Employers have always been interested in financial education, but recent changes to the pensions industry, particularly the arrival of auto-enrolment, have made it an essential offering to staff.
What is financial education?
Workplace financial education involves employers, or a third-party provider, educating employees about financial benefits, such as pension and share plans, and teaching them how to use these perks to optimise their financial wellbeing. Financial education programmes typically focus on financial benefits, but can also include individual savings accounts (Isas) and tax planning.
What is the tax status of financial education?
HM Revenue and Customs regards individual financial education as a benefit in kind, with the tax charge generally on the cost to the employer providing the benefit. However, there are certain exceptions for pension advice costing below £150 a year and debt advice.
What are the origins of financial education?
The first employee programmes, launched in the 1970s, focused on pensions, but they have since evolved into wider offerings. Mass redundancies triggered a need for such programmes. Staff made redundant were awarded sizeable lump-sum payments and were typically in their early 50s, having worked for their employer since their late teens. Employers felt a sense of paternalism, particularly because such staff were unlikely to have been able to afford professional financial advice, to ensure their personal finances were in order and that they could maintain a decent standard of living.
What are the costs involved?
A financial education programme can be expensive for employers, although costs will vary depending on an employer’s size and the provider it chooses to work with. Prices can start from less than £1 per employee per year.
What is the annual spend?
There are no official figures on the annual spend on financial education, but an employer can easily spend up to £3,500 per employee per annum for independent financial advice.
How do they work?
Financial education providers offer one-to-one sessions and group workshops, covering topics such as investment guidance and retirement planning. Some consultants also offer online courses, which take advantage of new computer technologies, such as webcasts via Skype.
Which providers have the largest market share?
The biggest providers include Anthony Hodges, Clarity, Close Brothers Asset Management, Friends Life, Jelf Employee Benefits, Life Academy, Lorica Employee Benefits, Money Advice Service, Origen, Towers Watson and Wealth at Work.
What are the legal implications?
Employers are prohibited from giving employees financial advice. Only Financial Conduct Authority-registered advisers are permitted to do so.
- 45% of people are prepared financially for their retirement. (The annual Scottish Widows pensions report, 2012).
- 12% of respondents globally are very optimistic that they will have enough money to live on when they retire (The Aegon retirement readiness survey 2013).
- 18% of employees are aware of the various retirement income options available (Wealth at Work’s Rethink retirement survey, December 2012).
- 39%: difference between the average employment income of £19,000 and retirees’ average income of £11,600. (Partnership analysis, June 2013)
A well-designed financial education programme, tailored to the needs of a workforce, can help improve employees’ financial literacy and, consequently, increase take-up of benefits such as pension and share schemes.
Financial education can also help employees to understand ways in which they can make their take-home pay go further, which may help to reduce stress and other illnesses that may arise from experiencing financial difficulties.
A poll of working-age people undertaken by Axa UK in support of its My Budget Day initiative in 2009 found that financial anxiety affects almost 25 million working adults and is the cause of 1.4 million employees going absent from work. The economic downturn has inevitably exacerbated such anxieties for many more employees.
More than 17% of employers now have a financial education programme in place, according to Workplace financial education, a survey published by the Chartered Institute of Personnel and Development in August 2012.
Employers are prohibited from offering employees financial advice, but they are permitted to offer guidance on, for example, how to access the financial information staff may need for their particular circumstances.
Appointing a financial education provider or independent financial adviser is another option for employers to consider. Such third parties can provide guidance in the form of workshops that maycover a range of topics relevant to particular workforces. After all, there is no point in focusing on share plan investment for a young workforce that might find debt management more useful.
Employers could opt to segment their workforce and use different workshops for different employee groups to optimise the effectiveness of their programme. For example, debt management workshops could be targeted at younger employees, who may be struggling with student debt.
Time off work
According to the 10th annual MetLife study of employee benefits trends, published in March 2012, poor financial management by staff in their twenties leads to 15% of them taking time off work to sort out money issues.
At the other end of the scale, employees approaching retirement could be offered support with retirement planning workshops. These could provide information about, for example, the pension scheme annual tax relief allowance, which the government has reduced from £50,000 to £40,000, and the lifetime allowance, which will be lowered from £1.5 million to £1.25 million with effect from April 2014.
Retirement planning, including flexible-working options, may be another topic for employers to consider offering their workforce. Analysis by insurer Partnership, based on figures from HM Revenue and Customs’ Survey of personal incomes 2010/11, published in June, shows that retirees’ average income is currently £11,600, 39% below the average employment income of £19,000, which may be an eye-opener for employees.
Also, the Rethink retirement research published by Wealth at Work in December 2012 found that employers believe only 18% of employees are aware of the various retirement income options available. The research also found that only 13% of respondents are aware they no longer have to buy an annuity at retirement.
But the real strength of a financial education programme lies in its scope and flexibility, so employers should aim to provide guidance on a range of financial topics, rather than concentrate on one area. It may be tempting for an employer to focus only on retirement saving to help ease the introduction of auto-enrolment and minimise opt-outs, but this approach should be avoided.
However, financial education does not come cheap, which makes provision challenging, particularly for smaller employers. Some organisations are minimising cost by offering financial advice on a voluntary basis, while others are offering employer-funded advice to those most in need, such as retirees. Others still are targeting only senior managers and executives with financial advice offered by an independent financial adviser (IFA).
Employers that want to offer a financial education programme should first consider the needs of their workforce and then the basis on which they are prepared to offer guidance. Do they want to work exclusively with one provider or share the workload among several providers that offer different financial specialisms?
Employers should also consider whether the benefits professional tasked with the day-to-day implementation and management of a financial education programme understands what is involved in working with a financial education provider or adviser before entering into any deal.
Effects of RDR
Finally, employers must take into account the retail distribution review (RDR), which came into effect on 1 January 2013. Under this legislation, financial advice and education from IFAs and employee benefits consultants must be charged on a fee, rather than a commission, basis.
This may make a long-term commitment to financial education economically undesirable for many employers.
The aim of the Financial Conduct Authority’s rules is to stop intermediaries from making biased product recommendations based on the providers that pay the most commission.