Educating scheme members about an organisation’s pension schemes can boost take up and help to offset any potential risk of employer liability, says Debbie Lovewell.
If you read nothing else, read this …
Some providers have added financial education services to their group defined contribution (DC) products.
Educating members about their DC pension scheme can help to boost employee take up, which has benefits for employers such as increased loyalty and engagement.
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The risks of not providing financial education to staff in a DC plan are still evolving.
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Low levels of financial literacy in the UK have sparked much debate about who should be responsible for rectifying the problem; particularly when it comes to ensuring staff understand the need to make adequate provision for retirement.
Some providers of defined contribution (DC) pension schemes, however, have taken steps to offer financial education to the staff of employers that use their pensions products. In most cases, these services are included within the cost of providing pensions products to employers.
Friends Provident has teamed up with educational charity Life Academy to offer members of its schemes access to its financial education programme Learn About Money, which includes web-based education material, self-assessment tools and face-to-face workplace seminars. Separately, Axa has done the same.
Jeremy Ward, head of pensions marketing at Friends Provident, says: "In an ideal world, each employee would have access to individual financial advice but the reality is they don’t. The economic model is such that [this doesn’t work for organisations]. They don’t want to pay the fees in the majority of cases."
Ward explains that the move from defined benefit (DB) schemes to DC plans has heightened the need to educate staff, as they will be called upon to make more decisions about their pension.
Mark Polson, head of corporate business at Scottish Life, believes this is particularly important if employees are to make the most appropriate investment choices. "If people understood what was inside the box, they may not opt for the default fund."
Scottish Life also enhanced the worksite communications it offers to members of its group pension products earlier this year and provides packages tailored to suit the workplace concerned. "We believe it is absolutely part of the provider’s responsibility to ensure employees do understand the offer. Our core thing is about trying to demystify it, explain it and that’s not always easy to do," adds Polson.
But while educating staff about their pension can help to improve their prospects for retirement, this may not always be enough. In many cases, employees may require individual financial advice in order to understand how their pensions provision fits in with the rest of their finances. This can be key when deciding what percentage of their salary to contribute each month.
As DC schemes have only become the norm in recent years, it is not yet clear what will typically happen if employees reach retirement having failed to accrue an adequate pension fund. Ward warns employers: "There is a risk that, in the future, there may be employees who feel they haven’t been properly served by their employer. [But] it’s still early days for defined contribution schemes. The risks around DC are still evolving. That’s why employers are keen to provide information for their employees."
Liability aside, ensuring staff are able to access financial education around their DC pension can also help employers to get the best return from the scheme they offer."[One danger of not providing education] is that the benefit doesn’t achieve what it set out to, which is a waste of time and money. If we help people to value what they are getting, they are more likely to take it up," explains Polson