Flexible and voluntary benefits have only begun to gain popularity in the past 20 years, in line with a trend towards a more individualised approach to reward. The personalisation and flexibility of such schemes can address the diverse needs of the workforce, and also provide a cost-effective approach to benefits provision. When adopting these arrangements, employers need to ensure that employees understand the advantages and the implications of their choices, making communication and education key elements in the provision of flexible and voluntary benefits.
This factsheet explores the background and rationale behind flexible and voluntary benefits, identifying the distinction between the two, and addresses the issues and considerations of organising and implementing flexible or voluntary benefits schemes.
We welcome the ability of flexible and voluntary benefit schemes to improve employee choice and flexibility over benefits packages. Such schemes may be seen as an ideal way of addressing employee diversity, cost-effectiveness in benefits provision and of harmonising reward practices, especially during merger and acquisition. However, they are not a 'magic' solution and need to be managed as part of an integrated reward strategy with clear goals and excellent support processes. Scheme communication and administration should build on insights from behavioural science about how people react to choice and make decisions.
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What are flexible and voluntary benefits?
Flexible and voluntary benefits schemes both aim to foster employee choice by providing flexibility over individual benefits packages, but it’s important to distinguish between them.
Flexible benefits schemes (also known as ‘cafeteria benefits’ or ‘flex plans’) allow staff to vary their pay and benefits package in order to satisfy their personal requirements. The dividing line between pay and benefits is less rigid than in standard reward packages. In most schemes, employees are able either to retain their existing salary while varying the mix of various benefits they receive, or adjust their salary up or down by taking fewer or more benefits.
Voluntary benefits (also known as affinity benefits) allow employees to buy products and services, usually at a discount, through their employer out of their own taxable income or through a salary sacrifice arrangements. These schemes differ from flexible benefits as the employee pays for the cost of the benefits. Under voluntary benefits schemes, although the employer does not pay for the benefits provided, it may incur research, administration, communication and launch costs.
Links between flexible and voluntary schemes
In practice, both voluntary and flexible benefits schemes may be used by the same organisation. Employers that provide a ‘flex scheme’ to the workforce often also offer voluntary benefits.
It’s also often considered useful for those thinking about introducing ‘flex’ to begin by offering benefits on a voluntary basis – though sometimes the planned move to flex never happens. The idea is that this allows firms to test the popularity of various benefits and helps them design and fine-tune their subsequent scheme.
Find out more on employee benefits generally.
Background and rationale
The idea of flexible and voluntary benefits schemes was developed in the US, where the popularity of these arrangements has been driven by the healthcare system and tax regime prevailing in the country.
In the UK, by contrast – although some organisations have a limited form of flexibility, such as allowing employees to buy or sell additional leave – it’s only relatively recently that interest in flexible and voluntary benefits schemes has grown. Such initiatives fit well with the increased focus on the individualisation of reward. However, the growth in schemes has been slow in the UK, partly because of the perceived cost and effort in their introduction and administration.
Scheme coverage and content
Our 2018 Reward management survey report has details on the extent of voluntary and flexible benefits in the UK.
Content of schemes
With flexible benefits, it's usual to set out a list of core benefits which are those that an employer might be expected to provide and which, though the employee might adjust them, may not be entirely removed from the package.
The contents of each scheme depends on local circumstances and legal requirements, but examples of core benefits include:
- life assurance
- critical illness insurance / long-term disability insurance.
For more on life assurance and health insurance, see our factsheet on group risk insurance benefits.
Beyond core benefits, the number (and type) of benefits involves a balance between offering employees a wide choice and keeping the administration manageable.
There may be an overlap between the content of certain flexible and voluntary benefits schemes, depending on how ‘core’ benefits are defined and the content of the original benefits package.
Many of the ‘non-core’ items within flexible benefits schemes are similar to those that might also be offered on a discounted basis under voluntary benefits schemes. These may be broadly grouped into three categories:
- Health benefits for example dental insurance
- Financial benefits such as household or holiday insurance
- Leisure/lifestyle benefits with examples including gym membership or childcare vouchers.
Organising and implementing flexible benefits schemes
Setting up a menu of benefits options
Many flexible benefits schemes draw initially on the existing benefits provision as the basis for the construction of a new, more flexible arrangement. This includes the setting up of a new menu of options allowing employees to buy or sell benefits to suit their needs. For example, individuals might be able to buy up to five days extra holiday a year in return for sacrificing the appropriate amount of salary.
Typically, a limit is set on how much base pay may be used to buy additional benefits and, equally, there is a baseline of items that must be retained, and hence a limit on the amount of extra pay that can be obtained by selling benefits.
Cash or points?
Some schemes show each benefit option with a cash value, which the worker uses as the basis for calculating the effect of changes. The advantage is that it gives individual employees an idea of the true worth of the benefit and the employer cost. The danger is such schemes may lead to an employee perception that they are being forced to buy benefits out of their own pay. Other schemes use a points plan, where each benefit has a points rating and the employee has a certain allowance.
