Financial education: Interview with Andrew Pendleton of York University

Financial education may not boost benefits take-up, but it can improve employees’ work performance, says York University’s Andrew Pendleton. Jenny Keefe reports

Britain might have finally staggered out of recession, but employees still need to repair the damage it has caused to their bank accounts. Andrew Pendleton, professor of human resource management at York University, explains:

“The extent of employees’ personal finances decisions is greater than ever. But, at the same time, trust in financial institutions is at a low ebb. Who will help employees to make complicated decisions with important consequences?”

Pendleton is leading a charge to teach staff about money matters. He ran a 2007 pilot study on financial education backed by share scheme industry body Ifs Proshare, and is now interviewing large employers as part of a major survey of the market.

In a downturn that has decimated many workers’ finances, Pendleton believes employers have a duty to help the ‘cash confused’. “In my view, the recession has made workplace financial education more necessary, because coping with debt and responding to declines in asset values has become pressing,” he says.

More responsibility for workers

On top of this, employers have shifted more responsibility for money choices onto their workers. For example, new pensions legislation can leave staff panicking and facing questions such as: Should they choose a tax-free lump sum? Should they pick an annuity or other draw-down? How much should they contribute? “As legislation makes benefits more flexible, this places more demands upon employees, so they need more guidance,” says Pendleton.

One consequence of staff having financial problems or concerns is that their productivity levels start to slip. According to the Institute for Employment Studies’ March 2009 report Financial wellbeing in the workplace, which surveyed 1,900 UK employees, workers’finances are in an alarmingly poor state. Nearly one-third of employees felt that their finances were out of control, while 10% said that money worries affect their work performance.

With no basic grounding in personal finance, mistakes can range from catastrophic to simply missing out on the best deals. Pendleton says: “One sobering finding from research carried out at the University of York is that around 25% of individuals who acquire shares through employee share ownership plans hold 50% or more of their non-pension savings in employer shares. These people were badly exposed when the market fell in the recession.”

Save staff from money mayhem

The big question, though, is how to save employees from money mayhem: a tricky task when generations of Britons have never been taught personal finance skills at school. “Most people get their financial information and advice from those closest to them, who are often ill-informed,” explains Pendleton. “Yet it is possible to make expert advice and tuition available to workers, often at little direct cost to the employer.

“Financial education has three main functions and benefits: it helps to develop employees’ knowledge; it improves their capacity to interpret their financial situation and foresee decisions that need to be made; and it can motivate people to manage their finances more proactively.”

Workers’ money nous can be boosted through seminars and presentations, as well as online tools. Some employers also provide access to independent financial advice.

But Pendleton is cautious about the business benefits of offering staff financial education. “There is, as yet, no definitive evidence to suggest there is a commercial benefit for employers,” he says. “However, the kind of benefits that employers might expect are lower absenteeism and greater engagement. Employees in more control of their personal finances are likely to be healthier and more engaged in their work.”

FSA’s financial capability scheme

Another option is the Financial Services Authority’s financial capability scheme. This subsidised scheme, offered by 750 employers across the country, provides employees with free one-hour educational seminars, commonly held at lunchtime or after work, run by trained professionals. The sessions feature some of the most common issues affecting employees, such as borrowing, saving, budgeting and investing, plus the organisation’s own benefits package.

The results are promising, says Pendleton. “There is no definitive information as to what is most effective when it comes to financial education, because it is early days. However, a strong feature of the FSA’s scheme is that employee behaviour after participation in the education event is monitored, and the evidence suggests that the scheme makes a positive difference in terms of people acting on the education.”

The FSA questioned 13,425 employees who took part in the scheme and found that the session prompted 86% to take action on their finances. Some 79% said the seminar had made them more financially savvy, according to the figures from June 2008.

But whatever type of scheme an employer chooses, a sustained effort is needed to give workers a thorough grounding, says Pendleton. “Educational theory tells us education is more effective when individuals are active learners. A regular programme of events is more likely to secure longer-term engagement by employees.”

No evidence of higher participation

But there is a potential snag. “Financial education might lead to higher participation in various employee benefits, although there is no definitive evidence,” says Pendleton. “But employers should beware of relying on workplace financial education to enhance participation rates in benefit schemes. It might justify the opposite.”

For example, debt-ridden graduates may ditch employee share ownership plans to pay off loans and credit cards first.

As for the recession’s effect on the financial education market, Pendleton believes that it is business as usual. “As far as I can see, the recession has had a limited impact,” he explains. “The FSA’s scheme is, in principle, unaffected because the FSA bears much of the cost of delivering it. Much financial education is informally provided by share scheme administrators and pension fund [providers]. This information still needs to be conveyed to employees, whatever the economic circumstances.”

What is clear is that, as more financial decisions are transferred to employees, the need for education is only going to grow. But employers may be slow to meet this requirement, says Pendleton. “The main problem is the lack of definitive evidence on its positive effects for companies. Workplace financial education will grow, but slowly.”

Looking to the future, Pendleton says: “I suspect there could be greater use of internet-based tools. However, in my view the personal touch counts for a lot, especially in motivating employees to develop their financial knowledge and skills.”

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Career history: Andrew Pendleton

Andrew Pendleton has been professor of human resource management at the University of York since 2005. He took up the position after moving from Manchester Metropolitan University, having previously worked for the universities of Bath, Bradford and Kent.

He is working on a major survey to establish the extent and character of workplace financial education in large companies. This follows a pilot study on financial education that he ran in 2007, which was backed by share scheme industry body Ifs Proshare.

With a doctorate from Bath University in managerial strategy and industrial relations in British Rail, Pendleton has long been interested in human resources strategy.

In 1999, he turned his interest to share schemes, working with the government on the design of the share incentive plan and enterprise management incentive.

His publications include Employee share ownership, governance and industrial relations, within Essays in honour of Harvie Ramsay, edited by B Harley, J Hyman and P Thompson (Palgrave Macmillan, 2005), and Profit sharing and employee share options, within Strategic reward systems, edited by R Thorpe and G Homan (Pearson Longman, 2000).

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Five lessons for successful financial education schemes

– Do not count on a take-up boost. Workplace financial education might not always increase scheme participation rates because it could encourage employees to drop out.

– Run schemes on a shoestring. Financial education does not have to be costly. The Financial Services Authority’s scheme is subsidised, and benefits providers will often provide free sessions around specific benefits.

– Do not forget highly-educated staff. It is not just employees with few qualifications who need lessons in financial awareness. Highly-educated and senior employees could also need to become more financially astute.

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– Consider outsourcing. If employers do not want to run schemes in-house, it is an easy matter to provide the co-ordination and facilities to enable education to be provided by outside parties.

– Make it a challenge, not a chore. Employers should take their lead from educationalists and put emphasis on active learning techniques, such as online tools, but not forgetting face-to-face lessons.