Package deal.

Benefits are costly to provide and can be seriously undervalued by employees. Flexibility is the key to redressing the balance, says Anne-Marie McEvoy, and can help companies to maximise return on their benefit investment

The obligation for employers to review pension provision, and some alarming statistics on employees' perception of the value of benefits packages, are prompting companies to take a long, hard look at how to get best value from their benefit offerings.

Today, companies provide employee benefits for a number of reasons. For most, the benefits package is an important tool for recruiting and retaining key employees and for trying to outmanoeuvre competitors. In addition, it can also support business requirements -- access to prompt healthcare for staff, for example, may help to reduce disruption caused by absence.

Benefits can be used to emphasise an organisation's culture. Companies that determine levels of holiday by grade, for example, are making very obvious statements about the role of status in the organisation.

One issue heavily influencing benefit provision is the work-life balance. Some companies are responding to employee pressure to provide a wider range of benefits that go beyond the traditional offerings to include childcare facilities, lifestyle management services, sabbatical leave and dental care.

Whatever the package on offer, the chances are that it will change over time. Employers must therefore review their benefit strategy regularly to ensure that it is competitive, supports the company culture, is aligned with business needs and meets employee aspirations.

While legislation dictates the things that must be provided as a minimum, this should not be used to determine how the benefits package is structured. Take stakeholder pensions: while it is important for employees to save for retirement, some may perceive other needs as more pressing in the short-term. Employees may decide to use other flexible tax-efficient savings vehicles to provide for their retirement, such as all-employee share plans and ISAs.

Whatever employees decide, it is important to establish their individual needs and for them to understand where their benefits fit into the total package.

Considering the amount of money employers spend on the non-salary parts of the benefits package, it is not surprising they want to ensure they get value for money. Research by William M Mercer indicates that employees underestimate the true value of their benefits by around 20 per cent. There seems to be little understanding of what is available and how much it is worth, but this can be addressed simply through communication.

One of the best ways to increase employee awareness of what is being offered is to give them a choice. Asking the employee to tailor their own individual package will focus their attention on the value to them of each benefit, leading to a greater awareness of the cost of each element. Well-informed employees are more likely to understand and appreciate the value of their benefits package.

However, offering flexibility can also bring challenges. Companies thinking of introducing such schemes need to consider the values driving the arrangement -- these will determine what should be core provision and what employees should be allowed to select, how credit should be decided and who should have access to what benefits.

Given the diversity of the working environment, one hat clearly does not fit all. From an employee's perspective, having a package that treats them as an individual and gives them choice should lead to greater satisfaction. It demonstrates that the employer is willing to listen to employee needs, which in turn should make them feel more valued.

Flexible benefit plans can also be potentially useful devices for controlling the cost of the overall package. An employer can design a scheme to allow all employees their basic salary plus some core minimum benefits and an allowance to spend as they wish. By controlling the allowance, the employer transfers some of the benefit risk to the employee and can cap the cost of most of the benefits in the employee's package (although there are certain benefits that normally sit outside the flexible benefits structure, such as final salary pension plans, where the costs cannot be capped in this way).

Employers do not necessarily have to pay for all of the benefits they offer. A flexible package can give employees access to additional benefits that they pay for out of their salary. In certain circumstances they may also benefit from a reduced tax and national insurance bill. In addition, the benefit prices will have been specially negotiated on their behalf using the company's purchasing power. Significant discounts can be arranged -- depending on the size of the company -- and underwriting restrictions on risk benefits are often rather less cumbersome.

The benefit structure depends on the employer's culture -- whether it prides itself on being paternalistic or tends to encourage employee empowerment, for example. Whatever the nature of the company, most employers try to ensure that all their employees have a minimum level of protection benefits -- such as life assurance and pensions.

The range of benefits is vast, but it is important to strike a balance when designing the package. It is now common to consider aspects of an employee's life when determining the benefit structure, including healthcare, financial security and lifestyle benefits.

Healthcare benefits are designed to protect the employee and their family against high healthcare bills. Some of the common benefits in this class include private medical insurance, health screens, dental insurance, optical insurance, personal accident and critical illness insurance.

Financial security benefits aim to provide financial security for employees and their dependents in the future. It is a traditional type of benefit usually offered with little flexibility as to the levels of cover.

More and more employers are now offering some choice in these benefits to eater for their employees' individual needs. For example, employees may value life assurance more if they have family commitments.

Lifestyle benefits are becoming increasingly popular with employees. Unlike the more traditional benefits, they are designed to redress imbalances between home and work life. They may include flexible working hours, membership of the local gym, or a more relaxed approach to how staff use their holiday entitlement. Allowing employees to accumulate paid time-off-to take a sabbatical, for example, shows that employers recognise that employees have different needs and priorities at various stages in their lives. Employers may also offer lifestyle management, designed to deal with conflicts caused by pressure of work.

So where do pensions fit in with the changing benefits culture? Final salary schemes, the traditional kind of pension offered by employers, have lost popularity over the past few years, mainly because they were so misunderstood and undervalued by employees.

Employers are now moving more towards defining the contributions that they are willing to make to a pension plan, as opposed to defining the benefit that they will pay out. Stakeholder pensions fall into this category. In many aspects they are similar to personal pensions and other defined contribution occupational plans. One advantage is that they can easily be integrated into a flexible benefits package because employees are able to choose what level of contributions they make.

If a pension plan is presented as part of the whole benefits package, rather than being dealt with separately, employees are more likely to understand its value and choose other benefits accordingly. Take, for example, an employer who decided to put its pension options on-line with the flexible benefits package. Although employees had some flexibility over what they could contribute to their pension plan, their pension choices had always been communicated separately.

As a result of putting them together, 20 per cent more employees changed their contribution rate in the first month. This was despite the fact that the pension decision was independent of other benefit selections and they could change their contribution at any time. The benefit structure that an employer chooses to offer its employees needs to take account of many things, such as the business need, company culture, cost and employee profile. By tailoring packages, staff get the individual treatment and flexibility they want, and companies stand a chance of getting a better return on their investment.

Anne-Mario McEvoy is a consultant with William M Mercer