All too often employees in stakeholder schemes simply plump for the default investment option due to a lack of interest and knowledge, so should employers provide more education, asks David Woods
Selecting which fund to invest in through a stakeholder pension scheme can be a tricky task for many employees, particularly if they have little, or no, knowledge of investments and fund performance. As a result, many employees simply opt to join their organisation’s default investment fund.
To avoid this occurring without due consideration, employers may wish to help educate staff about the issues they should consider when selecting which stakeholder fund to invest in. Jeremy Ward, head of pensions marketing at Friends Provident, explains: “It is important to provide as much [education] as possible, in as many forms as possible. [This] will provide employees with the support and reassurance they need in their preferred learning style.”
Some employees also believe it is their employers’ responsibility to ensure they invest in funds that will provide them with a satisfactory pension pot, and may even hold them liable if they perceive that they have not done so. Paul Scott, group pension director at independent financial advisory firm Pearson Jones, says: “Many members seem to believe that even though they are in a stakeholder scheme, it is somehow their employer’s responsibility to ensure the investments are satisfactory.”
Although employers cannot advise staff directly which funds they should invest in because they are not regulated to do so by the Financial Services Authority, they can provide education around investment and fund performance issues. “Investment education needs to stick simply to facts,” explains Scott.
Employers that wish to educate staff have a number of options, such as issuing tailored guides with company branding, which can be presented either in paper form or online. Damian Stancombe, head of employee benefits at actuarial firm Punter Southall, says: “The most widely-used education tool on stakeholder pension funds is distance literature. Staff receive a pack of written information as employers [often] don’t have funding to provide education onsite. Sadly, when staff receive the pack, they may do very little with it.”
Ward adds that many best practice employers will also provide online tools such as pensions calculators so staff can track and calculate how their funds are performing.
In many cases, staff may find they are drowning in a sea of information and need a more personal approach. Pensions clinics enable a group of employees to listen to facts about the available funds, ask questions and listen to their colleagues’ views. “Pensions clinics are the most effective way of breaking down understanding barriers and providing reassurance,” says Ward.
Stancombe adds: “Clinics don’t have to be taken by a top-of-the-tree consultant, but by someone who understands, in a holistic sense, what financial planning and pensions are about.”
Some employers, however, may view pensions clinics and group seminars as impractical to provide. “These meetings may last between 15 and 20 minutes and organisations are highly unlikely to want to fund that,” explains Stancombe.
Stakeholder providers may also offer additional services to help educate staff about their scheme, such as DVDs or webcasts, for example. These can be customised with an employer’s branding and include an introduction from its pensions or HR manager. “The cost of these items can be expensive but if negotiated within the overall pricing of the scheme, costs can be kept to a minimum and included in the overall annual management charge, avoiding capital outlay from the employer,” says Ward.
Provider management charges, should, however, be made clear to employees through financial education. The total charges for stakeholder schemes cannot exceed 1.5% each year for the first ten years and 1% for each year after that. This means that after ten years members may have to switch funds if their charges exceed 1%.
Employers can always opt to employ third-party pensions advisers to provide an education programme for staff.
The main problem employers might face around education, however it is provided, is a general mistrust by staff of pensions and scheme providers. In order to break down these barriers, employers need to offer ample support and encouragement. “[Pensions education] can be dull stuff and, done in isolation, can completely switch off the audience. However, done on the back of a broader education initiative on pensions this can be a natural extension. Annual clinics and feedback via intranets are essential to ensure the message is fully understood and appreciated,” says Scott
If you read nothing else read this…
- Many employees, when faced with the choice of stakeholder investment funds, simply select the default options
- Employees will require as much education as possible to help them make decisions
- Face-to-face education if often the most effective method, as staff can ask questions and listen to the views of colleagues
- Investment education can be pricey but can be negotiated into the overall cost of a plan.†