If you read nothing else, read this…
• Auto-enrolment is raising employee awareness about savings benefits.
• Staff expect employers to keep them informed about workplace savings.
• Financial education should be based on guidance, not advice.
• Communications should focus on risk.
• The new generation of savers require online and mobile communication.
• Providers may offer free advice.
Auto-enrolment has helped focus the minds of employers and employees on a comprehensive approach to workplace savings and financial education.
Personal finance might seem about as sexy a subject as politics, but understanding product availability and choice can help determine an employee’s quality of life, particularly when it comes to retirement.
Until now, it has been easy for workers to ignore personal finance and general wellbeing perks. After all, the welfare state provides free healthcare for all and employers often take care of products such as healthcare and pension plans in their employee benefits package. Even where there has been choice, typically in defined benefit (DB) pension scheme funds, most staff have been happy to be enrolled into default funds, freeing them from the complexities and stresses of self-selection.
This may explain why the UK has the lowest level of gross national savings as a percentage of gross domestic product (GPD). In 2010 statistics from the national campaign Save Our Savers, the UK scores just 12.22% compared with 12.41% in the US, 17.81% in France and 18.64% in the European Union as a whole.
The growing gulf between personal income and the cost of living has also hindered an interest in saving. A hand-to-mouth existence is the norm for more and more low earners, leaving financial products a luxury for higher earners.
But change is on the way. The arrival of pensions auto-enrolment this year will shake up the personal finance market as employees will be forced to save for their retirement. From 1 October 2012, eligible staff will be automatically enrolled into their employer’s pension scheme. The initial minimum contribution is 8% of earnings, of which employees will be required to pay at least 4%, while the employer pays 3% and the taxman 1%.
There is nothing like a drop in monthly pay to sharpen people’s minds, which is why employee interest in pensions has been growing. But the jury is still out over who should take responsibility to provide the answers, and whether they should be part of a comprehensive financial education package.
Crucial role for websites
A consumer survey of staff aged between 22 and 50-plus, conducted by Legal and General in May and July 2010, showed that employees believe their employer will provide them with the information they need about pensions auto-enrolment at the appropriate time. They also expect to receive guidance from their employer, and expect their workplace website to play a crucial role in assisting their decision-making and helping them through the auto-enrolment process.
Robin Hames, head of technical, marketing and research at Bluefin, says employers have a moral duty to provide financial education to help staff make informed decisions but, he warns, not necessarily the right decisions.
Jonathan Watts-Lay, a director at Wealth at Work, says: “If companies offer benefits provision, whatever it is, they should ensure employees really understand and get value, otherwise what’s the point?
“There is value to be had in the workplace that even employers don’t understand. For example, an individual may be saving £500 a year by getting tax relief on childcare, but in the workplace they could take the £500 and get more value in, say, a pension scheme where the employer matches their contributions.”
Similarly, he says, save-as-you-earn scheme profits can be transferred to an individual savings account (Isa) to save on tax – which a comprehensive financial education programme can help to explain.
But providing financial education is a challenging task for employers. Not only do they have to consider the complexity of employees’ needs, they must also consider their financial nous. Helen Buchanan, distribution director, workplace savings at Legal and General, says: “A lot of people don’t even understand what an interest rate is, so there’s a challenge for everyone in terms of getting employees engaged. I don’t think you can do it just once; there needs to be an ongoing programme.”
Buchanan believes risk should be a highlight of communication strategies. “A lot of employers don’t understand risk,” she says. “Education needs to be about the return you get on your investment and the risk involved.
Employees need to be getting key information on their scheme’s default fund and other relevant information, such as where their pension provider is going to be investing, what the risks are and the decisions employees need to make.”
Format is key. Martin Palmer, head of marketing, corporate benefits, at Friends Life, says face-to-face support is becoming more important, rather than the traditional approach of bombarding people with product literature.
Bluefin’s Hames expects the next generation of senior managers to want instant information in snippet form via their mobile devices. “Auto-enrolment involves a generation who haven’t chosen to save and who have almost been pushed through the door, rather than invited in, so the mindset will be different and require different delivery methods,” he says.
Ann Flynn, head of corporate marketing at Standard Life, suggests appointing financial champions, essentially unpaid volunteers, to help guide employees on financial product choice. But she warns: “There are definitely risks with providing financial guidance in the workplace. Some employers are nervous about providing anything near advice.”
Palmer agrees, pointing out: “Financial education is often not an objective of employers because there is a very thin line between promoting, for example, pension schemes to staff and guidance. They have got to be very careful.”
The cost of financial education is also an issue, particularly for large employers. Palmer says product providers have a role to play in offering free information, and where this is lacking, employers should consider offsetting the cost of provision against their benefits package by, say, reducing their pension contributions.
As employers grapple with their financial education provision, the retail distribution review (RDR) is also looming.
RDR, which will take effect from 1 January 2013, will prohibit independent financial advisers from earning commission on pensions and investment products, in favour of upfront fees. This could mean that independent financial advice will not be affordable for many employees, increasing the need for employers to play a part in educating their workforce in financial matters, whether they feel obligated or not.
Case study: Lilly keen to educate staff
Auto-enrolment has motivated Lilly UK to improve its employee financial education programme in the last two years. Julie Osman, director of pensions and benefits at the firm, says: “We wanted people to make informed choices about the benefits they had, to be able to maximise them and be a little more informed about their own finances.”
Lilly, which provides research and development and manufacturing and commercial operations on behalf of US pharmaceutical manufacturer Eli Lilly, appointed Origen to provide employee workshops on topics such as debt management, making the most of pensions, and an introduction to individual savings accounts (Isas). Lilly is about to launch a corporate Isa.
Osman has also reintroduced half-day financial planning workshops, also hosted by Origen. These are tailored for three employee groups: new joiners, staff in mid-career and those five years from retirement. This follows Lilly’s launch of a defined contribution (DC) pension to replace a defined benefit (DB) scheme, which it closed to new entrants in 2010. Osman says: “If people are very confident in their finances, hopefully they will be more engaged at work because they have not got money worries niggling away at home.”
Read more from the Workplace Savings Quarterly