UK: Employee Benefits Review, September 2008

Last Updated: 17 September 2008
Article by Peter Maher

In the current economic climate it's more important than ever to retain and attract good staff. Employee benefits are crucial for good employee relations. We look at getting value for money, examine SIPPs and consider how to get the best out of group life assurance schemes.

MANAGING BENEFITS IN A DOWNTURN - TAKING ADVANTAGE OF YOUR EXISTING PACKAGES

As the economy slides closer towards recession, it's time to take precautionary action and tighten belts. Ian Luck outlines some of the ways companies can reassess employee benefit provision.

Individuals and businesses are facing the same challenges – rising prices, falling stock markets and a higher cost of borrowing. Money is tight within most organisations and companies are resisting excessive pay increases. While low salary rises may make good economic sense, they do little for employee relations. In spite of the prospect of a tougher job market, companies will want to look after their people and prevent unnecessary staff turnover.

Getting Value For Money

When spending more is not an option, spending more wisely is an absolute must. Employee benefits take up a large part of a company's overall costs, yet there are many ways to save money.

When companies look towards maximising the impact of their employee benefits provisions much is made of flexible benefits arrangements. While this is certainly an increasingly popular and, in many cases, sensible route to go down, there are less costly ways of getting the most out of an existing employee benefits package before companies need to commit to the expense of a fully fledged flexible benefits package.

By introducing a range of voluntary benefits to staff, such as life assurance, critical illness cover, medical and dental insurances, the employee benefits package can be enhanced without any additional cost to the company.

For many years, employers have offered discounted goods arrangements as an added benefit. Usually restricted to local suppliers, the impact can be magnified using a discount club that has negotiated discounted goods with larger national affiliates. These opportunities would rarely be possible for smaller companies.

Salary Sacrifice

Salary sacrifice benefits are probably the easiest way for a company to save money and boost staff benefits at the same time. It is a legitimate method of using the tax rules to the best possible advantage and the vast majority of companies will already be offering salary sacrifice childcare vouchers.

There is no real reason why more should not offer their pension benefits on a salary sacrifice basis. Savings in employer National Insurance Contributions can be used to offset the cost of installing such a scheme or of reorganising existing pension arrangements. Alternatively this saving can be shared with employees, all or in part, as additional encouragement for them to join the plan.

What Do Your Staff Want?

An appropriate benefits package is one that meets both the needs of the workforce and the requirements of the company in terms of recruitment and retention of quality staff. But what does an appropriate benefits package look like? Obviously it will be different for each company and to some degree each employee. Rather than make an assumption as to what motivates and helps retain staff, why not ask them? Perhaps run a survey asking your employees what benefits they think they receive, what benefits they would like to receive and what benefits would make them stay.

Reiterate Existing Benefits

It may be that you already offer a comprehensive benefits package to staff. But how many actually know the value of the benefits they are enjoying?

Why not send each member of staff a total rewards statement reminding them of the value of their current package? Something that confirms salary, outlines pension costs, premiums paid for insurance benefits, and the cost of other non-monetary benefits provided can be a powerful staff retention tool.

At the very least it will stop staff leaving the company ignorant of the fact that they may be walking away from a better overall package.

Keeping Senior Staff Happy

It is important to look after senior members of staff, especially during a downturn, as their experience will be vital during the potentially difficult times ahead. Even within organisations that operate uniform benefits provision with, say, the same pension contributions for all levels of staff, there is scope to design a more attractive benefits package for key personnel. The greater investment flexibility offered by individual and group Self-Invested Personal Pension (SIPP) plans for example, can make them quite sophisticated wealth management vehicles.

Employers can arrange for senior staff members to have their pension portfolios and personal wealth managed using a much more holistic approach, without changing the basis of pension contributions. With the advent of a new type of SIPP designed specifically for professional partnerships, SIPPs are now available to pretty much every type of organisation.

Revisit Old Defined Benefit Schemes

Now is also a good time for companies to take another look at any defined benefit pension arrangements still in place. Any company providing this type of arrangement will know that it is far from easy to walk away from them. But there has been an upsurge in the managed buyout market, with one insurance company specialising in managed buy-outs recently announcing that it is receiving over 40 enquiries per week. Employers who can afford to do it are already thinking about making sizeable changes to their employee benefits packages.

Absence Management

Finally, in these difficult times, it is easy to forget some of the basic elements of dealing with staff. All of the above benefits are designed to encourage staff retention and keep your workforce happy. But experience suggests that during times of trouble, absenteeism often rises. This can lead to higher premiums to cover risk such as for long-term sickness benefits. It is therefore important for employers to have robust absence management tools in place, not only to highlight the occurrences, but to put in place early intervention measures that curtail the problem and immediately bring down risk premium costs.