Regardless of which is used, all schemes need to make a clear distinction between notional salary and the final value of salary that is actually paid in the year (whether this is higher or lower than the notional salary). The notional salary should then continue to be used as the basis for items such as pension calculations and pay reviews.
Determining the degree of flexibility
Before introducing a scheme, it’s important to estimate the likely take-up of specific benefits. This enables the most accurate possible quotations for the provision of each benefit to be obtained.
It may be worthwhile to survey staff in advance as to the type of benefits they like and value, which could help in maximising the value of the package to both employer and employee.
Choosing and changing benefits
To ensure a positive reception to the flex scheme, it's important that the choices, and the implications of those choices, are made clear to employees. If the options are too complicated, or the method of making choices is perceived as being difficult, then individuals may default to their existing benefits package and much of the resource spent introducing the scheme will have been wasted. In some instances, it may be more appropriate to offer a limited but meaningful choice of benefit options. Our report Show me the money! The behavioural science of reward has more information about how employees may respond to choice.
Many computerised systems used for administering such schemes include an option that allows employees to model their own choices, which can simplify the process.
Many schemes require changes in benefit selection to be made by a fixed date, once a year. Employees are sent a personalised document before then reminding them of their current selection and benefit allowance for the next 12 months, and giving them the opportunity to amend their selection.
Although reviews usually take place annually, in some circumstances, organisations allow changes to be made outside the normal renewal dates. These typically include:
- marriage or divorce
- birth or adoption
- death of a dependant
- long-term sickness absence
Key issues for flexible and voluntary benefits schemes
Several key issues are important when considering either flexible or voluntary benefits schemes.
Paper-based v online
One decision is whether to provide a paper-based catalogue or booklet, or to arrange online information for employees detailing the benefits available (or both). Paper-based may be more appropriate in an organisation where many employees do not have Internet/intranet access, either at work or at home. On the down side, hard copy versions can become out-of-date quickly and could be seen as environmentally unfriendly.
Keeping schemes up to date
Whatever the decision to go paper-based or online, innovation is essential to keep schemes up to date with changing employee needs and external influences such as tax breaks (see below). The most successful schemes are likely to be those where the benefits are regularly reviewed.
Employers will need to shop around to try to ensure that the services or products offered are accessible to the whole workforce and avoid any potential scope for discrimination. For instance, in the case of insurers offering medical benefits, are they willing to provide the same service to older people?
Tax and National Insurance implications
The prevailing taxation regime must be taken into account. In the UK, since 6 April 2017, changes to the legislation mean that the tax and National Insurance Contributions advantages where benefits are provided through arrangements under which the employee gives up the right to an amount of pay in return for a benefit, have been largely withdrawn. Benefits that can still be provided through salary sacrifice (or an optional remuneration arrangement – OpRA) include ultra-low emission company cars with CO2 emissions less than or equal to 75g/km and bikes-for-work schemes. Further details including the transitional arrangements can be found from HM Revenue and Customs.
Communicating the benefits
The most important elements in ensuring success of a scheme are effective communication and education. If employees are made aware of the reasons for, and benefits of, introducing flexible benefits they are less likely to dismiss such schemes as simply a means of cost control. In general, new schemes are more likely to succeed if there is no overall gain on either side, and this point is clearly communicated.
Voluntary benefits schemes are sometimes seen as the ‘poor relation’ within pay and benefits packages, given that it is employees themselves who pay for the cost of the benefits. It is therefore especially important to communicate the advantages of this approach to workers using the methods that are most effective or appropriate for the particular organisation.
See more in our factsheet on employee communication.
Books and reports
HUTCHINSON, P. (2008) Flexible benefits: creating competitive advantage. Research into practice. London: Chartered Institute of Personnel and Development.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.
BARTON, T. (2016) Strategy needs guiding light: an effective flexible benefits plan needs to harness a growing amount of available data. Employee Benefits. May. pp22-24.
CALNAN, M. (2016) Making sure the hat fits: whether a strategy is tailored or one-size-fits-all, the key to a successful motivation scheme is choice. Employee Benefits. March. pp41,43-44.
COLEMAN, A. (2015) Flex into the future. Employee Benefits. January. pp22-23.
LOVEWELL-TUCK, D. (2014) Attitudes (to flexible benefits). Employee Benefits (supplement). April. pp6-8.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was last updated by Charles Cotton.
Charles Cotton: Performance and Reward Adviser
Charles directs the CIPD's performance and reward research agenda. He has recently led research into: how employers can help improve their employees’ understanding of their personal finances; how front line managers make and communicate reward decisions to their employees; how employers manage the risks around reward; how private sector employers can build the business case for workplace pensions; how employees form their attitudes to pay; and how the annual pay review process can become more strategic.
He is also responsible for the CIPD’s public policy reward work and has given evidence to select committees on banking pay, redundancy awards as well as responding to various consultations, such as on pensions, retirement and MPs’ expenses.
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