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• A combination of information, education and advice can be the most effective way to improve employees’ financial awareness.
• Although most employees can benefit from financial education, only a small percentage will require additional financial advice.
Organisational activities and events such as changing the pension or a share scheme maturing can trigger the need for financial education and advice.
• The cost of providing effective financial education can be kept relatively low.
What employers can and can’t say
• Whatever an organisation’s motivation for providing employees with financial education, it is important for employers to understand what information they are, and are not, allowed to provide to their workforce.
• Under the Financial Services Market Act, employers can provide generic financial advice to their workforce, but they must not give advice to employees about the action they should take in respect to individual products. This means that employers must not make recommendations about financial products or services suitable for an individual employee.
• Advice, which is tailored to an individual employee’s personal requirements, can be provided as long as it is given by an independent financial adviser (IFA) which is authorised and regulated by the Financial Services Authority.
Should employers provide financial education?
Ian Hodson, reward and benefits manager, University of Lincoln: “Employers have kept a distance from any financial topics on the basis that it would be construed as advising but now, more than ever, there is a place for employers to offer financial education in the workplace.”
Dr Annette Cox, associate director, Institute for Employment Studies: “Employers are in a good position to help staff. By taking the initiative to support employees with financial education, they are likely to be rewarded with a more productive, loyal and motivated workforce.”
Ann Govier, manager for senior remuneration and employee share schemes, Marks and Spencer: “Financial education gives staff a better understanding of the value of their benefits and helps them make informed financial decisions. Financial health is an important part of an individual’s sense of wellbeing.”
Jonathan Watts-Lay, director, Wealth at Work: “Yes. Financial education is not something fluffy; it delivers hard benefits to employers and staff. It is about improving engagement with benefits, managing risk and complying with regulation.”
David Czerwinski, head of client management and proposition development, Aviva: “It is important. Pensions are not top of everyone’s priorities, so it is our responsibility to give [staff] information to enable them to make informed decisions.”
Angus Jones, managing director, Clarity: “It is not good enough for an employer to switch from a defined benefit to a defined contribution pension without giving employees financial education.”
Providing financial education for employees can pay off for employers too, but careful attention is needed to how it is offered, says Sam Barrett
Financially savvy employees can bring benefits to employers, including reductions in sickness absence and improvements in engagement and staff morale. But although there are advantages, employers must consider their role carefully when it comes to providing financial education and advice.
Jonathan Watts-Lay, director of Wealth at Work says: “Employers can help their staff in a number of ways, with their choice of the type of support they offer dependent on factors including cost and their view on risk and regulation. Employers should consider what their employees need and the benefits providing financial education can bring.”
Employers can help raise financial awareness in three distinct ways: information, education and advice, and each has its merits and pitfalls.
The cheapest option is information. This can include placing information about employee benefits or financial planning on an intranet site, or in new joiner and flexible benefits enrolment packs. Although low cost, this is also the least effective method because it depends on the employee reading and understanding it. It could even work out to be the least cost-effective.
Offering more active engagement with the employee, education and advice can both be significantly more effective. Education is typically delivered to a group of employees to help them gain a better understanding of a particular area of financial planning, such as building up a pension pot, retirement planning or debt management.
While the information provided through financial education is generic, advice is tailored to an individual’s circumstances. It will look at the employee’s financial position, either in its entirety or relating to a particular area such as pensions or retirement; assess their requirements; and make recommendations for future action.
To illustrate the difference, Angus Jones, managing director of Clarity, gives this example: “Under financial education, an employer could tell an employee it offers a pension and that there is a range of funds into which they can invest, but if it then tells the employee to invest in fixed interest, that would be seen as advice.”
More expensive advice
As well as being more tailored, advice is also more expensive. A session of financial advice, including analysis and recommendations, will cost between £1,000 and £2,000 depending on the complexity of the employee’s circumstances. If employers provide advice around pensions, it will be exempt from tax as long as it is offered to all staff and costs no more than £150 per employee per year.
A combination of information, education and advice is regarded as the best way to meet employees’ needs, but it is also important to weigh up the costs. Although advice is the most expensive element, most staff will not need this more than a few times in their career, says Tobin Murphy-Coles, commercial director at Lorica Consulting. “In most cases, you will be able to educate a group of employees and that will give most of them the information they need to make an informed decision about their financial situation,” he says. “A few, probably with more complex financial circumstances, will benefit from taking advice.”
For example, financial education could be provided on pensions to help staff understand matters such as how much they need to pay in; the choices they need to make; and the significance of their employer’s contribution. Murphy-Coles adds: “This would be perfectly adequate for a 21-year-old taking out their first pension, but an employee in their 40s with a number of different [workplace] pensions or a high salary would benefit from individual advice.”
Other life stages can also trigger the need for financial advice rather than simple education. Good examples are redundancy, where an employer could include financial advice alongside career support; and when an employee is approaching retirement, because they could benefit from advice on how to get the most value from their retirement savings.
The need for financial education and advice may also be triggered by employer events. For example, if an employer is changing from a defined benefit (DB) to defined contribution (DC) pension scheme, financial education is a must, says Clarity’s Jones. “With a DC pension, the employee has to take more responsibility,” he says. “It is a bit cheeky for an employer introducing such a scheme to expect staff to have this understanding without any financial education.”
The maturing of an employee share scheme is another example. Here, most staff would benefit from education to help them decide what to do with the payout. A few, perhaps those with larger payouts or more complex tax affairs, may find personalised advice more appropriate.
The 2012 pension reforms and auto-enrolment also bring a greater need for financial education. Lorica’s Murphy-Coles says employers will face a ‘magic month’ in which they need to ensure employees engage with their pension rather than seeing it as a financial drain and opting out.
With so many requirements for financial education and advice, costs can deter employers, but it is possible to keep expense to a minimum by using free services such as the Money Advice Service or hooking into schemes provided by some financial services suppliers. For example, Aviva offers a financial education programme for employers which use its employee benefits products.
David Czerwinski, Aviva’s head of client management and proposition development, says: “We can provide presentations around the products we offer but also on broad topics such as protection or budgeting.”
Although raising awareness in this way can often drive the need for advice, it is not always necessary for employers to foot the bill for this, either. Jones works with employers that provide advice sessions for senior executives, which covers the cost of offering online financial education for all staff. “Some employers include financial advice in their benefit package; others prefer to allow employees to access it through flexible benefits or pay for it themselves,” he says. “How much employers offer depends on what they want to achieve.”
Read also: Why offer financial education?
Read more from the financial education supplement