Recessions are not pleasant to endure but experience has shown us that companies that tighten their belts sufficiently come through them looking much fitter for business.

GROUP LIFE ASSURANCE - ARE REGISTERED SCHEMES THE ONLY OPTION?

Matt Haswell looks at tax efficient group life assurance schemes outside the pension regime.

It is common for an employer to sponsor a group life assurance scheme to provide a lump sum to an employee's dependants in the event of his or her death.

In the past, in order to gain tax efficient status, the tax authorities had to approve group life assurance schemes. Prior to pensions simplification in April 2006 (A-Day), tax-privileged lump sum benefits payable on death were limited. For most employees, this was up to four times the 'earnings cap' for approved group life schemes. For high earners, in order to secure the desired level of cover, unapproved 'top up' policies which did not enjoy the same tax efficient status were often established.

Post A-Day

On A-Day the old approval regime was replaced by an HM Revenue & Customs 'registration' process. This resulted in radical changes to the shape of group life benefit structures. Features include the following.

  • Existing approved policies automatically became registered policies.

  • There is no 'earnings cap'. A scheme may set its own cap or rely on transitional provisions that allow an earnings cap to continue in the pre A-Day format until April 2011.

  • Unlimited dependants' pension can be payable on death in service. This is taxed as income.

  • A lifetime allowance (LTA) was introduced on the value of all tax-privileged pension savings, including lump sum benefits payable on death. This is currently Ł1.65m and increases year on year.

Under the old and new regimes some things remain the same in terms of favourable tax treatment.

  • Premiums paid by the employer can be offset against corporation tax as a business expense.

  • Premiums paid by the company are not treated as a 'benefit in kind' for employees.

  • Lump sum death benefits paid out are free from income tax and, if paid via a discretionary trust, are normally free from inheritance tax.

A Significant Downside To Registered Schemes

While the removal of the earnings cap brings unlimited lump sum death-in-service benefits, such benefits are only tax free if below the LTA. A tax rate of 55% applies to lump sum benefits over the LTA.

This affects high earners whose life assurance cover (traditionally based on a multiple of salary) brings them over the LTA. It also impacts on employees whose death benefits from other pension arrangements, when added to death benefits from life assurance, would bring them over the LTA.

A Solution – Excepted Group Life Policies

Group life assurance schemes do not in fact have to be established as registered pension schemes to benefit from the favourable tax treatment outlined above.

Another type of group life assurance arrangement, known as an excepted group life policy, is available. This policy does not sit within the new tax regime and any death benefits from such a policy do not form part of the LTA.

An excepted policy, which meets the following caveats, enjoys the same tax privileges as a registered scheme and should be seriously considered as an alternative.

  1. The cover must be provided to more than one employee.

  2. The same method must be used to calculate the capital sum payable in respect of all individuals included in the policy.

  3. The policy must only pay a capital sum on the employee's death, no other benefits may be payable and the cover must end before the employee's 75th birthday.

  4. The policy must have no cash-in value other than a refund of 'unused' premiums.

  5. The benefits can only be paid to an individual, charity or trustee.

  6. No employee (who is a member of the scheme) can receive death benefits in relation to another employee's death unless he or she is a financial dependant of the deceased.

  7. The policy must not be taken out with tax avoidance as the main purpose.

With guidance, these caveats can normally be easily satisfied, leading to the establishment of a tax efficient group life assurance scheme outside the pension regime and therefore providing uncapped benefits outside the LTA.

FINDING THE RIGHT FIT - THE NEW AGE OF SELF-INVESTED PENSIONS

David Quinton examines why SIPPs are fast becoming the pension arrangement of choice for both employers and employees.

Defined benefit arrangements are disappearing fast, with employers unable or unwilling to underwrite the guaranteed liabilities inherent in this type of scheme.

So, what is the ideal company pension arrangement for employers? The following are likely to feature on most wish lists.

  • Controlled fiscal liability

  • Simple administration

  • Flexibility

  • Minimal custodial/trustee responsibilities

  • Workforce appreciation

  • A single arrangement that meets most staff members' major aspirations

SIPPs tick all these boxes. Such arrangements are widely perceived as individual schemes, but they are also available on a group basis. Their increasing popularity is being fuelled by senior executives seeking more flexible pension planning and by the pension simplification legislation introduced in 2006.

What Are The Benefits?

So, why are group SIPPs becoming the arrangement of choice for both employers and employees?

  • The liability for contributions is fixed, clearly defined and capped for the employer.

  • Costs are transparent, easily monitored and controlled.

  • There are no trustee or custodial duties.

  • After the design stage, the employer has only an overseeing role in terms of stewardship, with delegated responsibility for delivery.

