Money at work

2013-02-17 10:00

Do we want our employers telling us how to manage our money? Maya Fisher-French finds out

Research by Alexander Forbes into benefits offered by employers, such as retirement funding, life cover and medical cover, has shown that the less choice given to individuals the more cover they tend to have.

Research also shows that an employee who is suffering from financial stress is nearly 40% less productive.

This raises the question of whether our employers should take a larger role in our financial wellbeing, other than just paying a decent salary.

The Alexander Forbes Employee Benefit Barometer, an in-depth research study into the employee benefits environment, found that sectors where employers tended to be more paternalistic – such as mining and the public sector – had far higher coverage in terms of retirement funding and death benefits than sectors where employees had more flexibility in terms of opting out or selecting their own contribution levels.

Much of the research suggests many employees may prefer a return to the past where the company took care of their pension and medical needs.

Thirty years ago, when a person retired, they could expect some reasonable pension and often medical cover in retirement.

I suspect that today many employees believe this is still the case, which is why so many are surprised to discover that when they retire their benefits are nowhere near enough, or that death benefits from a breadwinner do not cover the family’s expenses.

What many employees do not realise is that the role of the employer in our financial wellbeing changed dramatically in the early 1990s when companies moved from defined benefit pension funds to defined contributions.

Basically, this meant that employees took over the responsibility of their pension fund and medical costs.

The company could offer a company pension fund, but it was up to the individual to decide how much they wanted to contribute. Employees were also free to take their accumulated pension benefits with them when they changed jobs or even cash them in.

Companies were only too happy to remove this burden and responsibility, and employees embraced it as it allowed more choice and flexibility.

Not only did it better suit the new generation of workers, who on average change jobs seven times during their lifetime, but it also meant they could increase their take-home pay by cutting their company benefits – and therein lies the rub.

Twenty years later, we are living with the unintended consequences of these changes.

It turns out employees are not necessarily better at managing their finances and, where choice is offered, employees often make decisions for short-term pay rather than long-term benefits. Where choice is given, most employees select the bare minimum in terms of employee benefits in order to boost their take-home pay.

As a result, the average retirement contribution for employees is just more than 12% of their salary.

Alexander Forbes calculates that at this level of contribution, the average member would only have enough funds at retirement to replace 30c for every R1 of their final salary.

In other words, their income will be reduced to just a third in retirement.

That will come as a shock to someone who has religiously contributed to their pension fund for 35 years.

But those who receive 30% of their salary in retirement would be the lucky ones because they actually preserved their retirement funds when changing jobs. The survey found that on average, fewer than 8% of people preserved their retirement funds, which means the actual retirement benefit for most people will be negligible.

The question is whether an employer or government needs to become more proactive and prescriptive in helping people to make the right choices.

The professional services sector, which is dominated by people working in the financial industry, has very high levels of choice in managing their salary packages and contribution levels. Now, whether it is an inflated belief in their own ability to manage their money, or whether they don’t trust the industry they work for, this sector has the lowest level of retirement cover and one of the worst preservation rates.

On the other hand, the public sector has one of the highest levels of retirement benefits and death benefits.

Public sector workers also enjoy high wages relative to the private sector and job security. This is theoretically the one sector where employees should be in the best possible financial health – yet public sector employees have one of the highest rates of indebtedness.

As stable-income earners without proper financial education, many public employees are sitting ducks for credit providers peddling loans and insurance salesmen selling policies.

If an employer wants to ensure their employees have healthy finances, they need to focus not only on retirement and death benefits, but on providing financial education.

A study has shown that more than half of employees use work time to address financial problems and that those in financial difficulty spend 26% more time on personal financial matters.

Employees in financial difficulty are also more likely to be open to corruption and fraud, so it is in the best interests of employers to find a way to educate their staff about financial matters and, for many individuals, the workplace offers the best opportunity for receiving financial advice.

The problem is that those companies that run financial wellness programmes find low participation rates. Their staff are just not interested.

There seem to be mixed reasons for this. Sometimes the programmes are not relevant or engaging, but often employees do not want to be discussing their personal issues in a work situation. Then there is the reality that some people prefer to take the ostrich approach and bury their heads when it comes to their money – until they are forced to take action.

This research raises many interesting questions about roles and responsibilities, and how to find a balance between recognising a person’s need for autonomy in dealing with what is, after all, their money while recognising people need more guidance in making the right choices.

One may argue that returning to some system where your employer can guarantee a decent level of retirement income and medical cover in retirement is a good thing, but who would be prepared to take the cut in salary that goes with those benefits?

» Would you like your company to provide financial education at work? Email personalfinance@citypress.co.za

» Fisher-French was a panellist at the launch of the Alexander Forbes Benefits Barometer

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