Article in full
It is almost impossible to turn on the television or open a newspaper without seeing some mention of consumer debt escalating out of control, a looming pensions crisis or potential crash in the housing market. Even the government has begun to intervene – through the creation of bodies such as the Pension Commission – in what has traditionally been perceived as a matter for individuals. Increasing numbers of consumers are also beginning to respond to fears of a poverty-stricken retirement and crippling debt.
A study published by the Association of British Insurers last November, found that the number of people who believed they must bear the main burden of providing for their retirement had increased since the previous year. Some 42% now say that they must do so. There is also evidence of widespread confusion among consumers about financial services products. The 2004/5 Employee benefits survey from independent financial advisers (IFA) Origen, revealed that 27% of employees do not know how much they contribute to their pension, while 33% were unaware of how much their employer contributed.
However, with the number of defined contribution schemes on the increase, employees face far more investment decisions. This presents a significant opportunity for employers to step in and provide employees with access to the financial information they currently lack. The HR department is already an employee’s first port of call whenever they have a query regarding tax or pensions provision, so it makes sense for an employer to extend its role and provide access to financial advice. David Elms, chief executive of industry body Independent Financial Adviser Promotion, says: "Employers are well placed to offer financial advice because they are a central collecting point of employee information.
Employers are also starting to realise that facilitating employee access to financial planning is as much an employee benefit as pensions and private healthcare." Indeed, a survey conducted by provider YouGov on behalf of IFA Chase de Vere, found that more than 80% of respondents favoured the idea of receiving independent financial advice as an employee benefit. Employers have traditionally shied away from offering this benefit primarily because of cost. A one-on-one appointment with a financial adviser, for example, can cost between £80 and a few hundred pounds.
Jim Aitken, marketing director at Chase de Vere Employee Benefits, explains: "Some employers also do not want to spare their employees’ time in the workplace for this activity." Many employers are also wary of being perceived to offer financial advice to staff, because they are not regulated by the Financial Services Authority (FSA). This is an issue that Paul Nelson, employee benefits consultant at IFA firm Millfield Partnership, believes could increase in prominence, especially if the UK follows the United States’ lead. "In the US, there have been several court cases where employees have looked to their employers for compensation around their promotion of pensions," he explains. Despite such fears, an increasing number of employers have begun to look in greater detail at including provision for financial advice in their employee benefits package.
Driving demand is not only a corporate responsibility to ensure employees are financially savvy, but also a realisation that employees will look favourably on an employer that offers this benefit. Unsurprisingly, another significant driver of change has been a drop in the cost of providing financial advice to staff, as an increasing number of cost-effective ways of offering access to financial advice have emerged. Without a doubt, technology has been one of the biggest catalysts in enabling more employers to provide financial advice to staff cost-effectively. Previously, only larger employers could provide financial advice to staff, however, technology has pushed this trend downwards to include organisations with as few as 50 employees.
Orbit Benefits, for example, provides online employee benefits packages for companies using its own internet-based technology. Although it does not provide access to financial advice on products such as loans, mortgages and savings, it does offer financial information around pensions. Charlie Carrick, director at Orbit Benefits, says: "Most people think about their pension once a year when they receive their statement. Online systems allow them 24/7 access to their pension where they can see its value to date, the split of funds being invested in and drill down to find out each fund’s specific objectives." Interactive pension calculators, are another important tool that enable employees to work out the effect on their pension of changing variables, such as contribution levels or retirement age.
One of the disadvantages of online systems is that they make it easier for an employee to ignore information than a face-to-face appointment. To this end, Orbit Benefits has developed a pension messaging service, which sends a reminder email or text message to an employee either updating them on the value of their fund or alerting them to any changes in their investment. Carrick claims that employers using an online system have seen take-up rates for their pension schemes increase by between 85% and 90%. In the offline world, he says this figure previously stood at between 65% and 70%.
FinanCity, a personal finance website launched last July, offers employers another way to provide cost-effective access to financial advice. It is not a provider of financial advice itself but works with either an organisation’s choice of IFA or has a network of IFAs it can put clients in touch with. Its role is to remove the administrative burden of providing access to financial advice and, therefore, reduce the cost. Arthur Kendall, managing director of FinanCity, says: "Employees are a captive audience so you can provide access to financial advice either through an intranet, or even better, via a secure, private area of the internet so that staff can find the information they need using the internet at home." Another channel that has emerged, particularly since the introduction of stakeholder pension schemes in the UK, is worksite marketing – the selling of individual financial services products to employees in the workplace.