  • The workforce can be offered investment options to suit all tastes, including flexibility and direct control over investment decisions for senior executives.

  • Staff find the arrangement simple and flexible.

Grouped SIPP arrangements can be offered to a wider selection of employees, including senior staff and key personnel. Although technically just collections of individual contracts, group SIPPs are run more like company pension arrangements. The employer retains control over the arrangement and the way it is offered.

A restricted fund range can be introduced to protect risk-averse staff or to offer particular fund choices, such as 'green funds' for environmental companies or own funds for investment fund managers. For members who want it, the SIPP will retain its wider investment powers.

Employers will have different aspirations for the retirement benefit package they offer to staff. Careful design in conjunction with advisers can ensure that all of these requirements are taken into account at an early stage. The result is a modern, effective, flexible arrangement at a reasonable cost, with minimal administrative responsibilities.

Arrangements For Professional Practices And Partnerships

The pension simplification rules have encouraged the development of another type of self-invested pension arrangement, suitable mainly for small groups such as professional practices and partnerships.

Among other benefits, these pension schemes will be able to purchase commercial property to be let back to the business as its trading premises on arms-length terms. This had previously been the remit of small private companies only, but is now more widely available. This option can be highly attractive, offering, among other things, opportunities to assist small businesses with succession planning.

The Smith & Williamson Professional Practices SIPP has been specifically designed for businesses seeking imaginative but robust solutions in these areas and can help bring pension and business planning together for professional practices and partnerships.

FLEXIBLE SOLUTIONS - NOT ANOTHER IT HEADACHE BUT A COMPLETE HR SYSTEM AND MORE

Flexible benefits packages were slow to take off in the UK. Ian Luck takes a look at why things have changed.

Flexible benefits were first introduced in the US in the 1960s. You could have guessed their origin as they were previously called 'cafeteria benefits'. The reason for this was that staff were able, for the first time, to choose the benefits best suited to their needs from a range being offered by the employer.

By more closely meeting the requirements of individuals, employers with this type of arrangement are generally more attractive to current and prospective employees.

The trend towards flexible benefits did not hit these shores until the 1980s. So, in the last 20 years or so, surely we have seen an explosion in the number of flexible benefits arrangements? Well actually, no.

System Developments

The main reason for this is probably their perceived complexity – particularly the amount of administration required to keep accurate details of each member's chosen benefits. Broadly speaking, flexible benefits were the preserve of larger organisations that could afford to commission a bespoke administration system. But within the last few years, advancements in system design have made them more accessible to everyone.

The systems are now more modular in design. This not only reduces the cost of replication as the underlying system remains the same for all companies, with the ability to turn components on and off according to need, but it also adds greatly to the flexibility of the offering. Various modules can be activated at different times to enable a controlled roll-out of benefits to staff.

While a bespoke system will better fit all the intricacies of an individual company, at tens, if not hundreds of thousands of pounds, they are beyond the range of most company budgets. For a minimal reduction in functionality, that most companies would not notice, a high-quality flexible benefits administration system can now be sourced at a fraction of the cost.

If you shudder at the thought of introducing a major new piece of IT to the company, then let me allay some of your fears. Firstly, these new systems are internet hosted. There is no big server to accommodate, update and maintain. Provided you have access to the internet, you can install and use one.

Data Management

Of course, installing a flexible benefits system is a major project. This is where your advisers should come into their own. By working closely with you, your advisers will have a good understanding of your requirements so they can resolve many of the more mundane queries. This will leave you to manage the data collection – possibly the most important part of any flexible benefits system.

Ultimately, a good flexible benefits model is dependent on having control over the data. It is important to have a central source of all information on your staff, as and when required, to enable effective management. It should also allow employees to self manage the data so that human resources (HR) departments need not get involved in the minutiae.

Reviewing Existing Benefits

It is useful to be able to use data to update providers and payroll systems and to reiterate to staff the breadth of the benefits package, perhaps through the use of total reward statements.

Although flexible benefits can be introduced to promote an existing benefits package, ideally they will be part of a wider review of the total rewards strategy of the company. A review should take into account the ways in which employees are being motivated and rewarded, and feed directly into their individual management. This will ensure that not only do you get the maximum out of the system, you get a co-ordinated approach to these vital areas. Your adviser should be able to help you with an examination of the way in which you are managing your employee benefits in order to maximise their effect.

Feasibility Study

Experience suggests that the most vital part of any flexible benefits package is the feasibility study. It is well worth spending a little bit extra on a comprehensive and wide-ranging feasibility study before embarking on the project. Not only will this pay dividends in the long run, but it will become the basis of your HR department's business plan for the foreseeable future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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