CIPD response to HM Treasury document
Charles Cotton, Adviser on Reward
Our expertise and experience
Our response is based on the input and feedback that we have received from our panel of pay and benefit experts who represent the interests of around 2,000 reward practitioners, consultants and academics who belong to our reward special interest group.
The CIPD has long championed the cause of encouraging employers to educate and communicate the reward package to their employees so as to maximise the effectiveness of employee recruitment, retention and engagement. We have worked with the Department of Work and Pensions to produce a good practice guide on pension communications for employers and we are currently working with the Financial Services Authority (FSA) to produce a good practice guide for organisations on workplace financial education. We have also produced recent briefings for members on employee share plans and flexible benefits.
Our reward special interest group has held a number of events around pensions, employee shares and pension communications to highlight the importance of good communication and education in a total reward environment. There have also been articles addressing this topic in the CIPD’s magazine, People Management.
Our position
An issue that has been regularly raised by our reward and generalist HR members is what they can do to encourage employee participation in such benefits as employee share plans or pensions without falling foul of FSA regulations. As a consequence, we find some employers who have been scared off from communicating to their employees about the reward benefits on offer. Not only do employers lose out in terms of employee attraction, recruitment, motivation and costs, but employees lose out from not participating in valuable benefits many of them which give them an element of security and protection.
However, the CIPD believes the issue is not one of simply freeing up employers to promote their benefits packages to employees, there would be issues of overselling employee benefits to the disadvantage of some employees (such as the low paid). Rather it is also finding ways of improving the financial education of the workforce, so that they can make informed choices at the workplace, and ways of improving employer reward communications to their employees, so that they are aware of the reward arrangements that exist and able to take advantage of them.
Research shows that the more informed and educated a workforce is about financial and reward issues then the more employees will value and appreciate what the organisation is doing for them and this will be reflected in levels of employee engagement and contribution (Understanding the people and performance link: unlocking the black box - see Reference 1 below) and flowing through to an increase in staff participating in those benefits (Pension communication: realising the value - see Reference 2 below). Our research also shows that many employers and employees are critical of the current level and quality of communication around their organisation’s reward package.
Our survey Age, pensions and retirement – attitudes and expectations - see Reference 3 below)found that many employees were unsure of what type of pension scheme they belonged to (defined benefit or defined contribution) and of those that did, a sizeable chunk did not know how these schemes operated. Our Reward Management survey in 2004 (see Reference 4 below) found that most employers made most effort to communicate to staff about the reward package during the recruitment and induction stages. However, our reward management surveys show that many employers (around one-third) are adopting sophisticated reward packages (flexible and/or voluntary benefit arrangements and total reward approaches) to meet the increasingly demanding and diverse needs of their employees as well as the needs of the organisation to attract and retain high performers.
Communication by employers clearly needs to be done in a responsible way so employees can make well informed and sensible decisions on their reward package. The spread of flexible benefits packages with greater employee choice in recent years has great potential to enable employers to better tailor rewards to suit their own personal needs. But it also makes for a more complex reward environment in organisations and places a greater emphasis on employees being financially educated so as to be able to make in formed decisions such as which pension funds to invest in, or how much to invest in their company shares.
For all of these reasons, the CIPD believes that employers should be able to communicate, in an adult-to-adult way, the benefits of belonging to an occupational pension, share plans, etc. So their must be minimum standards of protection to help protect individuals against ‘rogue’ employers and poor decision making by themselves. Securing this balance in such a diverse and complex picture of organisational context and reward arrangements is a key issue in this legislation and government needs to be wary of trying to legislate for every possible circumstance.
The CIPD is supportive of the various government initiatives to promote financial education among employees. However, we believe that government has a part to play in reviewing these to ensure that there is no duplication of effort or mixed messages and that its proposals on financial promotions in the workplace both support and is supported by these initiatives. Also, we call on government for greater encouragement of workplace financial education via tax breaks (for instance, increasing the size of the £150 tax break and expanding it cover all areas of workplace financial benefits not just pensions), grants for programmes run by small and medium-sized employers and the production of good-practice guidance. The CIPD would be happy to support such initiatives.
Based on our panel of expert reward practitioners and consultants, our more detailed comments to the consultation are listed below.
Question 1: Do you consider that the exemption for workplace pensions promotions in article 72 of the Financial Promotion Order should be extended to cover third parties?
Yes. However, our panel raised the issue of the role of the pension trustees in this document. It appears to assume that under trust-based arrangements, employer and the trustees are one and the same when it comes to pension promotions. This is not always the case. For instance, when promoting the scheme generally the relationship will usually be between the third-party provider and the trustees. When the scheme design and/or benefits have been modified the promotion will usually involve both the trustees and the employer. The role of pension trustees and third party promotions needs to be explicitly acknowledged in this area.
Question 2: Do you consider that these third parties should be required to be contracted by the employer to make promotions about the employer’s group personal pension scheme or stakeholder pension scheme?
No. Most large third party administrators will be competent to make pension promotions. However, some of the smaller third parties that focus solely on pension administration will probably lack the necessary knowledge, skills and understanding to do this effectively. In which case, the employer will need to find another third party to promote the scheme on its behalf. Our panel believes that if a third party is going to be contracted by an employer for pension promotions then they should be FSA approved, but that the employer should not be able to pass on their liability to the third party.
