Special feature: Reap the rewards of flexible benefits schemes

Anyone who thought the recession would put an end to the war
for talent has missed the point. While employers are indeed laying off staff,
they are also fighting even more desperately than before to win and keep the
services of their best employees. They know only too well that it is the
companies with the most talented and productive staff that will survive
recession.

The only problem now is that they have fewer resources with which to do it.
Facing a three-pronged squeeze from cash-strapped banks, cautious customers and
an ever more demanding Treasury, employers are desperately casting about for any
tool that will enable them to reward their best staff without costing them any
money. A growing number are looking at flexible benefits, particularly salary
sacrifice schemes.

A flexible benefits scheme involves the employer presenting a range of
options from which the employee picks the ones they like. For example,
recruitment company Adecco allows its 2,000 permanent staff to add to their core
benefits of pension, life assurance and private medical insurance. Further
benefits from which they can select include travel insurance, critical illness
cover, dental and optical insurance, lifescan, wellbeing assessments and a wine
club.

Julie Bowen, Adeco’s head of organisational development, explains: ‘We
conduct an annual survey of staff so that they can provide input to what they
would like to see offered as part of the programme. By far and away the most
popular are the Love2reward products – vouchers which can be spent on the high
street, on travel or on ‘experiences’ and days out.’

The obvious upside of a flexible benefits package is it allows staff to
choose the rewards they want, rather than ones their employers think they want.
The less obvious positive is that taking some of those benefits as a salary
sacrifice can lead to significant tax savings.

Sacrifice or exchange
‘We prefer to call it salary exchange, as many people are scared off by the idea
of sacrificing their salary,’ says Adrian Glew, director at reward consultancy
Personal Group.

‘But, in essence, it involves an employee giving up part of their salary in
return for a benefit. On childcare vouchers, bikes, health insurance, pensions
and low-emission cars there is no income tax or National Insurance contribution
payable.’

For staff this means they can save between 33% and 41% of the total cost of
the item. Employers save 12.8%. Alysoun Stewart, head of entrepreneurial
advisory at Grant Thornton, offers this example: ‘An employee on £40,000 a year
who chooses a salary sacrifice of £6,000 to benefit from childcare vouchers, car
parking arrangements and enhanced pension entitlement of 5% of salary, will see
the overall net annual cash value of the benefits increased by £1,460. For the
employers the cost of the package will be reduced by £768 a year.’

It is too good to ignore. But, before you rush out to announce your new
scheme, there are some important caveats. Paul Bartlett, head of employee
benefits and rewards at Grass Roots, a performance improvement company, points
out, ‘The salary sacrifice is a contractual arrangement between the employer and
employee. It is necessary that it is effective and properly constructed.
Additionally, some of the benefits have restrictions and conditions including
Consumer Credit Act implications that need careful considerations and
expertise.’

Furthermore, as Roger Cook, employee benefits manager at Blacktower Financial
Advisers, says, it may not be suitable for all employees. ‘Salary sacrifice
schemes are not appropriate for people whose salary would drop below the
national minimum wage as a result of joining. There are also issues for those
who take certain state benefits, such as statutory sick pay, maternity pay and
the second state pension, as they are linked to the employee’s total gross
earnings and a reduction in their taxable salary may reduce their entitlements,’
he says.

It is also important to implement the scheme correctly. ‘Talk to your people
to find out what benefits they would find attractive,’ says Sean McSweeney,
Consultant at AWD Chase de Vere Consulting. ‘Communicate effectively – this will
be rewarded with take-up. Make the process easy, and don’t bog everyone down in
forms. Continually review the benefits available to take account of the changing
tax regime.’

However, a carefully considered scheme, aimed at the right people and
implemented correctly, can be an excellent way for employers to attract, retain
and motivate staff without paying them more. It is little surprise, then, that
we are witnessing a surge of interest in them.

As Richard Davies, head of P&MM employee benefits division, puts it,
‘Salary sacrifice schemes are becoming more prevalent and are being widely used
by employees. This trend is likely to continue. They are becoming a
‘need-to-have’ rather than a ‘nice-to-have’.