Financial education – an essential tool for workplace savings & benefits

1st March 2012

In these challenging economic times, with the introduction of many new regulations employers and employees are often overwhelmed. Whether it is the introduction of auto-enrolment, removal of default retirement age or options at retirement, the considerations are not only growing but critically they need to be understood.

Together with insufficient retirement savings, over indebtedness and a general lack of knowledge – employees have a pressing need for financial education in the workplace.
This is of special concern for those considering retirement. Employees save for many years to fund their retirement income but are often left without any guidance at the point of retirement. This is especially important as the decision an individual makes at retirement is probably one of the biggest financial decisions they will ever make in their life.

Why now?

The end of fixed retirement dates will see many employees continuing in employment for longer, often opting for flexible retirement where pension income is supplemented by earnings from part time work.

For those not in a pension already, auto enrolment will be introduced from 2012. This should not be viewed by employees as simply a ‘pay cut’ but instead it should be used to make essential provision to secure their long term financial well-being. This is where effective communication and financial education are paramount in order to understand the importance of saving for retirement.

Workplace savings and benefits are not just about pension.

 Increasingly a significant part of the modern benefits package includes share schemes. Whether Save As You Earn, the Share Incentive Plan or executive share plans, employees often fail to understand these and therefore do not maximise their value. For example, do your employees know:

• Capital Gains Tax can be mitigated on Save As You Earn by transferring the shares in specie to a Workplace ISA. (subject to annual limits)
• Two lots of tax relief can be obtained on ‘the same money’ by investing in a share Incentive Plan and then transferring the shares into a pension contribution (subject to annual limits) after 5 years.
• Diversification of Company shares need to be considered at scheme maturity to ensure employees are not exposed to a single stock. In other words do not have ‘all your eggs in one basket’.

The employee is faced with an array of information, not just on share schemes, but on all the other component parts of the modern benefits package – child care vouchers (CCVs), medical and life insurance, cycle to work schemes, restricted stock units  – the list goes on.

The information is usually provided through generic brochures and intranet sites. All of which come at a high cost. But is it enough? Can employees really understand how to maximise the offering by reading some information in a brochure or on an intranet site?

For example, take an employee benefit like salary sacrifice and CCVs. How can we maximize its value? For example, if someone is effectively saving £500 on tax and National Insurance (NI) on the vouchers, then (if) as part of the benefits provision the company is also offering a share incentive plan or pension, the employee can increase the value of that saving by putting the £500 saving into either scheme, possibly get a matched contribution from the employer and also tax relief. By explaining benefits in this way the employee can understand the value to be achieved via the tax system and any employer contribution.

This is best illustrated by the use of financial education.

Lets also look at workplace savings.

Maximising workplace savings

Different employees will have different circumstances which are likely to result in  different savings priorities , so different savings vehicles will be required to suit the various needs. Whilst pensions are likely to remain part of a longer term savings strategy and share schemes a medium term savings strategy, the Workplace ISA can be a more flexible savings choice. It is also a useful savings vehicle for those senior employees who may be affected by the restrictions to pension tax relief.

With the benefit of financial education and specialist advice, the integration of workplace savings such as share schemes with pension & Workplace ISA can prove beneficial. For example, using platforms to link benefits is a good way to achieve value such as; linking a share incentive plan to pension can allow employees to generate pension pots at little cost where they are awarded matching shares (up to 2:1 with some employers). Later on, the shares can be contributed to a pension. With the benefit of two lots of tax relief and employer matching, the shares would have to fall a long way for the employee to lose money.

For most companies, a Workplace ISA is a fantastic benefit to offer, particularly if employees already have shares. For example, if the employee is holding stock, they can wrap that stock in an ISA to protect it from further income tax and capital gains tax. Yet the price of supplying the Workplace ISA to the employer is nothing.

Creating value is especially important in the ‘accumulation’ phase of saving, leading up to retirement, to build up the largest retirement pot possible pre retirement.
Lets look at some statistics on retirement.

