Guidance versus advice: Where should employers draw the line?

Martin Palmer
Martin Palmer, Head of Corporate Pensions Marketing, Friends Provident

We all know there is a huge financial education mountain to climb in the UK and we have to start that ascent sooner rather than later. Arguably if we are to equip future generations with the necessary tools to take control of their own financial destiny, then we need to do it now. Thankfully our new government seems to recognise this and Mark Hoban’s, Treasury financial secretary, efforts to create a new Consumer Financial Education Body illustrate his strong desire to equip us for the climb. But perhaps there is another path to the summit? Could a readymade framework such as the workplace- that would allow ongoing financial educationprovide the route?

The workplace is a great place to promote savings to the UK workforce and to some extent a lot of employers already do. Encouraging employers to contribute more is crucial given that it also incentivises employees to save more as well. But some employers can view their pensions scheme as a source of additional risk, particularly in terms of providing ’advice’ to employees about their personal finances and options.

Financial Services Authority rules state that employers must promote their schemes without infringing the regulation that requires an authorised adviser to provide specific fund recommendations. So how do we get around this? Looking at the approach our US counterparts took to mitigate this risk – known as safe harbour, which allow member contributions to be directed into the most appropriate investment funds without attracting regulatory or legal liabilities – might just be the ticket.

As it stands, few members in defined contribution (DC) pension schemes receive individually-based investment advice. They expect trustees or their employer to choose the most appropriate fund for them. This is one of the key reasons why more than 80% of DC members are in ’default funds’ but they are traditionally passive, cheap and a safe option for the mass of the membership.

Pension providers, employers and trustees would prefer members to make a fund choice but this is not easy without expert guidance. But, for regulatory reasons, trustees and employers can only provide generic advice not individual advice.

Without US-style ’safe harbour’ rules to restrict liability, there is little incentive for employers or trustees of DC schemes to risk introducing new ideas and offering better guidance. The pension system is interesting in that it has to be attractive enough to get workers to participate, but it also has to be attractive enough for firms to offer it. To do this, the new coalition government should consider a ’better regulation’ review of the risk disincentives for employers around facilitating financial services in the workplace.

Employers play a pivotal role in setting up company pension schemes, and it is essential they feel inspired to promote the merits of saving to their staff.

Government has to implement a future policy that provides employers with sufficient confidence that the contributions they make on behalf of their employees will generate positive benefits for their company by enabling employers to give advice/guidance to their employees on retirement saving within a regulatory ’safe harbour’ that stops them being paralysed by worries over future legal actions.

Since coming into power the coalition government have addressed concerns that the pensions industry voiced but more needs to be done and they need to listen to what employers want. Unless there is incentive for employers to provide workplace pensions they may end up levelling down to the same contribution levels as NEST. If we are going to significantly increase savings levels in the UK, then the role of the Employer is supporting and facilitating this is going to be crucial.