In March 2016, following a seven month review, the FAMR published its final report, making a number of recommendations intended to allow firms to develop more streamlined services and engage with individuals in a more effective and affordable way. Not only did the FAMR report identify the workplace as playing a key part in addressing the “advice gap” but it proposed that the FCA should set up a Financial Advice Working Group to consider how employers could provide better support to their employees in respect of their financial wellbeing.
Financial wellbeing in the workplace
Currently, many UK employers offer their staff extensive benefits packages. However, the number offering help in the form of financial education combined with strong tools and advice is very low.
Financial Wellbeing programmes represent a significant evolution from a conventional benefits package. Not only do they aim to address the needs of employees but evidence shows that, for employers, improving the wellbeing of employees can lead to a reduction in stress, a decrease in absenteeism, the creation of additional employer loyalty and, ultimately, an improvement in productivity.
Given such a positive business case, many employers will, undoubtedly, want to integrate their existing benefits package into a Financial Wellbeing portal and provide a strong coherent communication programme. The question is how?
Effective communication is key. Content should not only cover topics such as debt management, mortgages, protection, investment, as well as retirement planning, for example, but should also take into account current, newsworthy items. Alerting employees to topical financial issues highlighted in the popular press is a good way to promote employee engagement with a Financial Wellbeing portal.
Another key to increasing the perceived relevance of a Financial Wellbeing portal is to have at its centre a dashboard which allows employees to enter as much of their personal wealth details as possible, to gain an holistic view of their current, overall financial position. Although data from employers is readily available, including other financial data, provided by the employee, such as bank accounts, insurances, mortgages and credit cards debts, etc. can greatly enhance the usefulness of a dashboard and help individuals in developing and reviewing their financial plans.
Although FAMR identified employers’ concerns around regulation and potential liability in offering financial support to their employees, access to advice is an essential part of any Financial Wellbeing programme. Following the introduction of pensions freedoms and Lifetime ISAs, changes to pension contribution limits and lifetime allowances, it’s hard to deny that for many, possibly the majority, when it comes to retirement planning, guidance will not be enough.
Advice will therefore be needed and should be “layered” and “integrated”. The layering allows employees to choose the service which best meets their needs and integration allows a smooth transition from guidance to advice without having to rework or rekey anything done previously. This has the advantage of greatly improving the efficiency of delivering advice which, together with the tax advantages of accessing advice via the workplace, available from April 2017, will allow employees to obtain very cost effective advice. (The benefits of layering and integrating advice are covered more fully in our White Paper “Robo Advice: The catalyst for transformational change”.)
Based on the successful US model, a UK Managed Account service would be an optional ongoing service covering pre-, at and in retirement algorithm driven advice. Although restricted to providing advice solely on an employee’s current pension arrangement, unlike the US Managed Account service, it should also take account of:
- Past pensions
- Investments designated for funding retirement
- State pensions
- Other income sources e.g. spouse’s income, property
- Other sources of future retirement funding e.g. downsizing or home equity release
In addition, unlike the US Managed Account service, the service should involve establishing a realistic retirement objective – lump sum, income level, increases, provision for spouse/dependants and retirement age. Employees will receive a recommendation as to the level of contribution rate needed to be paid into their employer's DC pension arrangement together with advice on an investment strategy, based on the investment options within that arrangement (including the default option).
Annual reviews should be carried out with recommendations being revised, when necessary, to ensure employees remain on track to meet their retirement goals. Advice will also be available “at retirement”, on the options available, and “in retirement”, on the sustainable income level, tax optimisation (i.e. the most appropriate vehicles from which to draw income) and the timing of annuitisation, where appropriate.
Financial Wellbeing programs and Managed Accounts do a great deal to help tackle both the lack of financial awareness and emotional frailty currently inherent in many UK employees when it comes to making decisions about their finances. Not only do they help to create environments and frameworks targeting defined financial planning goals but, from an employee’s perspective, they also help transform something, remote, potentially worrying and impersonal into something entirely focused on them as individuals. It is this overarching change, coupled with underlying support from their employer, which will help make the difference to an employee’s level of engagement and involvement in their financial futures.