The future for employee benefits

The immediate future

As I explored in my last article, it is only to be expected that the annual budget set aside for employee benefits should come under scrutiny in these troubled times. The speed with which events have moved since early September has been truly astonishing. While the collapse and rescue of major banks has undoubtedly been something of a windfall for some law firm teams, there can be no doubt that every sector of the economy will feel the effects of the recession we are now entering.

Accordingly, it might be worth reiterating a couple of my key points on how firms might best assess and analyse their benefits spend to ensure they are getting the best return for their expenditure:

Set your criteria for what a successful benefits package should achieve for the firm and then measure how you’re doing against this benchmark; and,
If you’re looking to reduce costs, first survey your employees to help you rank your existing benefits; then consider removing or reducing the level of the least popular benefits. This may give you scope to actually improve the most popular benefits at the same time.

When carrying out any review, it’s important that firms also keep in mind the impending personal accounts reforms; in particular, the issue of auto-enrolment after 2012. As a recap, if the current Pensions Bill passes without significant amendment, all firms will be required to automatically enrol every employee over the age of 22 into a pension scheme and contribute three per cent of a band of their salary into the arrangement. Any restructuring that fails to take into account these sweeping reforms might only produce very short-term savings.

For those firms with group income protection (permanent health insurance), it’s important for their finance and HR teams to consider the impact of the Welfare Reforms on their costs and scheme structure. Indeed, given the more transient nature of employees these days, a review of this benefit may well be overdue, in particular if it provides a benefit through to age 65. Fixed-term benefits have rapidly grown in popularity, especially following the cost increases caused by the Age Discrimination Regulations in 2006.

All of these issues have been considered in greater depth in previous issues of FD Legal.

The longer term

Our views of the economy mirror our emotions in the market – fear and greed. It is fair to say that politicians, economists and the media do like to indulge in a little hyperbole.

No boom is ever a boom – it is simply a reflection of a new vibrant economy which has broken the old mould. It’s not so long ago that a certain person was promising ‘the end of boom and bust’.

Equally, every recession, once it has taken hold, is never-ending and the end of the world is nigh. Despite the allusions to the Great Depression, it seems hard to believe that this recession will result in soup kitchens and mass tented cities for the unemployed. 2009 and (probably) 2010 seem likely to be difficult economic years, but if history and economic cycles repeat themselves then eventually the circle will turn and the sun will rise again.

So having reviewed, revised and budgeted for the short-term economic challenges, what are the future trends for employee benefits?

The next few years will see the leadership of firms passing from the Baby Boomers to Generation X. Given that this will generally mean elevation to equity partnership, the benefits packages planned over the next few years will really need to start addressing the graduates, newly-qualifieds and associates of tomorrow.

Generations Y and Z will be the new blood of law firms and it will be important for firms to consider the employee benefits package and recognise that what was acceptable in the past will need to be re-energised for the future.

Generation Y is subject to many dismissive comments – they are accused of being demanding employees who expect everything to fall into their laps. However, supporters of this generation (generally deemed to have been born between roughly 1978 and 1994) counter that it is probably the most independent, innovative and creative yet and that its members are ready to engage with employers who are prepared to offer the environments in which they thrive.

Jonathan Austin, chief executive of Best Companies (which compiles the Sunday Times ‘100 Best Companies to Work for’ supplement), has argued that debating the merits of the Y generation is pointless, as are comparisons with the preceding Generation X and the Baby Boomers.

Every generation is shaped by its times, and the simple fact is that demographic changes and the global hunt for top talent means this one will be much in demand.

“Generation Y people are looking for organisations that offer more than money,” Austin told the Sunday Times (How to connect with Generation Y – 20/05/2007). “I’m not saying money isn’t important – some of them are carrying debt from university – but our data shows they are looking for a working environment in which they can continue to learn. They also want flexibility and a real work-life balance. They simply aren’t prepared to mortgage their lives to the company.”

Given that the number of graduates has mushroomed over recent years, firms might expect to be awash with choice. However, many employers across all sectors express such levels of dissatisfaction with the quality of many modern-day graduates that it seems the search for the real talent is as challenging as ever.

Appealing to the new generation

There seem to be two key characteristics of this coming generation that must influence the design of employee benefits in future, or certainly accelerate the trends we already see. These elements are the desire for flexibility and the power of networking and the internet.

Flexibility is a challenge now facing many firms if they wish to satisfy their younger employees. This is not simply a desire for greater flexibility in working hours – the fabled work-life balance – but, importantly, the desire for flexibility and variety in the work they are required to undertake.

Whereas preceding generations have tended to accept building a career within a single discipline, Generation Y is characterised by a desire to move across disciplines over the course of their early career to build a portfolio within the firm without jeopardising their opportunities to progress. Translating this into the field of employee benefits suggests that the age of fixed benefits or very limited choice is nigh.

The transformation of the traditional benefits packages of pension, life cover and medical insurance into truly flexible benefits arrangements has commenced, albeit slowly, in the legal sector. In our last survey, only one in eight firms offered a flexible benefits package to employees and the vast majority of those flexible schemes offered were typically limited to pensions, child care vouchers and holidays.

It seems very likely that this evolution must accelerate if firms are to compete and differentiate themselves from their peers and the in-house opportunities at more progressive companies.

In simple terms, a flexible benefits scheme provides employees with an annual personal budget for their benefits. They then use this budget to select a bespoke package of benefits to fit their own circumstances from a range of traditional and lifestyle benefits. These can be as diverse as wine clubs, ‘bikes to work’ schemes and charitable giving.

An online selection is made each year, allowing the employee to change the distribution of their budget as their needs change.

Advances in technology solutions mean that the old assumption that flexible benefits schemes were only practically available to the largest firms no longer stands true.

Having said this, the transformation from fixed to flexible benefits is a journey which needs planning and staging. Firms considering introducing truly flexible benefits in early 2010, for example, should really have already started their project planning by now.

Technology itself is the other key element – Generation Y is the most socially networked group of working individuals yet (at least until Generation Z arrives). With MySpace, Facebook, Bebo and the like, individuals can access and offer opinion about employers faster than ever before. Research suggests that this generation is likely to most value the opinions of its peers, as opposed to its elders.

A firm wishing to portray itself as forward-thinking and modern will rather undermine its self-image if its benefits package appears old-fashioned and, worst of all, paper-based. The younger generations expect instant accessibility 24 hours-a-day via the internet. Ideally, the whole world should be only three clicks away.

Preferably this accessibility should come via an intranet portal and be branded as the firm’s own offering. There is little kudos to be gained through directing employees to a faceless insurer’s website. Many of these technology innovations are already developed and offer the opportunity to gradually build an online fixed benefits offering into a fully-fledged flexible benefits scheme through a staged transformation.

So while tackling the short-term challenges, keeping one eye on the future could prove very worthwhile – greater flexibility and accessibility does not need to mean greater cost but it will require greater planning.

Robin Hames is a consultant at PIFC Consulting. He can be contacted at robin.hames@pifc.com