An enormous sense of (financial) wellbeing - still a blur on the horizon?
Welcome to this latest in our ‘mini-series’ of blogs on current issues facing defined contribution pension schemes.
If recent events have shown us anything, it is the importance of our wellbeing. A significant component of this is our financial wellbeing, which has been exacerbated significantly by the effects of the pandemic, the tragic first anniversary of which has only just passed.
Although it may be self-evident, it seems that employees’ collective financial wellbeing concerns and general money worries are having a huge impact on their personal lives, as well as their employers. LCP’s 2021 Financial Wellbeing Survey (you can access the report here) found that, amongst other things:
- 1 in 4 employees have taken time off work to deal with personal wellbeing issues; and
- More than 1 in 4 feel that financial pressure impacts on their ability to perform their job and their behaviour at work.
The net effect of these worries is estimated to cost UK employers billions each year. Research by Aegon in 2020 also revealed that 72% of employees said that their employer didn’t offer any form of financial education, and that 70% of these would find general information highlighting steps to improve their financial wellbeing would be useful.
Despite this, most employers have not explored these issues meaningfully, reticence often associated with potential compliance concerns over inadvertently providing financial advice. Ironically, the converse may increasingly be true, as recent decisions from the Pensions Ombudsman suggest that employers could be at risk if they don't provide enough information to allow staff to make informed financial decisions!
Many employees now associate their employer as being best placed to help them in this particular area, given the symbiotic nature of the financial relationship. In fact, providing workplace financial support is very achievable without running this risk and can pay significant dividends in terms of improving trust, security and confidence during these challenging times, as well as reducing the costs of poor employee financial wellbeing.
For employers who want to take this seriously, the first step is getting senior leadership buy- in that investing in a strong workplace financial wellbeing strategy is worthwhile. The next is to develop a strategy that is bespoke, tailored and therefore more likely to be effective. Simply buying ‘products’ off the shelf, without first analysing and assessing the needs of the workforce, is crucial as part of this process.
Typical outputs from this analysis might include:
- Reminding employees of the value of existing employer-sponsored benefits, such as the pension scheme, life insurance, income protection and /or health insurance, as well as access to confidential counselling services through Employee Assistance Programmes.
- Inviting mortgage or debt consolidation experts to speak to staff.
- Refining existing benefit programmes by including more progressive savings strategies, such as offering supplementary savings accounts (e.g. Corporate ISAs), early salary access, salary-deducted lending and financial education.
Of all benefits that an employer offers, LCP’s research has revealed that the workplace pension scheme remains the most valued. This means that a key component of any financial wellbeing strategy has to be to make sure that your DC scheme remains fit for purpose. Here, there is a potential issue.
The bulk of current DC pension provision is now provided via Master Trusts and GPPs, which typically require nominal employer oversight. However, this is unlikely to be consistent with a credible financial wellbeing strategy, because it runs the risk of future claims from members who may discover that their plans for retirement are compromised, who in turn will then look to blame their employer, either for not highlighting any potential issues, or by offering a scheme that is sub-optimal.
A really simple and effective way to add value here is to set up an employer ‘governance / monitoring committee’. This can work closely with the DC scheme to make sure that a) the DC provider continues to be held to account and b) to communicate with scheme members, to help them understand what they need to do to be ready for retirement.
These committees can proactively keep an eye on issues, such as the suitability of the scheme’s default investment fund and whether charges continue to represent value for money. Most DC providers are more than willing to engage with these committees, bearing in mind the point made above about employees’ reliance on their employer as their primary source for queries and support.
These are just some thoughts for employers who are open to developing their approach to staff financial wellbeing. There are many different ways to create a successful strategy, call it an ‘MOT’, which encompasses corporate governance and meaningful wellbeing provision. The strong correlation between improved financial wellbeing and a productive and effective workforce is well documented - committed employers will reap the rewards, compared to those who don’t, in terms of the potential negative effects on their balance sheet.