Now is the perfect time for employers to consider their financial education strategy and the information and guidance they can legally provide for their staff.
Firstly, the gradual demise of final salary pensions, at least in the private sector, and their replacement by defined contribution (DC) schemes, means that employees are having to pay more careful attention to how their pensions are invested now that they, rather than their employers, stand to gain or lose as a result of pension funds’ investment performance.
Secondly, the introduction of auto-enrolment into workplace pensions is significantly increasing the number of staff in DC schemes.
Then there is the fact that the government is encouraging employers to set up governance structures that review the suitability of the pensions they provide for their staff.
Finally, there is an increasing tendency for employees to look at their savings in the round, with employers encouraging staff to review their pension savings in the context of their overall financial situation, including mortgages, loans, individual savings accounts and other forms of savings.
Under the Financial Services and Markets Act 2000 (FSMA), employers are prohibited (unless they are authorised by the Financial Conduct Authority (FCA) to do so) from carrying out a regulated activity, in particular by giving, offering or agreeing to give financial advice on buying or selling an investment; and making a financial promotion, which involves communicating an invitation or inducement to engage in investment activity.
Failure to comply with either restriction is an offence, carrying a maximum penalty of up to two years’ imprisonment and/or an unlimited fine.
Employers should be aware that advising employees on the merits of joining or leaving a scheme, or of exercising certain rights under a pension plan, constitutes regulated advice. It is therefore important that the employer has appropriate arrangements in place to ensure its documentation does not give such advice, and that its employees do not give such advice in any communication, whether in writing or verbally.
In broad terms, employers should only provide employees with factual information about the available pension plan and the relevant options. It is also important that employers do not receive direct or indirect financial benefits, such as a commission or introduction fee from a product provider, from providing a pension scheme for their employees.
Independent financial advice
Other ways in which employers can protect themselves from any risk include enclosing literature that is produced by investment professionals in any communications on financial matters, and pointing staff in the direction of an independent financial adviser. Employers commonly refer their employees to www.unbiased.co.uk, a website for those seeking financial advice.
An employer will not breach the financial promotion restriction when it offers a group personal pension plan or stakeholder scheme as long as it: will also contribute to the plan; tells employees how much it will contribute; will not receive any direct financial benefit; and ensures that all written material contains a statement that the employee has a right to seek advice from an FCA-regulated adviser.
Employers are also well advised to ensure that any information or guidance they supply to employees is appropriate and not misleading.
They should bear in mind that the financial circumstances of their employees will vary, so an investment decision that is appropriate for one employee will not necessarily be right for another. Even if there has been no breach of FSMA, other legal avenues may be available to employees that have been given poor information on the product by their employer.
That said, it would be a shame if an over-anxious employer did not give appropriate and balanced information because of concern over legal liability.
If an employer wants to support its employees as they take financial decisions, that is a good thing. As long as the material provided does not contravene FSMA and is designed to help employees, and the employer has taken steps to satisfy itself that it is accurate and appropriate, a court or tribunal is likely to be sympathetic should a claim be made by an employee.
Hugh Gittins is a principal associate at law firm Eversheds