Padraig Floyd: Financial knowledge is power

Financial education programmes can help to engage employees and boost the future success of a business.

Discussing finances with employees is often deemed a futile exercise because half the population does not understand what 50% is.Harsh, maybe, but unfortunately true.

The government has finally realised that in order to protect its citizens, and improve the financial services industry in the process, no doubt, people are going to have to be educated to make better financial choices, and so financial education is to be introduced into primary and secondary schools.

While that is a start, it does nothing for the millions of people already in the working population. But that is about to change, because pensions auto-enrolment will not allow employers to continue to squeak by with bare-bones communications.

When auto-enrolment was launched in October last year, a study by the Association of Consulting Actuaries, A million challenges ahead, 2012 ACA Smaller firms’ pensions survey report, published in October 2012, showed that less than one-third of employers (28%) had budgeted for auto-enrolment, and just 20% had it on their radar. Yet, over the next five years, more than one million employers will be required to enrol their staff into a qualifying pension scheme.

Those same regulations require employers to inform staff about the process and prove that they have not only done this, but that their employees understood what they were told.

That will be tough without setting up a programme of education, even with 21st-century communication tools, because there is a lot that can go wrong.

Defined contribution (DC) pension schemes place all the investment risk on individual scheme members, yet studies consistently show that more than eight out of 10 members will fail to make any choices about where their money should be invested.

People fear making the wrong choice more than making no choice at all, which explains the lack of engagement with pensions.

There is a good reason for that. Benefits, in particular pensions and investments, are complicated and the UK has an average reading age of just nine years.

Level of comprehension

Most nine-year-olds will not have decided which school they will move to at 11, yet we expect people with the same level of comprehension to make decisions that will affect their whole future.

In the burgeoning workplace savings environment, where employees can access an individual savings account (Isa) alongside a share scheme and their pension, education can help them make the most of their savings in a tax-efficient way.

Financial education also plays to broader wellness programmes. Work-related stress remains one of the main causes of sickness absence in the UK, with 428,000 cases in 2011/12, or 40% of all work-related illness, according to the Labour force survey, published by the Health and Safety Executive in October 2012. Money worries are the root cause, particularly during a recession.

Many organisations have recognised this, according to the Chartered Institute of Personnel and Development’s (CIPD) Reward management 2012 survey, published in May 2012, which showed that 54.4% of employers offer debt advice or counselling. Large employers are twice as likely to have a programme than those with fewer than 250 employees, yet only 16.9% offer financial education to their workforce, with 3.8% saying they intend to introduce some this year.

But at times like these, education may do more than just prevent absence.

Employees who are financially aware may finally get the message that their benefits offer value they could not replicate in the high street. And understanding will deliver a considerable return on investment.

If employees understand the investment their employer is making in them above and beyond their salary, they are likely to be more engaged and able to contribute to their business when the recession eases. With employee engagement falling to 35% in the last quarter of 2012, according to the CIPD’s survey, employers need all the help they can get before disengagement has a detrimental effect on their business performance.

Employers should therefore be aware that financial education may not just satisfy compliance requirements, it could even save their business.