This also offers a cost-effective way for employers to provide access to financial advice to staff, whether it is through leaflets, group meetings or one-to-one appointments. However, Mark Tucker, an analyst at Datamonitor, does not see a shift in the UK market towards the American model, where worksite marketing is firmly established. "In the US, there is a much clearer picture about what employers can say to employees about financial products, so between 80% and 90% of large companies have financial education programmes in place for staff," he says. The low take-up of stakeholder pensions has also hampered the market’s growth. However, it is still early days in the development of this channel and employers might ultimately find this to be a cost-effective way of increasing take-up not only of stakeholder pensions, but also other financial products. Before the internet’s arrival, telephone helplines were one of the more cost-effective ways of providing employees with access to financial advice.
These give employees direct access to an IFA or other consultant – providing debt counselling, for example – but at a significantly lower cost than a face-to-face meeting. According to Ian Luck, director in employee benefits at IFA firm Smith & Williamson, these are still popular with employers because "it enables them to be seen to be doing something for a lot of employees." However, he points out that there is usually minimal take-up, "although those people that use the service do value it". One of the main impediments to employers offering financial advice to staff is the IFA’s fee. Paying by commission, however, could offer a cost-effective option for employers. "Commission generated through a standard 1% commission charge – the capped charge rate for stakeholder pensions – can fund a one-to-one meeting for every employee," says Millfield’s Nelson.
The government is also trying to reduce the cost of face-to-face pensions advice by offering a tax exemption for advice and information up to the value of £150. However, this does not cover non-pension related information or advice costing more than this amount. Employers could also pass the cost of financial advice onto employees by including it in either a flexible or voluntary benefits package. The latter, in particular, is more cost-effective for employers because the only charge lies in setting up the scheme. The disadvantage, however, is that many companies have not yet moved to this model of benefits provision.
According to Datamonitor, 25% of organisations currently offer a flexible benefits scheme and only 11% of organisations offer a voluntary benefits package. More traditional ways to raise awareness of financial products to staff, such as group workshops, roadshows and seminars, also remain a popular method of targeting multiple employees in a limited time period. Millfield offers group presentations to address particular issues, for example, a pensions transfer during a merger. Likewise, IFA firm Towry Law works with organisations to provide seminars at key times in an employee’s life. Helen Kerley, account manager at Towry Law, says: "The most popular services we provide are pre-retirement seminars and specialist advice for senior managers, who tend to have more complex financial needs." >From each of these methods, it is clear that communicating financial information is as critical as the sale of financial services goods in boosting take-up and cutting through the fog that currently surrounds products, such as defined contribution pension schemes.
Last December, a survey from Winterthur Life concluded that education and information were key to meeting the government’s objective of reversing the 60/40 ratio of state to private retirement provision and improving the savings gap. One of its key findings was the high level of take-up as a result of face-to-face advice: one-to-one surgeries achieved an average increase of 26% in take-up, compared with 16% following group presentations. Unsurprisingly, Millfield’s Nelson is in agreement. "Where employees need to make a decision, face-to-face or phone contact with an IFA cannot be beaten." The use of technology and other new channels has undoubtedly lowered the cost of employers providing employees with access to financial advice and planning. You only have to witness the proliferation of IFAs and employee benefits consultants still developing services in this area. But an organisation must offer more than one delivery channel if it is to do more than simply pay lip service to providing access to financial advice for their staff.
Who should you choose to provide financial advice
Employee benefits consultants and independent financial advisers (IFAs) tend to play different roles. Mark Tucker, an analyst at Datamonitor, explains: "With employee benefits consultants, the value mainly lies in minimising the administration of any employee benefits package. They tend to play a more strategic role in working with companies to set up employee benefits packages and target a broad range of issues to companies with more than 50 employees." In contrast, IFAs tend to work at the lower end of the market. They have the advantage of being independent and, unlike employee benefits consultants, are able to give financial advice to staff. Some employee benefits consultants might employ a qualified IFA, but otherwise they are limited to providing generic financial information or tools to manipulate existing financial data.
The driver behind providing financial advice to employees at 3G mobile phone provider, 3, was a realisation that staff were unaware of how their group personal pension scheme was funded. Andy Wiles, director of reward at 3, says: "Employees would receive their pension statement and discover that the fund had lost money. This provided the trigger for us to proactively help them understand their pension scheme better." It selected Orbit Benefits to take over the administration of its scheme and launch its selection of online pension tools to staff. According to Wiles, 25% of staff now log into the site on a monthly basis. "This is significant given that the average age of our workforce is around 30 years old," he adds. The system also appealed because it provided a cost-effective way of managing 3’s pension provision. "We have saved money, since the costs associated with running the scheme have fallen, and we have enabled employees to directly interact with their pension," says Wiles. Staff also have the opportunity to receive access to broader financial information, such as online mortgages, through its voluntary benefits package.