A fear of breaching Financial Services Authority (FSA) regulations means employers traditionally shy away from giving staff financial advice. While only authorised firms and individuals are allowed to advise on financial services products, however, employers can provide access to financial advice. In some cases, they may even be able to say more than they think, particularly around stakeholder pensions.
Case study: PricewaterhouseCoopers (PWC)
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Employers give financial advice to their employees? Most employers are likely to run screaming for the door at the mere suggestion. Particularly since the Financial Services Authority (FSA), the regulatory body that governs financial services in the UK, is pretty strict about who can and cannot give advice. It has decreed that only those firms and individuals that it has authorised are allowed to sell or advise on financial services products. Darrell Parsons, employee benefits director at IFA firm John Scott & Partners, says: "In order to provide advice on financial services, you have to be regulated and authorised. You need qualifications and exams. Employers are not providing advice or information, just access to information. Consultants like us work with employers to provide employee access to information whether online or [elsewhere], but it’s not actually provided by employers." The FSA’s guidelines to employers make it clear that, as long as, they are not in the business of providing investment advice and do not receive any commercial benefit for helping their employees with their pension options, they do not have to be authorised by the FSA. By commercial benefit, it means receiving commission from a pension scheme provider or enjoying reduced insurance premiums, for example. However, these are not the same as negotiating special terms for schemes as an employer. Mark Stopard, pensions specialist at IFA firm Origen, admits that employers have long been running scared of the legislation governing what they are and are not allowed to do, under the Financial Services and Markets Act 2000 (FSMA). "Employers have not wanted to go near financial advice so handed any responsibility over to employee benefits consultants and advisers," he says. So have employers been correct in their interpretation of the rules, or can they do things that many will not, in fear of breaching the rules? The FSA stresses that, with the above exceptions, employers should be able to help their employees in the financial services arena if they want to. However, any information they might wish to provide for employees is subject to the FSA’s rules on financial promotions. These rules effectively state that promotional materials for financial services must be fair, clear and not misleading. In other words, employers need to take care about the way in which they choose to publicise the products and services on offer. It is fine, for example, for employers to provide staff with written factual information about the financial services on offer that simply helps them to understand the product or scheme. However, if the material were to promote either of these, or tried to persuade employees to buy them, it would have to be approved by someone authorised by the FSA. The same rules apply to any conversations that employers have with their employees which could also be considered financial promotions. This kind of scenario is probably more likely in a small firm setting where bosses may be closer to their employees and feel free to give them the benefit of their expertise and experience. However, once again, employers have to be very careful what they say. "Making a personal recommendation is different from actually providing advice. It’s ok for an employer to encourage an employee to join a pension scheme, but [they must] always has to mention the small print: ‘If you need individual advice, we can’t provide it, but we can give you access to advice’," says John Scott & Partners’ Parsons. However, Origen’s Stopard thinks it unlikely that the FSA would go after employers who have accidentally overstepped the mark on financial advice. The government has just changed the rules where employers want to provide information about the pension scheme on offer to employees. As a result of a review of the FSMA, provided they have no commercial gain to be made from the choice, employers are free to promote the pensions schemes on offer in the workplace. In addition, whereas the provision of financial advice by employers has previously been a taxable benefit, they can now provide employees with up to £150-worth of financial advice on pensions tax free. However, the rules are pretty strict. If more than £150 is spent, the whole lot becomes subject to tax. Also, it can only be spent on pensions advice, not on that covering any other kind of financial services. Michael Whitfield, managing director of Thomsons Online Benefits, takes a particularly cynical, but probably accurate perspective of the reasons behind the changes. He points to the parlous state of pensions in the UK, in particular, to the poor take-up of stakeholder pensions. "Stakeholder has been a disaster. I can’t think of any work-based stakeholder scheme where the take-up is more than 10%." He argues that pensions are a mystery to 90% of employees in the UK, who have heard only doom and gloom about the state of pensions. "The government has looked at the void of support for stakeholder, which has fallen flat on its face. But employers have provided access to stakeholder only to be able to put a tick in the