Financial literacy for all

Addressing the gap in financial education will benefit both employees and organisations, says Charles Cotton from the CIPD
Financial education and enlightenment

Words: Charles Cotton, CIPD
Illustration: ©Ikon

There’s a gap in employee financial education right now – and there’s a compelling case for organisations to address the fact. Charles Cotton, Performance and Reward Adviser for the CIPD, the professional body for HR and people development, explains more.

As income providers, employers have a definite role in their employees’ financial lives, and to this end financial education can be understood in the round as an individual aspect of employee financial wellbeing. Other elements include pay, benefits and recognition, and each forms part of the broader financial wellbeing strategies adopted by organisations.

It’s fair to say that the number of organisations providing financial education for their employees isn’t exactly huge. There has, however, been increasing appreciation of the advantages afforded by such strategies in recent years, and for good reason: pay, benefits, recognition, all of these aspects are capable of affecting work performance.

For instance, if an employee perceives that their contribution is not being properly acknowledged, or if they feel that they are not being as generously rewarded as their colleagues, then their self-esteem as an employee may well be negatively impacted. Similarly – and even more essentially – if an organisation does not provide a fair wage, there is the increased potential for absenteeism and employee turnover.

Financial education is no exception here. Even an employee who is receiving a good wage may suffer from low financial wellbeing as a result of poorly informed financial decisions, and this ultimately comes down to being financially unaware. And the result? Research suggests that poor employee financial wellbeing is associated with poor employee health, specifically in terms of stress and anxiety. It’s even linked to poor employee productivity, reduced cognitive functioning and lower engagement. On this latter point, employees who are less financially literate are less likely to be strongly connected to their organisations, and are therefore less inclined to go beyond the call of duty.

At the end of the day, it doesn’t matter how great an organisation’s financial education programme is, if the organisation is not paying employees enough, it’s not going to have a positive impact. Similarly, no matter how much money an organisation pays employees, if those employees are not financially savvy, then they’re not going to have financial wellness.

Savvy workforces, happy workforces

In places like the UK and the US, the recent rise in focus on financial education from an organisational point of view is, to a large degree, a reflection of the limited nature of welfare states, as well as the benefits and tax decisions that have arisen around them.

In scenarios such as these, employers tend to put more emphasis on financial education, and understandably so; ultimately they want to make the best use of the benefits that they are offering. As governments and employers start to give employees more financial freedom and self-determination in a move away from welfare states, then employers should also display financial savvy to make a return on the investment of rewards and benefits.

Reward packages and benefits packages have become increasingly sophisticated in recent years, though, and employees haven’t perhaps fully appreciated the value of what they have been offered as a result. This has been driven by things such as automatic pension enrolment (as seen in the UK), as well as recent and current variations in the global economic environment.

If employees can make better financial decisions and stretch their pay packets further, then they are going to be better off, which is obviously important when pay rises are somewhat limited. External financial wellbeing can also be enhanced through education on mortgages, bereavement issues, will writing, even putting parents or relatives into care. There are internal considerations too, such as dealing with share plans and pensions and examining the implications of tax regime changes. Even on an employee performance level, financial education has the ability to enhance: an employee who is financially savvy and aware is likely to be more confident with numbers and budgeting.

Research suggests that poor employee financial wellbeing is associated with poor employee health, specifically in terms of stress and anxiety

There’s no set textbook for financial education

Some organisations may provide financial education to their employees because they feel morally obliged to do so, others because it makes business sense. For instance, in the UK we’re getting all of these pensions freedoms about what to do with defined contribution pots, and so it makes sense to implement some kind of financial education programme around that in order to ensure that employees are aware of the decisions that they have and the potential implications of those decisions.

If a business is thinking of setting up a financial education programme, it may want to look at certain groups of employees who potentially require or even need more support than others. Employees who have recently left school or university may welcome tips around managing money and saving money. For those people who are perhaps approaching retirement, employers may want to help them start planning. It may be linked to things like share plans or changes, flexible benefits packages, auto enrolment – these are all trigger points, and if an organisation is large enough, it may be able to try all of the approaches to begin to understand what an effective approach may be.

There’s also the thought that financial education helps organisations manage and develop their talent and future talent needs. It can have an impact on staff retention because employees are more able to appreciate the value of the benefits spent. If an organisation is spending money on benefits to retain staff, then that’s going to have more of an impact if the organisation’s employees are aware of the benefits available and the value of them. What’s more, it signals to the employee that the employer cares about their wellbeing.

It depends on the drivers of the business, so its mission, its vision, its aims and its objectives. Some organisations say that financial education is absolutely the right thing to do because they have a moral duty to their employees. Others will say that it’s an important way to manage risk – especially true in the likes of financial services and security services.

Ultimately, then, it comes down to the business case. Does a business want to be adopting a financial wellbeing strategy? Is it trying to help its people make more informed decisions? Or is it just helping them become more financially savvy?

The return on education

Within organisations, it’s important to get financial education out there and to communicate it, and to this end technology is invaluable. You can use it to help employees look at various scenarios. For example, if an employee were considering increasing his or her pension contribution by 1%, what would the impact be? Or what if he or she were to move from one kind of an investment to another?

Technology can also assist people in shopping around for better deals, to get better at managing money and to help out with loans. These are the kinds of technologies that are becoming more and more commonplace in people’s lives, both at home and in the workplace. Share plan management platforms, for example, are being readily utilised by organisations as employees are afforded more responsibility over their individual share packages. And for every such platform education needs to be given, not least because of the rate of technological change.

If an organisation has a disparate workforce, so working mobile, on shifts or even around the world, it is more challenging to run financial awareness programmes. And so again, technology comes into play in the form of mobile applications and company intranet.

At the end of the day, if an organisation can get employee wellbeing right (which absolutely involves financial education), then it can improve employee engagement, it can improve employee health, and it can improve employee productivity.

It makes sense, then, to get a return on investment for paying for benefits by communicating and educating employees about the value of such rewards. After all, if employees understand the value more, they’re more likely to stay with their organisations and genuinely want to work for them.

About the author

Charles Cotton is the CIPD’s Performance and Reward Adviser. He directs the Institute’s performance and reward research agenda. He has recently led research into: how employers can help improve their employees’ understanding of their personal finances; how front line managers make and communicate reward decisions to their employees; how employers manage the risks around reward; how private sector employers can build the business case for workplace pensions; how employees form their attitudes to pay; and how the annual pay review process can become more strategic. He is also responsible for the CIPD’s public policy reward work and has given evidence to select committees on banking pay and redundancy awards as well as responding to various consultations, such as on pensions, retirement and MPs’ expenses.

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