Jacqueline Otten, director of flexible benefits consulting at Towers Watson, says flex can play an important role in the changing benefits landscape
Recently, I have often had the feeling that everything is on the move, changing, transitioning around us – and the benefits world is no exception. New legislation and changes in taxation have been key drivers, however, there have also been the business drivers of managing costs, controlling risk and delivering results in a challenging economic environment.
It would be stating the obvious to say that many employers have been looking at ways to reduce the benefits offered under their defined benefit (DB) pension plans, and, in many cases, closing these plans to future accrual and moving to defined contribution (DC) pension provision. But other restructuring of benefits has also been taking place, including pruning private medical insurance (PMI) provision, reducing the term of income protection benefits and moving from dependants’ pensions to lump-sum death benefits.
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These changes have not always been made simply to cut costs. Some employers have even improved defined contribution rates with the aim of making the defined contribution option a more realistic alternative to defined benefit pension provision, but with a lower level of risk and cost volatility. Drivers such as the desire to reduce risk exposure longer term have led to other benefit changes, for example moving to lump-sum death-in-service benefits.
There has also been a move to simplify benefits and the associated administration, to cut management costs. In particular, harmonising benefits terms across an organisation and removing legacy differences where many exist can reduce administration costs significantly.
And, of course, there has been the tax and legislative changes from the new rules on pensions taxation, auto-enrolment and the national employment savings trust (Nest) from 2012, removal of the annuity purchase requirements at age 75, and changes in childcare taxation, among others. These are leading to interventions such as the provision of cash alternatives to pensions and the greater use of salary sacrifice arrangements.
Flexible benefits can facilitate these changes in a number of ways. At the simpler end of the scale, flexible benefits can help soften the impact of other harder changes. It is also an excellent mechanism to enable employees to make their choices about future benefits provision, be it pensions, private medical insurance or income protection, at the same time facilitating the introduction of salary sacrifice benefits.
Flexible benefits can also be part of a proactive solution to reduce costs and manage risk. For example, it can be designed to help share with employees the rising costs of benefits or to manage benefits to a lower level or different structure over time. In this way, employees become more actively engaged in the structure and cost of the benefits they choose to meet their needs. This moves benefits away from traditional paternalism to a new consumer approach. The employee thus becomes the consumer of benefits within the cost and risk controls defined by the employer.
There is a compelling business case for using flex to support benefits change. Not only does it provide an effective tool for the employer to manage change, potentially reducing costs, but it also delivers value to the employee through greater tax and national insurance efficiency and access to employer-negotiated terms for a wide range of benefits.
Read more from Employee Benefits/Towers Watson Flexible Benefits Research 2011