Employer guide to flex benefits and how pensions fit in

In practice, this covers a wide spectrum. Total reward strategies offer the most extensive flexibility, whereby the employee has a reward pot and has complete freedom in how they use it, choosing from a wide variety of benefits with any balance taken as remuneration. 

Traditional flexible benefit designs feature a core range of benefits and allow the employee to adjust cover levels up or down to tailor the package to their own circumstances.

Popular benefits include pension, life assurance, health cover and holiday entitlement and there are often maximum and minimum levels that an employee must choose within. 

Voluntary benefits are integral to flexible benefits; these are products and services that are not funded by the employer but can be purchased by the employee through payroll, often on a tax-efficient basis through salary sacrifice. Examples include childcare vouchers and cycle-to-work schemes.

Corporate advantages

Flexible benefits strategies can meet many different corporate objectives. The most obvious is to provide a relevant and compelling reward package across different demographics of a workforce, rather than a traditional one-size-fits-all approach.

It is also an opportunity for the employer to emphasise the monetary value of all of the benefits provided to the employee by providing a total reward statement.

By converting fixed benefits into a monetary benefit pot, flexible benefits can be a convenient way to harmonise different benefit entitlements arising from mergers and acquisitions.

Flexible benefit strategies are ideal for the modern workplace and pensions can, and should, be right at the heart of them

For financially oriented objectives, flexible benefits can maximise employer and employee national insurance savings through salary sacrifice initiatives.

They can also manage future exposure to high benefit cost inflation by linking indexation of the reward pot to earnings growth rather than future increases in insurance premiums – particularly relevant in managing private medical insurance inflation.

Early flexible benefit schemes were managed with paper election forms and spreadsheets. However the majority are now managed through technology solutions that enable employees to make benefit choices online.

They can also automatically generate relevant reports for payroll and the various benefit providers, as well as providing useful management information for the employer.

Technology developments have enabled multi-channel communication and delivered improved flexibility of benefit election, for example rolling monthly enrolment windows are increasingly replacing a single annual window. Technology has also made it a lot easier to integrate pensions with these benefit structures.

Pensions are often the biggest reward spend after salary. It is tax-efficient for employers and employees, and usually one of the most popular benefits among staff.

Despite this, pensions have historically been excluded from flexible benefits packages, often for practical reasons: incompatibility between flexible benefit and occupational pension scheme rules, particularly defined benefit schemes; coordination between employer and trustees; administration conflicts; and concerns about flexibility of pension salary sacrifice rules.

However technological and legislative developments mean these issues are surmountable and, for all of the reasons listed above, there is no reason why pension should not be a central element of any flexible benefits strategy.

Progressive employers have already taken this step, with some also integrating other saving options such as Isas – particularly relevant considering the increased flexibility of pensions from April 2015.

Where pension is included in flex benefits, it is imperative that auto-enrolment legislation is reflected in the communication, joining processes and benefit design.

As a minimum, eligible jobholders must be automatically joined into the qualifying pension scheme at appropriate contribution levels and any opt-in and opt-out processes must be compliant.

Concern as to whether the ability to opt down to lower contribution rates, or opt out of pension membership altogether, would be deemed to be inducement has been addressed by the Pensions Regulator.

It has reassured that the intention of the legislation is not to restrict flexible benefits packages, as long as the sole or main purpose is not to induce individuals to opt out of a qualifying scheme.

Flexible benefit strategies are ideal for the modern workplace and pensions can, and should, be right at the heart of them.

Mark Pemberthy is a director at JLT Employee Benefits