Need to know:
- Employers recognise that a one-size-fits-all approach to financial education is not as effective as individualisation.
- Employees face different financial pressures at different life stages, but these change through an individual’s working life.
- There are a variety of workplace savings schemes that employers can provide to help employees save in the right medium for them.
Helping employees to address their different financial concerns is a hot topic among employers; while the implementation of pensions auto-enrolment in 2012 brought about a renewed focus on saving for retirement, it has become commonplace for employers to offer support for other financial matters.
Jonathan Watts-Lay, director at Wealth at Work, says: “There used to be this focus on pensions and that [employees] should optimise and maximise what [they] pay into pensions. I think there’s been a realisation over more recent times that actually people do have different saving needs as they go through their various life stages.”
The Employee Benefits Awards 2017 saw outstanding entries from employers that are supporting their employees through a variety of workplace savings initiatives, demonstrating that the focus has clearly widened from being pensions-centric. For example, DHL International, which win the award for the Best financial wellbeing strategy, provides its staff with financial education, an employee loan scheme at reduced interest rates, and an employee assistance programme that includes information about how to improve financial health.
The shift from defined benefit (DB) to defined contribution (DC) pension schemes and the introduction of the pension freedoms in April 2015 mean that individuals now have more responsibility for their own financial situations. However, those situations can change drastically throughout their working lives, whether it is paying off a student debt, saving for a mortgage or planning for retirement. Andrew Drake, consulting and proposition director at JLT Employee Benefits, says: “There are certainly different priorities that [employees] need to try and meet, rather than just defaulting into pensions. I think most [employers], if they want to change the way their people view their finances and corporate savings, should be looking at some alternatives that are not just pensions.”
Until recently, employers and providers looking to address financial needs would target certain age groups and focus communication on particular generations. However, there has been a shift towards individualisation, says Brian Henderson, financial wellness leader at Mercer.
“Putting [employees] into groups or cohorts is old hat,” he says. “In the past, we would try and group people together but we don’t do that anymore. We look at the individual and that one-size-fits-all approach just doesn’t work, it doesn’t make sense. From a benefits perspective, [employers should] offer the flexibility and a range of offerings that better suit the needs of the individual.”
This is a move away from looking at an employee’s needs at the beginning, the middle, and towards the end of their working lives, to a focus instead on a life event. To help employees strike the right savings balance, they must understand the support that is available for their individual needs.
These needs can be grouped into short-, medium- and long-term savings, says Watts-Lay. “Even though there’s no absolute demarcation line on these, short term would be less than five years, medium term might be five to 15 years, and long term beyond the 15 years,” he says. “Clearly that timeframe is quite important because of the types of investment [an employee] might want to do and the risks associated with it.”
Short-term savings vehicles could include sharesave schemes, which normally run for three or five years. “They are appropriate for short-term saving because at the very least [an employee] will get their money back and if things go well [they] can exercise, buy shares or still sell shares and that will give upside on that investment,” says Watts-Lay. “[Sharesave] schemes are often seen as short term because there is no risk with them.”
Medium- and long-term saving options
Employers can support employees to save on a more medium-term basis through schemes such as share incentive plans (Sips), says Watts-Lay. “Often they are matched so even though the [employee] is carrying more risk, because [they] own the shares from day one, some [employers] match one for one,” he adds. “They look very attractive but there is a bit more risk attached to them.”
Another medium-term option is a workplace individual savings account (Isa) or, if the employee is saving for a home, the Lifetime Isa (Lisa). An Isa available through the workplace holds high appeal to employees because of the employer’s involvement, says Drake. “The real hot topic at the moment is a corporate Isa, where [employers] will sponsor it,” he explains. “That’s the big difference here, the sponsorship, otherwise it’s just another Isa. Giving [an employee] a stocks and shares Isa, which mirrors a pensions approach of investing in the stock market, is a message [employers] are already getting out there through pensions.”
A stocks and shares Isa is best suited for medium-term saving because investing for less than five years might not give the return or upside on the investment that the employee is looking for.
Many employers now offer their staff help with consolidating debt or debt management. It can be challenging for an individual to get on top of a debt, especially if they are paying it off at a significant rate. Employers can help to consolidate loans, such as credit cards, car or season ticket loans, and arrange a consolidated loan through payroll. “That’s a very real and practical way of improving the amount of money that is available to save,” says Henderson. “The point here is not that [the employer] effectively puts money in the pocket of the employee for them to go and spend, that’s money that [they] can maybe nudge into a pension or longer-term saving.”
Saving into a pension is undoubtedly one of the biggest long-term investment vehicles an employer offers, but when an employee faces multiple financial pressures, such as student debt, credit card, saving for a home deposit, is it always the right thing to prioritise?
Getting the savings balance right can be challenging, but financial education can help employees recognise their different financial strains in whichever life stage they are at, and what is best for their situation. Steve Herbert, head of benefits strategy at Jelf Employee Benefits, says: “[Financial education] is really about empowering people to make the best decisions they can in their circumstances. When should [an employee] start saving [for a pension]? As soon as [they] possibly can, but for someone who is saving for a house and doesn’t have enough money for a deposit that might not seem like the right answer, even though it is.”
The key points that financial education can serve to communicate to employees is that they may have three or four areas of financial concern and these will continually change over their working lives so should not be viewed in isolation. Education can help to create that balance of having control over day-to-day spending, saving for retirement, and emergency money in case the unexpected happens.