Rethinking retirement

WEALTH at work recently conducted the ‘Rethink Retirement Survey 2011’ to determine the approaches and opinions of a range of UK companies in relation to retirement.

Only 23% of respondents believe that employees are aware of the various income options available to them at retirement. In many cases, the shift from defined benefit to defined contribution pension provision has not been accompanied by an increase in employee support, leaving employees with little explanation of the retirement income options available.

51% stated that employees were not aware of the removal of the requirement to buy an annuity, whilst only 13% believe employees will possess knowledge of the change.
67% agreed that the removal of the default retirement age will see a significant number of employees choose to work longer. Others may carry on working in order to enhance their retirement savings which is an inevitable outcome; given that the evidence suggests that many are not saving enough for their retirement. Indeed, only 21% believe their employees are saving enough for retirement.

Changes to legislation mean that there is now far greater flexibility in how and when retirement income is taken. Those individuals with pension savings outside of a defined benefit pension scheme will need to be made aware of this, considering either annuity or drawdown pension options or a combination of the two.

60% believe there will be an increased requirement for specialist advice at retirement. This support will be essential if employees are to make appropriate decisions given the irreversible decisions of annuities and the complexity and risk associated with drawdown pensions.
Employees need to rethink their retirement whether saving towards or taking an income to live in retirement. It is essential that employees receive financial education and suitable guidance in the workplace to understand their choices, what can be achieved and consequently make informed decisions.

But how is effective education delivered?

How is effective education delivered?

The employee population should always be segmented so that an education programme can be tailored and delivered in the most appropriate way for the particular audience. For example what motivates a 25 year old is often very different to the requirements of a 50 year old.

The most popular form of education, and arguably still the best, is in the ‘classroom’. Seminars allow for an interaction with a presenter in order to gain better knowledge.
However, new technology also allows for ‘mass education’ sessions in the form of webinars. Here a presenter could speak to hundreds of staff in many locations simultaneously and, through live email capability, give answers to questions posted live from the audience. Back up information can be provided in the form of  webcasts which are  pre-recorded. Here the education is delivered by a presenter together with simultaneously changing slides, viewed either on intranet, internet or DVD.

A further development of education which aids the learning process is through use of online financial modelling tools which allow the employee to work through examples using their own personal information for example, pension savings or savings they have in a company share scheme, which can help aid decisions. A combination of e-learning and classroom education, with reminder webcasts and podcasts covering the salient points help understanding and often act as a reference point following a seminar. Having this provided by a specialist financial education supplier is critical to ensure technical information can be delivered in an accurate yet engaging way.

This growing trend for financial education was also highlighted in WEALTH at work’s 2010 ‘ Financial Well-being Survey.’  The survey stated that 84% of companies surveyed provide financial education and/or advice as a degree of support to retirement, with 34% providing this support five years or more before their anticipated retirement date.  Furthermore, 80% of companies surveyed agreed that they need to take action to ensure employees are aware of the need to save.  This increased to 100% of the FTSE 100.
In addition, we must not forget that advice plays an important role.

The need for advice

Given the new retirement options and various ways retirement income can be drawn, it is important employees are given access to specialist advice following financial education. As retirement decisions are probably the biggest financial decision most people will make in their lives  getting it wrong after a lifetime of saving needs to be avoided at all cost.

As stated, from our research, the majority of respondents believe there will be an increased requirement for specialist advice, with 60% supporting this view. This support will be essential if employees are to make appropriate decisions given the irreversible nature of annuities and the complexity and risk associated with drawdown pension.

The key issue with all of this, is that employees need to rethink their retirement plans now – whether saving towards retirement or taking an income to live in retirement. It is essential that employees receive suitable financial education and guidance in the workplace to understand what can be achieved through saving and what retirement income options are available so they may make informed decisions

And finally…

In tough economic times it is important to ensure value is being maximised from the benefits programme, there are many ways to do this which both employers and employees are often unaware of. A financial education programme may hold the key to releasing value.

Read the full article on the  Pay & Benefits website.