Question 3: Do you consider that an exemption for all third parties, as long as they have a contract with the employer, is too broad?
No. However, the employer must ensure that the third party is sufficiently knowledgeable and competent to make the promotion, see below.
Question 4: Do you consider that the employer should be satisfied that third party pensions administrators are knowledgeable and competent to make the promotion? Do you consider that this requirement should be covered by guidance or by legislation?
While most third party pension administrators will be competent and knowledgeable enough to be able to administer a company pension, some smaller ones may lack the expertise to promote it. However, the CIPD believes that rather than the government increasing the legislative burden on employers, it should help produce guidance (such as an online tool) that will help employers (especially smaller ones) evaluate whether the third party administrator has the knowledge and skills to make the promotion. We at the CIPD would be happy to help in the production of such guidance.
Question 5: Do you consider that the legislation should specify that third party pensions administrators should explain to each employee the size of any direct financial benefit that they will receive as a result of that employee either taking up a pension or increasing the size of their pension investment? Alternatively should this be left to guidance, or should this condition not be adopted?
Yes, we need transparency and disclosure. But we believe guidance rather than legislation is the most effective means to achieve this across a wide diversity of organisational settings.
Question 6: Do you consider that any other conditions should be applied, either in the legislation or in guidance?
Our reward panel raised the following issues:
- When promoting a defined benefit scheme to employees, employers should be required to inform employees that the contributions are not fully protected if their company goes bankrupt.
- With pension auto-enrolment, employers should educate and communicate the advantages and disadvantages of the plan to new members who have been brought in to the scheme.
- Employers should be required to stop promoting their defined benefit plan if the scheme is judged to be in financial difficulty.
- When communicating their defined benefit to new employees, employers should do so in a way not to encourage employees to transfer over their defined benefit pension pots built up under previous employers. Rather, information should be provided concerning the pos and cons of such a move and that if an employee wants advice then they should contact an IFA.
Question 7: Do you consider that employers should be provided with a specific new exemption from the financial promotion regime in relation to any communication which they make to their employees in relation to insurance products?
Yes. Again the thrust of any legislation should be to support employers providing a good range of benefits that employees can select according to their needs - ranging from pet insurance to group life cover. However, the employer should be obliged to ensure that any provider promotes their products to their employees in a fair and honest manner. Again, guidance should be produced that would help employers ensure that a third-party provider was providing its products in a fair and honest manner, such as being FSA compliant.
Question 8: Do you consider that the legislation should specify that this exemption applies to any insurance contract or should it be limited to work-related insurance products?
Many employers now offer insurance products (such as pet or holiday insurance) under a flexible and voluntary benefit scheme. From this perspective it would make sense for all insurance contract products to be exempt rather than just those that are work-related.
Question 9: Do you consider that the conditions attached to Article 24 of the Financial Promotion Order should not apply, but that; (i) employers should be prohibited from receiving commission from a provider of insurance in the event that an employee, as an individual, enters into a contract of insurance as a result of a promotion by an employer, and that; (ii) employers should be required, when writing to employees, to remind them of their right to seek advice from an authorised person or an appointed representative?
i) No. We do not believe that employers should be prohibited from receiving commission from a provider of insurance in the event that an employee, as an individual, enters into a contract of insurance as a result of a promotion by an employer.
This is because some employers, especially smaller ones, use this commission to run their voluntary/flexible benefits scheme in a cost neutral way. However, we believe that employers should state to employees that they are receiving a commission and explain what it is being used for. We would be happy to help formulate guidance in this area.
Our panel believes that HM treasury should clarify what it means by the term “commission”. Some employers may receive indirect payments from third parties to help them promote their benefits, for example a poster campaign to communicate the existence and features of an employee share plan arrangement. If the employer had not received such assistance from the share carrier, it may not have been able to communicate the benefit of the plan an effective manner, possibly to the detriment of the company and its employees.
ii) Yes. Our panel believes that employers should be required, when communicating (written, verbal or audio) with employees, to remind them of their right to seek advice from an authorised person or an appointed representative. In addition, employers should point out that depending on their personal circumstances, individuals may be better off shopping around for these products.
However, government should examine how it can facilitate access to such advice, such as increasing the value of £150 tax break on pension advice and extending it to cover all aspects of workplace reward.
Question 10: Do you consider that any other conditions should apply?
No.
Question 11: Do you consider that the existing exemptions from the financial promotion regime for share saver schemes and share incentive plans, as set out in article 60 of the Financial Promotion Order, need to be amended or expanded, and if so how?
No. Our panel believes that the existing exemptions are working well. However, there could be a role for employer guidance on how to better communicate such schemes to employees that explain the nature of the risks involved given the continuing low levels of employee unders
References
1. Understanding the black box: the people and performance link, 2003, CIPD
View details in the CIPD Bookshop
2. Pension communications: realising the value, 2004, CIPD
View the guide
3. Age, pensions and retirement, 2003, CIPD
View the survey
4. Reward survey 2004
View the survey