reditEmployers may not always see the value in offering financial education but it can have quantifiable returns on investment, says Amanda Wilkinson
For employees, the benefits of employer provided financial education are clear as they become better equipped to make crucial decisions about their long-term future. However, some employers may well ask ‘what is in it for us’ as the commercial benefit of putting in place financial education may not be so readily apparent.
With the move from final salary to defined contribution (DC) pensions and the wide uptake of flexible benefits, employees have to make their own financial decisions and often lack the ability to do so as they don’t understand the perks that are on offer. Consequently, employers should also offer financial education, argues Jonathan Watts-Lay, a director at JPMorgan Invest. “Where employers ask ‘why should we offer financial education?’, you could equally ask ‘why do you offer financial benefits then?’. If employers don’t believe people need to understand them, then why really offer them.”
Experts are agreed that pensions are the perk around which there is most need to offer financial education, especially given the trend to move towards DC schemes away from defined benefit (DB) plans. Angus Jones, managing director of Clarity, says: “There is a responsibility [on employers] to make sure that when they are giving 5% matching contributions in place of a one-60th [DB] scheme employees don’t presume it’s the same thing because some people will.”
This is even more important where some staff are in a DB scheme and others in a DC.
There are also investment factors to consider. Tony Newman, employer solutions manager at Close Wealth Management, adds: “We have had this massive change, yet we have not given employees any education around choosing the right assets for their pension scheme and any indications of the amount of money they should put in.”
Arguably, it is in employers’ interests to make sure staff plan for the future. New age discrimination rules that came into effect in October last year removed the upper age limit for unfair dismissal and redundancy rights and gave employees a statutory right to request to work beyond the statutory retirement age which employers have to “duly consider”.
“As an employer, it is in your interest to get this right, because what you may find is that you have people queuing up at your door aged 65 years asking to carry on working because they can’t afford not to work,” says Watts-Lay.
Share schemes are another benefit which employers should ensure that staff fully understand. There have been instances where employees have taken the cash option at the end of a sharesave scheme despite a massive gain in the share price or where staff have been exposed to large capital gains tax bills unnecessarily. “[Organisations] go through all the pain and effort of putting in place schemes presumably because they want to attract and retain staff, but what is the point of doing all that and then not explaining how it works,” says Watts-Lay.
Similarly, employers go to great lengths to introduce flexible benefits schemes in order to attract and retain staff. However, Clarity’s Jones says that they don’t always explain to employees how to choose between options. For example, an employer may have reduced core death-in-service cover from four-times salary to two times with the option to flex upwards to three or four times, but not taken steps to help educate staff, through modellers and seminars and the like, about the level of cover that they actually need to suit their individual circumstances.
“I can’t see how flexible benefits can be promoted without an intrinsic financial advisory process. It is almost like giving someone a car who has never driven one before without the manual telling them how to do it,” says Jones.
If staff do not understand the benefits they are being offered then some experts say there is a risk that disgruntled employees could, at some later date, resort to legal action over any information given or lack of it. Although no such steps have yet been taken by employees in the UK, there have supposedly been instances where legal action has been undertaken in the US around pensions. Employers are also often wary of undertaking financial education themselves because they may end up inadvertently giving financial advice when they are not regulated by the Financial Services Authority (FSA) to do so.
Member understanding
There is also a risk that employers could fall foul of existing legislation or regulatory guidance around the provision of benefits. For example, The Pensions Regulator recently raised concerns in its consultation on the regulation of DC schemes about member understanding of schemes per se, and their retirement options following pensions simplification legislation.
One of the most persuasive reasons for employers to offer financial education is provided by research undertaken by Dr E Thomas Garman, professor emeritus fellow at Virginia Tech University and president of the Personal Finance Employee Education Foundation (PFEEF) in the US. He says: “By providing quality financial programmes to employees, the business benefits with fewer workers who bring their serious financial distress to the workplace. Less distress means better productivity, higher job performance ratings, less absenteeism, and better presenteeism. Research studies confirm these findings and the PFEEF estimates that the return on investment for employers is three to one.”
Such research should help HR obtain the support of senior management, which is necessary if financial education is to be effective, says Harper Wright, financial capability manager at Bank of America, who educates staff internally and consumers externally. “You have to have very senior buy in at an HR or finance director level otherwise further down the food chain they say ‘it is not in my budget or goals for the year’,” he adds.
The government is so worried about the lack of financial capability of the UK population that it has appointed Otto Thoresen, chief executive of Aegon UK, to carry out a review examining the feasibility of delivering a national approach to generic financial advice. In the meantime, The FSA is spearheading a number of initiatives in schools, colleges and the workplace to improve financial capability. Employers have been given materials for staff such as booklets and CD-Roms, and the opportunity to host seminars.
Paul Frost, manager financial capability, workplace team at the FSA, says: “It’s a whistle-stop tour across all things relating to personal finance. Whether employers are introducing flex or changing their benefits or not, it’s very useful to offer this because people can better understand the value of the benefits the employer is offering.”
The aim is to provide education to employees on an independent basis, free from any direct sell.
However, providers of financial education services and fee-based independent financial advisers say the FSA service just provides a basic overview, while, in contrast, they offer a more sophisticated service that is also independent and is tailored to the needs of different groups within an employer’s workforce through the use of seminars, online modelling tools, DVDs and podcasts. This does not have to be seen as an extra cost by employers, argues Watts-Lay, as firms already spend money on communicating the details of perks to staff, but sometimes ineffectively.
“Employers have relied on passive information, produced a brochure and put something on the intranet and have ticked the box, but they don’t know whether people have understood it or not, whereas education, and this is why we tailor it, has to be a learning exercise,” he concludes
Case study: Market exposure: Close to call†
Alliance & Leicester (A&L) began running financial education seminars on its share plans after the bank floated in 2000 to ensure that staff understood their potential exposure to tax liabilities and the stock market.
Paul Askew, share plans manager at A&L, says: “We saw a stockpiling of shares and having far too much exposure to the market. We couldn’t give employees financial advice directly so that’s one of the reasons we brought in Nelsons, now Close Wealth Management.” A&L runs all-employee sharesave and share incentive plans as well as executive share schemes.
Seminars are run not only at the launch of share plans, but also when they are about to mature so that employees are fully aware of issues around capital gains tax (CGT) liability and the risks of holding too much stock in one company. Following the first seminars, Askew noticed a change in behaviour with employees exercising their share options and selling stock within their CGT limits.
Case study: GSK outlines perks for staff†
GlaxoSmithKline (GSK) has put in place a programme of financial education so that staff understand their benefits.
Julie Skidmore, financial and education manager, says: “We are looking to get a good return on the investment we put in [in terms of recruitment, retention and motivation]. But, on the flipside of that, we want employees to understand what the benefits are so that they can maximise them.” GSK has closed its defined benefit pension scheme and now offers new joiners a money purchase plan. “With the move to DC pensions we have obligations [which] we need to fulfil,” adds Skidmore.
GSK uses JP Morgan Invest to help deliver its programme which includes inductions for new joiners, a free consultation with an independent financial adviser, annual total reward statements, pension trustee reports, share reward statements, monthly financial surgeries, lunch-time presentations on financial issues, pre-retirement workshops and online webinars.