Educating pension holders
In the wake of auto-enrolment, employers could be best placed to teach a new generation about the importance of saving for their future
by Andrew Davis
Providing financial education is rather like paying tax or doing the ironing: most people agree it needs to happen but they’d rather someone else did it. So far, so typical of human nature. But ask who should take responsibility and it seems opinions remain remarkably fluid, according to an annual survey of employers.
The survey, commissioned by advisory firm Chase de Vere, reports that in 2017, 35% of businesses believe it is the government’s job to provide their staff with financial education – a huge turnaround from the result in 2016, when 65% of employers thought so. That sounds promising, until you see the next line in the results. Last year, just 4% of employers thought it was their employees’ responsibility to provide their own financial education. Fast forward a year and now 29% think so.
Encouraging newsThere is, however, one mildly encouraging piece of news in this survey to offset the impression that people are being left to fend for themselves in the financial services jungle. The proportion of companies who feel it is their responsibility to provide financial education for their staff is rising, from 14% in 2016 to 20% this year.
Admittedly, this is no landslide but it is a step in the right direction and one that must be related to the fact that auto-enrolment into workplace pension schemes is spreading fast and has already resulted in eight million new members. By 2040, these people are forecast to have built up a vast pot of pension savings: some £500bn in the National Employee Savings Trust alone. Where will they naturally look first for information and advice as their pension pots grow? Their employers, in all likelihood. Thankfully, it seems that a growing proportion of these companies are acknowledging their central role in helping their staff to make sense of the pensions system and get the most out of it: Chase’s survey finds that 58% of employers plan to help their staff make more informed choices about their retirement.
Providing financial education is rather like paying tax or doing the ironing: most people agree it needs to happen but they’d rather someone else did it
This is both encouraging and important. Of course, the days are gone when old-style paternalism meant your company shouldered all the financial risks involved in providing you with an index-linked final salary pension for life. But the instinct among employers to do right by their people has not died out entirely and some, at least, are still showing a welcome willingness to take responsibility. In fact, those that work with smaller employers to help them put schemes in place say there is a widespread view that they do indeed have a duty of care to their staff where pensions are concerned, although the survey finds that only 36% of respondents have budgeted to pay for financial advice this year.
Building trustIn the long campaign to ensure better financial education, finding a willing provider is half the battle. The other half is building trust among those who need the information. Research repeatedly shows that people who do not have a financial adviser tend not to trust them as a breed. By contrast, they are generally happier to trust the company they work for and are therefore more open to receiving financial education and guidance in this context than from most other sources.
Among many larger companies, access to professional financial advisers is now a standard part of the employee benefits package, a trend encouraged by changes to tax allowances. This makes sense as employers can bulk-buy advice at better rates than employees could get for themselves and so deliver a service that people want in a context that makes sense: where better to talk about your occupational pension than at work?
Thanks to the spread of auto-enrolment through smaller companies, the workplace is becoming a more important channel through which to access financial education and guidance. It is still early days, however – the experience among specialists is that employees don’t generally start to take an interest in their pension until it is worth more than their car. But as that pool of workplace pension savings climbs towards £500bn and beyond over the coming decades, we’re likely to see an increasing flow of requests to employers for financial guidance.
Provided enough companies are willing to accept some responsibility and find ways to respond, it’s possible that many more people will gain an improved level of financial understanding from a source they are generally inclined to trust.
If a system of this kind can indeed emerge as a byproduct of auto-enrolment, it should offer an effective way to help millions of people gain the knowledge they need to get the most out of their savings. Perhaps we can see in it the contours of a replacement for the old-style paternalism that gave us the final-salary system: employers not as providers of pension guarantees, but of pension engagement.
This article was originally published in the Q3 2017 print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.