Daugherty C04 presentation

Flex - A Case StudyBuilding the Business Case for Flexible Benefits: 

Flex - A Case Study Building the Business Case for Flexible Benefits 13 June 2002 Chad Daugherty Hewitt Bacon & Woodrow Alison Harber Hewitt Bacon & Woodrow

Agenda: 

Agenda What is Flex Why Organisations Consider Flex Building the Business Case Measuring Success Pensions in Flex Any Further Questions

What is Flexible Reward?: 

£x = £x What is Flexible Reward?

What’s on the Menu?: 

MENU Lifestyle Options Holidays Sports/leisure clubs Car/petrol Childcare Retail vouchers Travel insurance Bicycles Financial Options Pension Loans Mortgages Financial planning Pension counselling Cash Providing for the Unexpected Life assurance Long-term disability insurance Medical insurance Dental insurance Critical illness insurance Personal accident insurance Pet care insurance Professional Options Personal development Business equipment Car parking PC packages PDAs What’s on the Menu?

How Does it Work?: 

Employer: Your package is £25,000 Some of it is fixed The rest is flexible - how would you like it spent? Employee: Like this Employer: OK How Does it Work?

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0% 5% 10% 15% 20% 25% 30% Other Reducing the cost of total compensation Removing/reducing status symbols Harmonising total compensation arrangements Containing future benefit cost increases Helping recruitment Helping retention Increasing employee understanding of total compensation Meeting diverse needs of employees Source: Hewitt Survey 2000 -2001 of Employee Attitudes to Flexible Benefits Why Organisations Consider Flex

The Business Case/ Feasibility Study: 

The Business Case/ Feasibility Study Six critical elements Assessing the environment for flex Developing the plan design Developing the communication strategy Administration/systems issues Assessing the level of investment Ensuring buy-in

Assessing the Environment for Flex: 

Assessing the Environment for Flex

Assessing the Environment: 

How do we run our Business? : Assessing the Environment

Reward Philosophy: 

Reward Philosophy Reward Philosophy How do all of these elements support the business and HR strategy?

The Outline Design: 

The Outline Design Key considerations include: Design principles Eligibility Flex fund development Pay management Menu choices/pricing Core benefits New hire packages Default benefits

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Design Mechanism Strategic Aim From Strategy to Design

CSC Case Study: Flex and Harmonisation: 

CSC Case Study: Flex and Harmonisation Total Compensation Model to Harmonisation Contract 1 Base Salary Other Benefits Life Insurance Private Medical Pension Base Salary Life Assurance Pension Other Benefits Contract 2

The Communication Strategy: 

The Communication Strategy Key considerations include: Philosophy/key themes and messages Branding/look Process/vehicles/timing to cover: Interest Education Action Feedback

Administration and Systems: 

Administration and Systems Key considerations include: Uncovering issues and scope for rationalisation of systems and processes (e.g. HRIS, payroll, joiners, leavers, internet access, etc.) What we currently have What we could have How we transition How we overcome interim issues In-source/out-source/co-source administration

Sources of Cost and Savings: 

Sources of Cost and Savings Possible sources of cost: Time spent in design, set-up, communication, administration/delivery (internal or external time) Current non-take up of benefits Printing/intranet design costs for communication On-going administration, redesign and communication costs Possible sources of savings: Employer National Insurance savings for some benefits Benefit cost savings through containing future costs (e.g. medical) Potential reduced benefit administration (depending on insource/outsource decision) Integration - not moving to ‘highest common denominator’s Lower employee turnover (reduced recruitment costs and higher productivity)

Ensuring Buy-In: 

Ensuring Buy-In Key considerations include: Analysis of key issues Early identification of stakeholders Board/executive Wider business and HR community Unions Syndication Formal Informal

Conditions for Success: 

Conditions for Success Link the plan to business and employee needs Actually setting success measures early in the process so you know what “success” means Successful plans take account of wider organisational impact Integrated design, delivery and communications activity High level champion and effective syndication Dedicated project manager and realistic project timeframes

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Pensions in Flex

CSC pre-Flex: 

CSC pre-Flex Legacy arrangements DB : many accruals and contribution rates DC : many contribution structures New hires DC : min 3% employee contribution, matched by employer to max 8%

CSC post-Flex: 

CSC post-Flex DB legacy arrangements: unchanged, but notional “value” in Flex fund All DC: contribution structures unchanged, but employee contributions by salary sacrifice

DC structure for new hires: 

DC structure for new hires NB: Outside Flex

What are the issues?: 

What are the issues? Flex contributions are ‘employer’ contributions not deemed part of ‘salary’ need for notional pensionable salary not deemed part of ‘earnings’ need for particular care over Inland Revenue limits increased employee communication and education to reduce possibility of over-funding complex checking procedures around additional contributions

What are the issues?: 

Potentially increased complexity of communication contributory/non-contributory differences between AVCs and flex contributions Benefits based on return of employee contributions may need to be redesigned vesting periods death-in-service What are the issues?

What are the issues?: 

Additional administration implications changes to administration systems additional record keeping Inland Revenue limit checks changes to scheme documentation What are the issues?

Why Flex Pensions?: 

Why Flex Pensions? One of the largest elements of non-cash reward can provide a better understanding of “value” employees ask why it’s not included Increases the success of flex plan generally one of the most successful flex benefits easy access to additional contributions Provides increased flexibility to employees Flex contributions in addition to 15% AVC limit

Why Flex Pensions?: 

Why Flex Pensions? Employee and employer National Insurance savings Salary/Notional Salary Employee Pension Contribution (5%) Flex Pension Contribution (5%) Income Tax Employee NI Net Take-Home Pay Employee Saving Employer Saving ‘Conventional’ Pension Arrangements Integrated with Flex Plan £20,000 £1,000 £0 £2,957 £1,547 £14,496 £20,000 £0 £1,000 £2,957 £1,447 £14,596 £100 £119

Why Flex Pensions?: 

Why Flex Pensions? Improved communication and understanding further develops employee appreciation and understanding of the pension provision Allows pension plan to respond more effectively to the needs of the workforce highly mobile, young vs. closer to retirement Can facilitate harmonisation of different pension arrangements scheme rationalisation DB to DC transfers

Why Flex Pensions?: 

Why Flex Pensions? Reduce HR/payroll administration some transactional activity can be provided through flex delivery mechanism inter-scheme transfers more efficient/pro-active distribution of materials more efficient capture of information employee queries

How it’s done - without flexibility: 

How it’s done - without flexibility Basic communication communicates plan but provides no flexibility around pension through flex may improve profile and perceived relevance of flex plan Employer’s contribution communicates ‘value’ of plan but does not include the value in calculation of flex fund ‘value’ of pension included in the calculation of flex fund but no flexibility around how this is taken either improves awareness around the value of the plan

How it’s done - without flexibility: 

How it’s done - without flexibility Employee contributions employee contribution for scheme membership is diverted through flex plan to become an employer contribution additional flexibility provided outside of flex leads to employee and employer NI savings

How it’s done - with flexibility: 

How it’s done - with flexibility Defined contribution plans include employer contribution in the calculation of flex fund with charge for scheme membership (and maybe for opt-out) facilitates both trading-up and trading-down from default provision can ‘price’ contributions to share NI savings with employees, but this complicates plan design and communication

How it’s done - with flexibility: 

How it’s done - with flexibility Defined benefit plans more difficult to include pension ‘value’ in flex fund calculation trading-up is generally provided on a defined contribution basis could allow trading up on a DB basis but pricing this option could mean more risk for the employer and would be difficult to administer

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Any Questions?