If your workers are actively managing their finances, then chances are they are better focused on their work.
While there is no legal obligation on employers to offer financial education to their staff, the number of organisations that do offer it is on the increase. So much so that providing financial education to staff is beginning to be seen as best practice. Angus Jones, managing director of IFA firm Clarity, explains that when his firm started to help employers offer the service there were few providers in the market. “Now there are over 100 firms offering financial education services to employers,” he adds.
For most organisations, financial education provides an opportunity to explain to employees the benefits that are on offer and how to get the best value out of them. This, says Jones, is important when employees are being offered different options through flexible benefits schemes. “Say an employer offers a choice of three-times salary death-in-service benefits or four times. How does the employee know what to choose?” he asks.
Jonathan Watts-Lay, a director at JPMorgan Invest, suggests that employers are motivated in different ways when offering financial education. Some, he says, believe they should ensure that employees understand and appreciate the benefits on offer so that the standing of the organisation is enhanced among staff. As a result, employee engagement will be increased, and staff turnover and recruitment costs reduced.
Other employers, he says, consider that they have a moral obligation to let people know about their benefits packages and may, for example, be concerned by how little some employees contribute to their pensions. “Employers feel they need to get people to understand what they need to do,” he says.
There are also those employers that offer financial education as part of a risk management exercise as they are concerned about potential negligence claims in the future. “People can go through life quite naively believing that they have something that they haven’t,” says Watts-Lay. He believes there is a real danger that employees will get to retirement only to discover too late how little they have to live on. “They could turn round and complain that ‘no one ever explained it to me,’” he adds. A number of employers have already found themselves the subject of such grievances in cases going through the US courts. In the UK, some employers are taking steps to guard against the possibility of similar action by offering financial education.
The government is so concerned about the nation’s lack of financial knowledge that it has launched the National Strategy for Financial Capability which is being led by the Financial Services Authority (FSA). The UK’s financial watchdog is spearheading a number of initiatives in schools, colleges and the workplace to improve financial capability. Employers have been given booklets for their staff and the opportunity to host seminars.
The Treasury has also appointed Otto Thoresen, the chief executive of Aegon UK, to carry out a review examining the feasibility of delivering a national approach to generic financial advice.
In addition, the Pensions Regulator has highlighted the need for financial education for members of defined contribution pension schemes as part of its consultation on the regulation of such plans.
Research in the US shows that the government has good reason to be concerned and provides one of the most compelling reasons for employers to offer financial education to staff. Conducted by Dr E. Thomas Garman, president of the Personal Finance Employee Education Foundation, it revealed that a lack of financial education could impact on employees’ performance at work. It found that 80% of financially distressed workers spent time at work either dealing with or worrying about money problems. They were also found more likely to be absent from work and suffer ill health.
Therefore, employers that provide financial education will increase staff understanding of the value of their benefits and also boost productivity †