Financial education

With the government introducing programmes to improve financial knowledge across the UK, it might also be time for law firms to reconsider how they financially educate their employees.

By Robin Hames, PIFC Consulting

Just over ten years ago, a young fresh-faced prime minister famously set out his government's priorities in office as ‘education, education, education’.
Regardless of our political views on his success in this arena, the education agenda looks likely to be further promoted under his successor in one very specific area: financial education. The government is so concerned about the lack of financial knowledge in the UK that it has launched a ‘National Strategy for Financial Capability’, which is being led by the regulator, the Financial Services Authority. Financial education programmes are currently being piloted with the results to be announced before Easter 2008.
In addition, the Treasury has also appointed Otto Thoresen, chief executive of Aegon UK, to carry out a review examining the feasibility of delivering a national approach to generic financial advice, with a clear steer towards considering how employers can assist in its delivery.
Meanwhile, the Pensions Regulator’s recent paper on contract-based pensions (such as group personal pensions and stakeholder pensions) highlighted the importance of good member communications. Furthermore, the paper went on to promote good practice in the governance of investment processes, encouraging regular reviews by the employer, provider and adviser of investment-fund choice and processes.
Combine these different strands of thought, policy and review, and a general consensus appears to be gathering pace that employers should be doing more to help employees with their pension and general financial planning on an ongoing basis, rather than troubleshooting when the need arises.
The current Pensions Bill, which contains provisions for the new Personal Accounts, will only add to this heady brew. It seems apparent that a direct link is likely to be drawn between improving financial capability and education in the workplace.

The savings culture
There is a clear concern within government circles that the decline in ‘the savings culture’ could have significant implications in future years, particularly when future generations come to retire.
A survey of UK adults led by the Financial Services Authority, ‘Financial Capability: Establishing a Baseline’, carried out in March 2006, found the following:

As many as 81 per cent of respondents did not think a state pension would provide the standard of living they had hoped for in retirement;
Despite this, 37 per cent had not made any additional provision;
Of those, 28 per cent blamed their lack of savings on inadequate income, while 26 per cent claimed they had not thought about pensions or had not got around to saving.

As yet no party has been brave enough to suggest the politically fraught option of introducing compulsory savings into pensions. Instead the focus is shifting to educating individuals on how to take personal responsibility for their retirement.

The risk for employers
Regardless of future political pressures that may translate into legislation, the ageing UK workforce is going to have an impact on employers across all sectors.
Over the next two decades within the EU, it has been estimated that the number of workers aged between 50 and 64 will increase by 25 per cent, while the number between the ages of 20 and 29 will actually decrease by 20 per cent. Therefore, the demography of all firms is likely to tilt towards an older age profile.
In considering the possible impact of this tilt, consideration must be made of the age-discrimination legislation, which will soon begin to make its presence felt in employment relations.
In our survey of the legal sector last year, none of the responding firms currently offer employees membership of a final-salary pension scheme. There are many sound financial reasons for employers to avoid the costs involved in such arrangements. However, the shift to ‘defined contribution’ arrangements, such as personal pensions, as the best means of providing for employees has important ramifications. Responsibility for adequately saving for retirement falls squarely on the employee, as do vital issues such as investment selection.
It is extremely likely that this combination of an ageing workforce with inadequate savings will lead to a sharp increase in the number of employees requesting to work beyond the default retirement age of 65. While the legislation does not currently require employers to grant such requests, it does oblige them to duly consider each and every petition from their employees. This, in itself, could begin to become administratively time-consuming and tiresome for larger employers.
However, the issue and the burden may become even greater in future years. The current Pensions Bill proposes increasing the State Retirement Age from 65 to 68. It seems likely that the default retirement age under the Age Regulations will therefore have to follow suit. Indeed, it has always been mooted that the presence of a default age is only an interim measure, since it is inherently ageist, in any case. The logical end progression of anti-discrimination legislation would be to remove all age barriers: physical and mental capacity to carry out a job becoming the sole criteria.
This would pose even greater challenges to firms if employees don’t grasp the nettle and plan for their future; they may lose control of future retirement policy.

Building an education programme
If, in the face of these various drivers, the decision is made to commence some form of education programme, however limited in its initial scope, it is important to appreciate that one size rarely fits all.
Education programmes can combine group seminars, focus meetings, one-to-ones, technology, helplines and a whole host of other media.
However, a suitable starting point is assessment of employees’ current understanding of their benefits is to try and gauge a base point from which to build. The results can sometimes surprise and also highlight areas of potential future risk.
A good example can be found in the results of an employee survey we carried out last year for a City law firm regarding their group personal pension scheme.
These are not untypical responses but are particularly galling for partners and financial directors alike. The scheme in question was undoubtedly generous and, based on our benchmarking survey last year, above its peer group. The cost of the pension to the partnership profits was substantial and yet was poorly understood. Comprehension and appreciation often go hand in hand, so the implication was clear.
One particularly worrying aspect for the firm was that over a quarter of responding employees believed that responsibility for investment selection lay with the partnership and was not an employee responsibility.
A Working Party drawn from all sectors of the firm was created to assess the results and to establish the best means of raising awareness. Some of its key findings were that:

The communication of the scheme assumed too much knowledge of pensions and was jargon heavy;
The degree of investment choice on offer was so great that it tended to confuse and lead to inaction;
A guide to reading the pension provider’s statement was needed to help people understand their possible future benefits.

These findings helped to shape the communication and education programme subsequently designed and inaugurated. Being able to focus on key areas of confusion allowed employees an entry point for building their financial acumen and planning their future. Rather than trying to throw everything into the mix at once, the programme set itself small, immediately attainable and realistic goals, and continues to evolve.
In particular, a series of educational seminars on the basic principles of investing, demystifying the jargon, and explaining the nature of risk and return, helped employees better understand the default investment fund into which their money was invested in the pension scheme. By understanding the nature of not making a choice for themselves and remaining in the default investment process, employees were better able to decide whether this was appropriate for them and to investigate the various online investment-planning tools available.
The feedback showed that even for those who chose to stay in the default investment process, their understanding had grown appreciably and that the firm had gained considerable kudos from the delivery of the programme.

Conclusions
It is apparent that financial capability is, at best, mixed across the entire employee community from lawyers to lathe operators. At present, there is no obligation on employers to step in and fill the breach left by today’s education system and the culture of debt. However, it seems increasingly likely that, as part of their deemed incumbent social responsibility, this will not be the case forever.
Furthermore, there are a number of reasons to consider financial education as a positive contributor rather than an obligation. By raising financial awareness, employers can help employees better understand and plan their immediate finances, whether investment or debt dilemmas, hopefully leading to reduced stress and potential distraction. Through the targeting of areas of confusion relating to the employee benefits offered, firms can improve appreciation of their cost and value, aiding retention.
In the long run, advocating education and planning should also assist firms in retaining control of future retirement practices by helping employees better prepare for a comfortable retirement. This is an issue

Robin Hames is a consultant at PIFC Consulting. He can be contacted at robin.hames@pifc.com