box, [and show] that they have done what was required of them." The change in the rules and the decision to allow employers to provide £150-worth of pensions advice arise from the government’s recognition that the workplace is probably the most effective way to disseminate pensions and boost their take-up. "The aim of the rules is to facilitate the means whereby education in the workplace is provided. The workplace is one of the few places to get information across to employees," says John Scott & Partners’ Parsons. So what difference, if any, will the rule changes make? Angus Jones, managing director of IFA firm Clarity, explains that, whereas before an employer could say, "here are the details of the pension scheme: if you want to join, let us know," they can now be more persuasive. Now they can give the scheme details, say that they think it is a good idea that employees join, list the reasons why and the benefits, and formally and forcefully promote their schemes. However, the kind of advice that they can give remains limited. "The problem is that simple issues can lead to much more complex questions. Once the employee starts asking about the retained benefits from their previous pension schemes or the fact that their spouse has a pension, employers cannot say anything. They can only refer [staff] to a qualified adviser," says Jones. In reality, of course, employers are likely to be highly unwilling to give advice in such detail. They will probably feel that they lack the appropriate expertise and would prefer to pass the buck to a qualified adviser. More than anything, the rule changes simply provide scope for employees to receive more pensions information. Employers are slightly freer to provide access to the information and are likely to be more focused on the specific pensions needs of their employees. In turn, the government is probably hoping that employees will find themselves more focused on the issue. No doubt employee benefits consultants will come up with appropriate ways for employers to allocate that £150 per employee and whole programs and packages are likely to spring up around the money to make the provision of financial advice more tax efficient. However, employee benefits consultants and pension advisers argue that the measures are too little too late. Thomsons Online Benefits’ Whitfield contends that the UK needs pension products with reasonable charges that allow providers and advisers to make money. "How can insurance companies survive on pension products that take 17 years to make them a profit when pensions are held for [an average of] only seven years?" he asks. Although there is little or no scope for employers to give advice to staff, he complains that there is still too much complacency about pensions and that employers, in particular, are deluding themselves by thinking that they are making a real contribution to pensions provision. He suggests that most of them see pensions provision as a necessary evil and argues that pensions contributions from employers should be mandatory. It seems that many employers agree. A recent survey conducted by the Engineering Employers Federation (EEF) and Aon Consulting found that 77% of manufacturers with occupational pensions arrangements think that employers should have to make compulsory contributions above national insurance levels. The figure is up from 50% in 1998 and 56% in 2002. However, the EEF also echoes some of Whitfield’s sentiments, arguing that further compulsion could not be contemplated unless it was part of a satisfactory long-term solution to future pensions policy. Unfortunately, while employers see compulsion as part of the answer, it is highly unlikely. The government recognises that compulsion at any level is unlikely to prove a vote winner and is therefore unlikely to be implemented. Points to remember • Unless they are regulated and authorised by the FSA, employers are strictly forbidden to give financial advice to their employees. • The government has loosened the rules on employers’ promotion of pension schemes. As of the Spring of 2005, they can be more persuasive and forcefully promote their organisation’s pension schemes. • However, as soon as an employee begins to ask for detailed pensions advice, employers can only recommend that they seek it from a financial adviser. • The workplace remains the most effective place to boost pensions take up in the UK.
Case study: PricewaterhouseCoopers
PricewaterhouseCoopers (PwC) has around 750 partners for whom it provides access to financial information and advice. The decision to provide this came out of a demand from the partners themselves, many of whom are high net worth individuals with sophisticated financial service needs. PwC encourages partners to take independent financial advice because they tend not to have the time, or in many cases the specialist knowledge, to manage their own financial affairs. Originally, PwC provided each partner access to two hours’ free financial advice a year through IFA provider Clarity. For ease and convenience, the adviser would visit the partners at their desks. Surprisingly, there was a relatively poor take-up of the service because, while two hours was sufficient for a basic financial health-check, many partners have fairly complex financial affairs and, for these, the time was thought not to be enough for a thorough review. Partners now pay for the service themselves and a number make full use of the advice. PwC also provides seminars on financial products and services, and includes financial planning in its partner training programmes.