By Lee Coles, Head of life after work, Jelf Employee Benefits
‘Pension Freedom’ came into effect from 6 April 2015, billed as the biggest change in pensions in living memory. Whilst Pension Freedom empowers prudent individuals to achieve the retirement they deserve, making the wrong choices can be disastrous. Pension Freedom is make or break.
So what does this mean for our friendly neighbourhood employer? Many will want to help and that will typically mean bringing in outside expertise. Certainly, few will have the skills and knowledge themselves to navigate their employees through these tricky waters. Others will simply decide to keep silent on the subject.
Pension Freedom has introduced a communication problem, and I am seeing employers make the same mistakes that I have seen when it comes to approaching financial education more generally.
For me, the top 5 howlers to avoid are:
1) Doing nothing – There is a growing body of evidence linking financial wellbeing with physical wellbeing. Regardless of the size of a workforce, individual employees can be a very different prospect if they are financially stressed; whether that’s due to spiralling debt or the lofty tax bill taking the wrong Pension Freedom path has created. Time and cost are the headline reasons normally stated for employer’s ducking financial education in the workplace, yet both of those arguments miss the defensive, risk-management benefits such support can bring.
2) Too much focus on pensions – Pension scheme providers will typically offer literature and tools to support people in their decision making, and may even offer gratis face to face engagement. On the face of it this is no bad thing, although there are accompanying limitations. For one, pension providers will focus on what they offer and their strengths rather than weaknesses; this can be problematic for those approaching retirement given that they may not get the best deal or access to the freedom they were expecting. Secondly, the focus will inevitably be about pensions. This is obviously only one aspect of any individual’s finances. It certainly needs attention, but employees may have greater concerns that are front of mind. It could be debts, budgeting, mortgages, protection against something going wrong, through to investments and inheritance tax.
3) Too much focus on whoever shouts the loudest – Or indeed whoever holds the purse strings. Rather than see financial education as an important ongoing benefit for all, employers will often bring in help to solve a specific problem for a small community within their workforce. There may be a group of employees approaching retirement and one or two are pressing for assistance Perhaps one of the directors has got around to reviewing their pension; they twist an arm or two and encourage the company to fund this. Good financial planning, particularly for those who aren’t well paid, starts with getting into good financial habits. I would advocate career-long education, but often younger populations get overlooked because they don’t have the voice or the influence.
4) Picking the wrong financial education partner – I’ve already mentioned that there are limitations to using pension providers. The other type of provider to be watchful of is a financial adviser. Employers may find that advisers will offer financial education for free. There is, however, clearly a cost to providing such a service and the “no such thing as a free lunch” argument applies here. The only way costs can be recovered is if the adviser sells advice services or the limited range of commission paying products which still exist. The real goal of financial education should be to train people to be better with money. There is also a point to make here that the delivery of financial advice is a very different skill set to the delivery of engaging workplace education to a group of people. Some can do both well but they are few and far between.
5) Missing the point about retirement – Financial readiness for retirement is only part of the game but often dominates education on the subject. The switch from employment to retirement is a massive change of lifestyle which should not be underestimated. The impact such a decision has on an individual’s relationships, drive, self-worth and sense of purpose can lead to opting out of retirement altogether. This can lead to workforce stagnation. Education focussed on helping someone to plan for their life after work can offer the impetus and confidence needed to make the leap.
By avoiding these pitfalls an employer can build towards best practice. Consider education which looks to train your people rather than sell to them, is offered regularly by an independent expert supplier paid by fee, and covers a variety of topics to include lifestyle-focussed support prior to retirement.
But hey, don’t take my word for it. If you’re wondering what your employees would like in terms of financial education, why not ask them?