Financial education has probably never been more relevant to employees, and organisations can tailor it to the needs of their workforce in various ways, explains Ben Jones
In an age when those we entrusted with our money fouled the whole business up so spectacularly, one might be forgiven for asking: if the banks do not know how to make good financial decisions, how are the rest of us supposed to achieve this?
In a tough economic climate, where the buy-now-pay-later approach of more prosperous times has all but died away, many people are now looking for help with getting, or keeping, their financial affairs on track.
Thankfully, help is at hand in the form of financial education, and the workplace is often an ideal setting to reach a wide audience. Financial education can be used to give staff information about a range of personal finance issues. It can help staff to understand the value of the financial perks offered by their employer and, when coupled with financial advice, can encourage them to make informed decisions about their finances.
Mark Pearson, director, business development at Origen, says: “Financial education is about educating employees about the benefits the company provides, such as a pension or share scheme.”
Employers can also opt to extend financial education beyond benefits and work-related issues to help employees with their general financial planning. This can include covering topics such as managing debt, budgeting and taking out a mortgage.
Three categories of education
Jonathan Watts-Lay, director at provider Wealth at Work, puts financial education into three categories: managing risk for the employer and employee, employee engagement, and changing policy and regulation. “We have seen situations like the collapse of the bank HBOS, where a number of staff who were probably on quite modest salaries had quite a large proportion of their liquid wealth tied up in the company’s shares. Then the company went bust, and they lost all that money. The message there is: do not put all your eggs in one basket.”
Financial education tends to be well executed when staff take up a financial benefit, but that is not always the case when the investment matures. “Companies are always telling people about joining their share schemes and such like, but it very much needs to be an ongoing process. It is no good doing it once and saying ‘we have done that’,” says Watts-Lay.
Employers can choose to undertake financial education in-house or employ the services of a third-party provider. If they want to provide staff with financial advice however, they need to ensure they comply with the law by only using a qualified independent financial adviser (IFA). Whatever route they choose, financial education can be delivered in a number of ways, including posting basic information on the organisation’s intranet or internet sites, benefits brochures, posters and flyers, group seminars, and workshops. More innovative employers could also use web or podcasts for staff to download and watch or listen to.
The type of education given will vary, depending on the type and size of the organisation involved, as well as the objectives it is hoping to achieve.
When employers opt to use an IFA, they must decide whether to go for an adviser that is remunerated on a fee or commission basis. Both routes have their pros and cons for the sponsoring organisation.
Angus Jones, managing director of provider Clarity, says: “The more you come back to fees, the more strategic your advice tends to be, whereas if you go by commission, you become product-focused.”
Mick Calvert, associate director at HR consultancy Towers Watson, is not a fan of commission-based remuneration for advice: “Basic financial planning should be fairly straightforward. People should not have to pay 5% or whatever on top to get good advice.”
However, the Retail Distribution Review (RDR) planned by the Financial Services Authority (FSA) could have major repercussions for financial advice in the workplace. If RDR proposals are implemented in 2012, benefits consultants and advisers can no longer be paid commission by the pension providers when appointed to deliver an employer scheme. Instead, employers will pay the fees and/or commissions, agreeing upfront how much the advice will cost them and how they will pay for it.
Advisers which rely on provider-paid commission declare that under the FSA’s proposals, employers would have to employ extra staff to run their pensions and benefits schemes with no add-ons, such as financial advice for staff. They say that this could result in a worst-case scenario of employers no longer being able to afford to offer their employees any sort of financial advice on benefits and retirement planning.
However advisers and consultants which do not take provider-paid commissions say it will have little effect.
Another big change for the financial education industry in the past year was the establishment of the Consumer Financial Education Body (CFEB), which demerged out of the FSA earlier this year. The CFEB was created to enhance people’s understanding of financial matters and improve their ability to manage their own financial affairs. The CFEB runs free workplace financial education seminars, as it did in its former FSA guise.
Effects of pension reforms
Forthcoming legislative changes could also affect the financial education and advice market. The pension reforms of 2012, which will see the introduction of auto-enrolment and compulsory minimum employee and employer contributions, as well as the tax changes for high earners could both increase the need for financial education and advice for employees.
As Neil Wilkie, associate director at AWD Chase De Vere, says: “Change tends to be what brings enquiries from HR departments.”
Focus on facts
What is financial education?
Generic financial education can give employees a better understanding of the benefits they are offered, as well as addressing their wider financial planning needs. Employers have a range of options available to them, which they can carry out in-house or through a third-party provider.
What is its origin?
Workplace financial education emerged in the late 1980s as listed companies looked to offer their employees share schemes, but failed to educate staff on the tax issues surrounding these.
Where can employers get more information?
More information and free modelling tools are available from the Consumer Financial Education Body.
Nuts and bolts
What are the costs involved?
The costs of offering financial education to staff will vary depending on factors such as the format chosen and the size of the organisation. For example, a financial education seminar can cost a few hundred pounds per person, but an ongoing annual service can cost up to £2,000 for every employee in an organisation.
The Consumer Financial Education Body has taken over the Financial Services Authority’s (FSA) free workplace ‘Money made clear’ seminars, which can be offered to staff.
What are the tax issues?
Pensions advice, if it does not cost more than £150 per person, is exempt from tax and NI. If it costs above that, it must be reported via P11D. Any other form of financial education is taxed as a benefit-in-kind.
What are the legal implications?
A distinction must be drawn between financial education and financial advice. Only someone registered with the FSA can give advice, so employers must avoid straying into this area.
What is the annual spend on financial education?
Exact figures are not available, but it is thought to run into hundreds of millions of pounds.
Which providers have the biggest market share?
Exact market shares are not available, but providers include Alexander Forbes, AWD Chase de Vere, Bluefin, Clarity, Close Wealth Management, Friends Provident, Legal and General, Life Academy, Origen, Templar Group, Towry, Wealth at Work.
Which providers increased their market share the most over the past year?
Figures are not available.