Pensions roundtable: Financial education is vital

Getting staff interested in financial matters is not easy, but it is a necessity when it comes to pensions, says Matthew Craig

As any compensation and benefits professional knows, the level of financial knowledge among today’s employees varies hugely.

Some staff may want online access to their pension pot to implement their own investment decisions based on a serious interest in business and finance, while others may barely understand what a pension is.

Equipping employees with financial knowledge is becoming more important in a world increasingly dominated by defined contribution (DC) pensions, which place greater responsibility on individuals for decision-making. And at a time when staff can pick and choose benefits in flex packages, financial education is also needed to get them to appreciate the advantages of salary sacrifice, which some can find difficult to grasp.

Huge challenge for employers

Tina Odell, pensions manager at Sony, says financial education is a huge challenge for employers. “One of my frustrations is that people have immense awareness and understanding of quite complex financial products, such as mortgages or mobile phone contracts, and yet with something as simple as a DB or DC pension plan, they cannot understand it.”

One of most difficult audiences to get the savings message across to is younger employees, who find it hard to imagine themselves in retirement and living on a pension. Pension providers also recognise the scale of this challenge.

John Taylor, market director of corporate pensions at Scottish Widows, says just over 50% of employees will take up a pension with an employer contribution. “The others are turning their back on free money,” he adds. “Some understand what they are doing, but most do not.”

Panellists at the roundtable discussion suggested that one way to implant a savings habit was to encourage staff to save for things they wanted, such as a new car, before building in pension saving alongside this. Pointing out the value of an employer’s contribution and tax relief could help show staff the value of their pension scheme.

Duncan Brown, director of reward services at the Institute for Employment Studies, says: “Pension education seems to be more effective if it is part of a broader picture of financial education as a whole.

“If people do not have an understanding of concepts such as compound interest and annuity rates, you haven’t a hope of getting them into a pension discussion.”

Recognise diversity in the workplace

Brown also says it is important that employers’ financial education programmes recognise diversity in the workplace. Pushing a uniform message does not work for everyone, so employers need to segment their workforce into different groups by conducting attitude surveys. So, for younger workers who see retirement as a distant horizon, talking about saving for more immediate needs is a better way to get their attention.

Employers embarking on a financial education programme can use a number of strategies and techniques to get their message across. One of the most obvious tools at their disposal is the internet, which can be just as effective for blue-collar employees and manual workers based outside the office.

John Chilman, group pensions director at First Group, says take-up of his firm’s online financial education tool exceeded expectations in attracting bus and train drivers, with more than 50% of staff logging on to see what difference various accrual rates would make to their eventual pension.

“The tool is helpful and has raised the debate around pensions in the canteens and workshops,” says Chilman.

As well as giving staff access to ‘what-if’ modelling tools, a benefits website can enable employers to show workers what their contemporaries, in similar financial circumstances, have done with their pensions. uses a similar technique to show purchasers of any given item what other buyers of the same product have also bought from the company’s website. Chilman points out that trade unions can be powerful advocates for pensions and other employee benefits if they are brought onside and treated as partners.

Jargon can put staff off

Taylor says a variety of methods should be used to present financial education to employees, ranging from online tools to face-to-face meetings. At the same time, employers should bear in mind that jargon can put staff off.

Ricky D’Ash, remuneration specialist at Equity Insurance, says: “What do we mean by actively managed funds, passively managed funds, lifestyle funds and default funds? There is a lot of terminology there and it goes straight over the head of the average person.”

Naturally, employers are careful not to break any rules set out by the Financial Services Authority when offering staff financial education. The FSA has decreed that only those firms and individuals that it has authorised are allowed to sell or advise on financial services products.

James Churcher, pensions manager at Telegraph Media Group, says that while many employers are preoccupied with making sure pensions communication to staff is safe, the consumer advertising industry is engaging with people on financial issues in an offbeat, exciting, creative way.

Nevertheless, Churcher says no one should underestimate the importance of pensions for employees. “We are talking about what people will use to buy their food and clothes and, hopefully, holidays for the last 20 or 30 years of their lives. Communication is going to be the key.”

The arrival of the national employment savings trust (Nest) and auto-enrolment in 2012 will change the rules of the game. These reforms should boost pension saving, but will not be a panacea, says Taylor. “We need to disabuse people of the notion that an 8% contribution to Nest will give them enough for holidays in retirement,” he stresses.

Odell says she hopes media coverage of Nest will raise awareness of pension issues, pointing out that media coverage of the banking crisis showed it was possible to explain quite complicated subjects in a straightforward and simple way.

“I never thought I’d see the day when papers like The Sun would report the banking crisis in a totally understandable fashion,” she says.

If the benefits of this type of media coverage are harnessed to pension stories, then the type of financial education employers want to see could get a major boost, says Odell.

Financial awareness programmes

Churcher says the Telegraph Media Group has improved its financial education as a result of a staff financial awareness programme run jointly by its HR and pension departments.

“Pensions are a huge, complicated financial issue, but this covers the whole realm of financial awareness,” he says. “We have run free seminars during the working day. We realised that if you give people free sandwiches, then they are [more] likely to come.”

Podcasts were used to supplement the seminars and the company also paid for an independent financial adviser to come onto its premises to give free, one-to-one financial clinics to staff.

“He does not do any product selling, but will give advice and the subject that people want advice on most is pensions,” says Churcher.

Providing independent advice like this can be a useful financial education tool because employers cannot give advice, only information. Churcher says that although this has a cost, it is not huge compared with the fees associated with a DB scheme, and it provides a highly valued benefit and has led to a rise in pension provision.

Employers should also use financial education when communicating benefits to employees to get messages across on the value of perks, such as pensions.

John Taylor, market director for corporate pensions at Scottish Widows, says: “Putting £1 in someone’s pocket costs a lot more than £1. Finding a way of getting employees to value what is going into their pension pot today is the trick here.”

One idea that could work for visually-minded staff could be a version of the thermometer graphic used for fund-raising, which uses a red line to show how much of a target amount has been raised.

Enliven benefits statements

Visual imagery can also be used to enliven annual benefits statements, where most employees focus solely on the current value of their pension and its value 12 months earlier.

In this context, a fall in value may look and feel disastrous, so it is important for an employer to put over key messages on market volatility and the importance of investing for the long term.

Nevertheless, the fact that employees resent any fall in the value of their pension pots has led to plans for Nest to involve investing contributions made in an employee’s early years in a cash or guaranteed fund that will not fall in value.

This shows the importance of meeting employee perceptions on how a benefit works. If employee contributions are initially invested in low-risk funds, once the assets have built up to a certain level, a financial education programme could be used to help staff become more sophisticated investors.

After all, an employee’s interest in pensions increases significantly when their pension fund is equal to, or greater than, their annual earnings. Once this point is reached, it may be a good time to start talking to an employee about their pension fund and how it could be invested.

The challenges of financial education may seem daunting to employers, but there are various means at their disposal to achieve their objectives. A good financial education programme should enhance staff appreciation of benefits and increase understanding of the need to save for their retirement.

Read more from: Employee Benefits / Scottish Widows Pensions Roundtable: engaging staff in pensions