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The defined benefit (DB) to defined contribution (DC) trend, coupled with the so-called A-Day changes which come into play on 6 April 2006, really change the whole face of how pensions within the workplace are provided, viewed and managed. Financial directors are trying to build in more certainty to their staffing costs with the move from DB to DC, but it invariably results in lower money purchase contributions than were channelled in total into the DB arrangements. Financial education in the workplace is the missing link in the story. Organisations have an obligation now, having provided themselves corporately with a more certain future, to help make their employees’ financial futures more assured.
On the basis they are not going to provide final salary benefits at any cost, they need to do this by meeting the financial education needs of their employees. How many employees are truly going to know how to assess their attitude to risk, determine an appropriate asset allocation model, select suitable funds and then monitor the whole process going forward? And if they are all capable then how inefficient is it to leave them all to do it in isolation? Surely some economies of scale exist? Why not take some expert fee-based advice and apply a series of solutions first using cost-effective “self serve” options such as a dedicated website, online interactive newsletters, email and telephone helplines, seminars and tutorials. Once these bases have been covered, only then consider one-to-one counselling at the more expensive end.
These tasks can be performed in-house but due to Financial Services Authority issues, employers will need to get authorisation to give advice through a subsidiary company. Alternatively, you could outsource this function to a firm geared to providing services in this way, that is to say, for the benefit of your employees and designed with HR communication issues in mind.
Some of these services may be obtained for “free”. Usually through a commission-based independent financial adviser but, as you may have found with any commission-based group personal pension (GPP) set ups, what you are effectively doing here is opening a list of your employees to a salesman. A lot of effort seems to take place at the initial sale (when the commission is generated), but what about the annual maintenance/reviews? Also, if commission is the motivation then what is the likely quality of the GPP product that is put in place? And what impartial advice does the individual get when they come to take benefits and buy an annuity? Do your employees know that they can shop around for an annuity rate and find it might be 30% better elsewhere?
Employers looking further ahead generally realise that a fee-based approach will allow an impartial stance and one where strategic advice and tools are offered, rather than products.
Financial education in the workplace is soon going to move to the “must have” category from the “might have”. Those organisations that set up schemes and really look after their workforce will find knock-on benefits, meaning their floundering GPP/stakeholder will suddenly gain momentum and the take-up rates will increase dramatically. Employees will be less financially stressed, reducing related absences. They will also be better informed about their pension options and understand their other employee benefits more easily.
With employees facing ever-increasing complexity in their affairs, it simply isn’t good enough to suffix all internal communications on benefits with “please consult your own financial adviser for advice”. The footnote should read “please consult your workplace sponsored adviser and website for further information”.