Savings Gap vs Advice Gap - what’s the solution?
Employees are facing a new challenge of increased responsibility for planning their own financial future. With Government pulling back the role of the state and employers moving from Defined Benefits to Defined Contribution arrangements, we are seeing responsibility being transferred to employees. This means in most cases employees must assume the responsibility that sophisticated institutions no longer want. But do employees have access to the financial guidance and advice needed to make decisions to secure their financial future?
The majority of employees need help to understand their options to make educated decisions and are looking to their employers to provide this support. Demand for access to financial education, guidance and advice in the workplace continues to grow. The Scottish Widows Workplace Pensions Report 2010 showed 95% of employees now expect their employer to provide access to this – in 2009 this figure was 76%.
As employees desire for financial advice and education rises, we’re faced with the challenge that access to it, in the traditional sense, is declining. The advice model, as we currently know it, is changing with the introduction of the Retail Distribution Review in 2012. Previously employees may have been able to access financial advice via their employer’s financial adviser, however many commentators predict a contraction in the number of financial advisers after R-Day, thus increasing the advice gap. Unless steps are taken to address this imbalance, the logical conclusion is employees will fail to take control of their finances and the current savings gap will increase.
The first step being taken to address the retirement savings gap specifically is auto enrolment. Whilst this is a significant step, it does not provide a complete answer. The basic default level auto enrolment provides is unlikely to be sufficient to provide for employees financial future. It can be argued that with auto-enrolment, employees need more financial education and guidance to help them understand all their workplace savings options and benefits their employer has put in place.
Employees have multiple needs outside the traditional pension. Short, medium and long term savings needs all require to be met from the same pay packet. Employees need assistance to work out how to achieve this and prioritise their savings objectives. In a world with less access to advice and increased saving needs such as debt management, it’s clear we need a robust solution.
Effective employee engagement is central to the solution as it can help optimise employee’s outcomes at retirement therefore reducing the savings gap. Over the last 12 months we’ve seen the introduction of corporate wraps – whether they offer the full solution is yet to be answered. What they clearly do offer is good employee engagement and access to financial guidance that may help address the advice gap. This could see the development of a two stage engagement process in the workplace:
1) Financial guidance and information providing all employees with access to simple online savings solutions 24/7, will satisfy the majority of employee needs, up- skilling their knowledge and helping them take control of their finances.
2) Advisers maximise their value by providing face to face advice for more complex financial requests and decisions.
This combined approach enables the Adviser and employer to provide financial education to the entire workforce in a cost effective and efficient manner. It recognises advisers need to be more selective on how they spend their time, and allows them to segment their business model for advice purposes.
This new approach works well in a post RDR world where advice will not be readily available for all in a traditional sense. It meets the employee need for access to financial education, guidance and advice when required and assists employees to effectively plan their financial future.