Modelling tools can help staff understand their benefits and encourage them to act on money matters, but they will require additional support, says Sonia Speedy
Boosting employee interest in their personal finances and workplace perks can seem like a Herculean task. But increasingly sophisticated modelling tools are helping to ease this process, while offering advantages for employers too.
These calculator tools allow employees to consider the potential impact of different financial decisions or scenarios. They are often used in pension planning, tax guidance around company share schemes and in flexible benefits provision.
Trevor Rutter, communications consultant at Mercer, says modellers are particularly good at showing an employee just what various scenarios will mean for them. “It helps them to do ‘what if’ calculations and to look at changing their circumstances and see the effects of changing them. It’s a perfect tool for communicating individual circumstances to a member,” he says.
Jonathan Watts-Lay, director at JPMorgan Invest, says modellers have traditionally been used in pension planning to help staff understand how much they need to put away for a comfortable retirement.
These tools typically work by allowing staff to input information such as the percentage of their salary they wish to contribute, their age and when they want to retire, leaving the modeller to calculate the size of the pension pot they are likely to end up with, he says.
Alternatively, staff can input the size of the pension pot they already have and the modeller will calculate the level of retirement income they are likely to receive.
John Sansone, employee benefits division practice manager at Towry Law, says good pension modellers will offer both options and will also take account of other factors such as the state pension, previous pension funds accrued, the costs involved in the pension scheme and changes in the cost of living.
Modern modellers are becoming increasingly sophisticated and are tackling more complex scenarios, placing even greater importance upon the other forms of financial education that sit alongside them, says Watts-Lay. They can be used to help staff work their way through different investment choices. “Often people get into savings schemes within their organisations, like pensions or share schemes, but when it comes to what to do at the end of that savings period, there’s not a lot of help there,” he says.
For example, modellers can help staff make decisions about things like what to do when their company share scheme matures. This can include showing them the amount of capital gains tax that may be due and helping to illustrate the various scenarios that might be open to them to mitigate tax, such as the use of individual savings accounts (Isas) and the transfer of assets to pensions.
In addition, Peter Leach, a director of Killik Employee Share Services, says modellers can also help employees to calculate things like income tax liability at the point of exercise of share options. He adds they can also form a vital role in share scheme communications, particularly around more complex schemes such as share incentive plans (Sips) where different tax rules apply.
Leach says modelling tools need to be backed up with the necessary support and processes to help employees make changes to their perks. “Calculators are great, but they really just tell employees – 99 times out of 100 – that they’ve probably got a problem and they need to do something about it. That’s great, but then employees need support to be able to resolve that,” he says.
Modelling tools are also being used to help staff make choices around the various perks on offer to them through flexible benefits schemes. Gerry O’Neill, chief executive at flexible benefits provider Vebnet, says modellers are an intrinsic part of the flexible benefits enrolment process, and can be used to show staff the impact of different benefit “combinations and permutations” on their post tax and national insurance (NI) pay.”[Flexible benefits schemes] need to have an enrolment modelling capability so [employees] can see not just the individual cost of the benefits, but also the net effect of different combinations and to be able to compare those,” he says.
For example, schemes with modelling capabilities can enable staff to work out the tax and NI savings they can make through using childcare vouchers or to choose the most tax-efficient company car for them.
O’Neill says: “They can see the cost of the childcare, they can look at different combinations of the number of vouchers that they can purchase and the net impact of NI and tax that it will have on their pay packet.”
Paul Jackson, managing director of fleet firm The Miles Consultancy, says it offers modelling tools that help employees compare the relative costs involved when deciding between a company car and cash. They are also used to help employees choose a model from a list of company cars on offer, including factoring in various costs such as tax.†
While modelling tools are undoubtedly aimed at benefiting the employee, there are spin-offs for the employer too.
Watts-Lay says that these tools offer a relatively cheap way for bosses to increase the value of the benefits packages on offer and that proper education combined with the use of such tools can help prevent employees being “tripped up” by the likes of tax issues.
Rutter points out employers can also make cost savings on management time by offering modelling tools. “The alternative is the member ringing up the pensions department or the guy who runs the car fleet with a list of 20 questions that they then have to look up themselves and answer,” he says.
While effective in highlighting the value and variety of perks on offer, modellers and other calculator-style tools are not a magic bullet. Rutter says that these are often based on a variety of underlying assumptions and therefore need to be understood in context. “What [they don’t] do is give [staff] the big picture and a high-level message. Pensions are the classic there, because if you don’t understand the concepts and the theory behind what you’re doing you might find a modeller is misleading,” adds Rutter.
Staff also need to be directed and encouraged to make use of the modellers. “Something, somewhere, has to make me, as an employee, realise that it is worth going to look at this and to use it. [A modeller is] either going to be on a CD; or it could be on a website; or off an email; or it could be on a kiosk in the canteen,” says Rutter.
Employers should ensure that the information produced by modellers is consistent with other company communications and the tools are kept as simple as possible to use. “If [employees] can’t use [a modeller] without having someone from HR there to interpret the results, it’s not doing the job,” Rutter says
Top tips: How to offer an effective modeller
• Make it clear to employees why they should be interested in the particular modeller available and how it could be useful to them. Keep the modellers simple and easy to understand.
• Make sure that the modeller directly and specifically relates to the benefits that the organisation offers.
• Ensure that whatever the modeller suggests an employee can do, they can act on it. For example, if it suggests that transferring the shares in a share incentive plan into a self-invested personal pension could be beneficial, then make sure the employer’s administrative set-up allows staff to do that.
• Make sure that the financial education and the tools themselves on offer allow for ongoing scheme reviews. For instance, where an organisation offers two sharesave (Save-as-you-earn) schemes a year, employees will need to be taken back through the system each time.
• Consider offering a helpline, potentially from a third party, for those employees with questions after they have been through any kind of modelling process.
Case study: Siemens
Technology giant Siemens made extensive use of modelling tools last year when it moved from an array of final salary pension schemes to a defined contribution pension plan and took steps to standardise the way pension contributions were calculated.
The change affected around 6,000 of Siemens UK’s workforce, which numbers over 20,000 in total. Before bringing in the changes, the company held an extensive consultation process which involved roadshows, presentations, the distribution of printed literature and the provision of helplines, in order to explain the proposals to staff. As part of this, two modelling tools were provided for employees to see how the changes were likely to affect them.
The first illustrated how the changes would impact on employees’ take-home pay, and the second enabled them to project retirement benefits.
By making the modellers available on the intranet and internet, as well as emailing them out to some staff, it was ensured that as many employees as possible could access the tools.
These devices helped employees make a decision about the exact level of pension contributions they wanted to make for the following 12 months, at the end of which a further choice would be made.
Ian Howard, director of corporate pensions, says: “You couldn’t have answered the ‘what does it mean to me’ questions without those tools. They were critical in helping people to understand the change, and [to] make an informed decision about it when the time came.”†