A rainy-day fund: how to implement workplace savings schemes to encourage financial resilience

Before I share some scary statistics, let’s first dispel the myth that financial resilience is linked to level of earnings. It really isn’t. Higher earners with zero financial resilience are surprisingly common; and someone considered a ‘low earner’ may have all their financial ducks in a row and therefore have high financial resilience.

Workplace savings and financial resilience is one of the key themes at this years’ virtual Employee Wellbeing Congress. View the full agenda and opportunities to join discussion groups with your peers or register here to attend.

So, what does it mean to be financially resilient? We typically talk about ‘financial fitness’ and describe it as follows: “Being financially fit means having the financial resilience to cope with day-to-day demands on your money, rather than just being satisfied with your level of income.”

Clearly, achieving this through good financial planning and sensible money management requires more than just pension savings.

Building financial resilience is essential for *everyone*

On to those stats I mentioned. The 2019/20 DNA of financial wellbeing report from Neyber, showed that:

One in four people don’t save regularly – of those that do, the most common amount saved is less than £50 a month
One in four people would not be able to cover their regular expenses for a month if they lost their income.

The same report also demonstrated that financial issues affect people across the earnings spectrum – for example, 46% of employees who earn more than £70,000 a year are affected by money worries. Evidently, financial stress is not just an issue for lower-paid employees.

Our own research, carried out in 2019, showed that 90% of employers now recognise the fundamental link between employees’ financial, mental and physical wellbeing. We know that money worries are plaguing huge levels of the population; causing stress and sleepless nights, reducing productivity, creating unwanted distractions and anxiety, even depression. So anything employers can do to help, can only be a good thing.

ISAs have come of age

For those of us that have been knocking around the financial services world for longer than we care to remember, it’s hard to believe that the humble-yet-mighty individual savings account (ISA) has now been around for 21 years. And their popularity is gradually increasing each year. Simple, flexible, tax-efficient – what’s not to like?

Data from HMRC’s National Statistics shows that in 2018/19, 11.2 million adults paid into an ISA (up from 10.1 million the previous tax year) contributing a total of around £67.5 billion. Interestingly, although both the total number of people saving into an ISA and the total amount saved increased, the number paying into a stocks and shares ISA actually decreased by 450,000.

However, while positive, the gradual growth in ISA usage doesn’t detract from the more frightening figures at the other end of the scale. Remember; if they were to lose their income, around a quarter of UK workers do not currently have enough savings to live on for even a month.

It is beyond time to create a savings culture in the UK – and the success of auto-enrolment, coupled with the surge in employee wellbeing programmes, suggests that the workplace is the ideal place to start.

But do you have a WISA?

Although slightly younger than their retail sibling, the workplace ISA (or WISA) has now been around for well over a decade. However, despite there being an all-round general consensus that enabling employees to save (outside of a pension) automatically through payroll is a very good idea, use of WISAs remains surprisingly low.

Research carried out by the Association of Consulting Actuaries in 2019, showed that only 9% of the 580 employers surveyed currently offer a workplace ISA or non-pension savings option. When asked whether they might introduce one in the next two years, a further 13% and 22% stated ‘yes’ and ‘possibly’ respectively.

Of course, offering a WISA is just the first step – to be of any value, employees also need to use them. Although industry-wide participation rates are not freely available, anecdotal evidence and real-world experience suggest that WISA take-up is currently low – ranging from 0-10% of employees. As with many employee benefits (think pensions in the pre-auto-enrolment world), this likely highlights a need for better communications and financial education – rather than suggesting a lack of need for the product.

WISAs can help employees build the all-important savings buffer needed for financial resilience, in a tax-efficient way. If you have employees who are affected by the pension allowances, a WISA can be their default workplace savings benefit, in place of employer pension contributions. Although, if you go down this route, remember that employer payments to a WISA will be taxed in the same way as salary, so you will be subject to employer’s National Insurance contributions (NICs) on the payments.

By facilitating access through the workplace, employers are also likely to be able to achieve better value for their employees than would be available on an individual basis. For example, lower charges through economies of scale, as well as potentially better support services and access to financial planning tools and information due to the group wrapper. Crucially, by offering payments to ISAs directly from payroll, you help to overcome the widespread inertia people have when it comes to saving. And, like pensions, we know that it’s far easier to save money if it’s taken from your pay before you receive it.

Another added benefit, in terms of creating a savings culture, could be the effect of ‘employee FOMO’ (fear of missing out) – if they hear their colleagues talking about their WISA, they’re more likely to want one too.

Where can I get one?

First of all, if you have a modern workplace pension arrangement, check whether your scheme already has the facility to ‘turn on’ wider savings options, such as a WISA or general investment account (GIA). Or perhaps your scheme provider offers a separate workplace savings arrangement, that can easily be added on. If not, review the market and work with an adviser to get the best fit for your needs. Just as an employer is likely to receive better terms than an individual employee, a professional adviser will often be able to achieve better value, such as lower costs and enhanced services, than if you approach providers directly. They should also have the specialist market knowledge to be able to effectively compare different provider offerings.

At the risk of stating the obvious, once you have your workplace savings scheme in place, make sure you do something with it. Communicate the benefits with your employees, incorporate it in your broader financial education and wellbeing initiatives. Add to your governance agenda, so you can effectively monitor, manage and improve it. Then we can all hopefully watch and smile as the scary statistics on the UK’s financial resilience gradually start to paint a far happier picture.

The author is Gill Hibbard director at Lorica.

This article is provided by Lorica.