “The take-up is probably no higher than for childcare, which works out at between 2% to 5% of the workforce, but for those who take it, it is extremely highly valued,” she says.

William Laing, director at Laing and Buisson, which provides statistics on the PMI market in the UK, says the evidence points to PMI being an absolutely stable part of the employee benefits mix for a long time to come. “PMI is definitely regarded by employees as a valued part of their benefits and as such it is very much worth an employer’s while to keep it on the table. Including the two main providers, Axa and Bupa, there are about 25 providers in the market so prices are very competitive,” he says.

Mike Izzard, chairman of the Association of Medical Insurance Intermediaries, says that the combination of group risk and PMI with flexible benefit packages (where employees choose the benefits they want from a menu of options) is developing extremely well. “Given the chance, employees are choosing PMI above a host of other benefits,” he concludes.