How to help employees with short-term financial needs, while still encouraging them to save
There’s no doubt that COVID-19 has shone the spotlight on the importance of financial resilience – the backbone of financial wellbeing. Financial resilience is about the ability to withstand a sudden fall in income or an unavoidable rise in expenditure; in other words, it’s about having a financial buffer in place or having access to savings that can see you through a difficult patch.
Even before the pandemic, the signs were there that the UK is not a nation of savers. The Money Advice Service estimate that 16 million people having less than £100 in accessible savings; an amount which can hardly be described as a financial buffer. A lot of people in the UK were definitely not in the best state financially to weather the COVID-19 storm.
Why is it an employer issue?
Although financial wellbeing is pushing up the corporate agenda, there are still those who are not convinced that this is a problem for the employer. But the reality is that a lack of financial resilience in the workplace negatively impacts on the bottom line. Financial worries affect mental health and mental health impacts on productivity.
Our coronavirus crisis and financial resilience (May 2020) research found that two out of three employees agree that money worries affect their mental health, with three out of five stating that it also impacts on their performance at work. Money worries are very rarely about events that happen in 20 or 30 years’ time, like retirement. They’re usually about the here and now: I’m battling to manage debt or I’m struggling to save enough to get on the housing ladder; issues that a great pension scheme can’t help with.
Pension contributions for many employers are probably the second biggest people cost next to pay; funding for a future event that in most cases the employer is unlikely to witness. Add to this low engagement rate, especially amongst younger employees, and it’s difficult to see the return on investment.
But helping employees build up accessible savings for their shorter term financial needs not only has a positive impact on the bottom line now, but it also improves engagement levels with pensions.
It’s about priorities
Maslow’s hierarchy of needs is a great way to understand this issue. His well-accepted model for human motivation asserts that, until someone’s fundamental needs are met, they can’t imagine or engage with their future.
Translated to workplace savings, this means that until employees have met their immediate and near future financial needs, they are unlikely to be able to engage with longer term needs such as retirement planning. So conversely, helping your employees become more financially resilient is helping them to engage with pensions. You’re getting a double whammy; improving the bottom line and increasing your return on investment with the pension scheme.
We’re really talking about holistic workplace savings
The mistake that many employers make is seeing short-term and long-term financial needs as separate, when in fact it’s all about the same thing, saving. In all fairness, this separation is probably driven by the tax and legislative system. We have a pension scheme for retirement, a Junior ISA for our kids’ futures, a Help2Buy ISA for home ownership etc. We’ve been forced to compartmentalise our approach to saving which is complicated and quite frankly a hinderance.
The Lifetime ISA was the promise of a more practical approach. When it was first tabled, it was viewed as a product that would see you through your adult life; hence the name. You would save and the government would reward you with a 25% bonus. Then when you were ready to get on the housing ladder you would take out what you needed and then carry on saving for other life events, which culminate with retirement. It was to become an alternative to a pension scheme, in fact there is still a growing call for this to become an auto-enrolment vehicle.
With a 25% government bonus, it’s still a great product for getting on the housing ladder and you can use it as an additional retirement pot, but it fell short of full flexibility when it was launched i.e. the “one product, all solution” we hoped it would be.
But that said, it’s possible for an employer to create an apparent seamless approach with a holistic workplace savings plan. One that incorporates pensions and accessible savings such as workplace ISAs. Many employers are now doing this and from our research, more and more are considering it – 93% of employers indicated that they would consider this approach.
It’s not just about pensions
But to implement it requires a corporate mind set change – workplace savings is not just about saving for retirement and pensions. It’s about catering for an employee’s other savings needs as well.
The best approach is one that we refer to as pensions redirect, where the employer allows employees the option to redirect pension contributions over and above the auto-enrolment minimums into a workplace ISA. Straight away there is an increase in engagement with the pension scheme as employees decide on the best contribution combination for them. Think about how flexible benefits have increased engagement with benefits – there’s a forced interaction and therefore a better understanding and better engagement.
Pensions redirect is also putting the pension scheme in the context of an employee’s entire needs. One of the biggest issues I have about pensions, is that too often they are spoken about in isolation. There needs to be context and there is no better context than an employee’s entire life journey. Pension redirect forces the employee to consider their short-term savings needs against their long-term savings needs – the now versus the future if you like. It’s not a binary decision.
Again, our research shows that over 70% of employers would now consider a pensions redirect arrangement. My prediction is that in the near future it will become the market norm just like flexible benefits.
If pension redirect is not possible, then setting up a workplace savings scheme funded by the employee is still a great start. But it’s important that it’s seen as an adjunct to the pension scheme and framed in the context of a wider financial wellbeing programme. 71% of employees would like to see their employer set-up this type of arrangement.
There is still a lot of uncertainty around COVID-19 and people are concerned about their financial future. Building financial resilience is paramount and the best place to start is in the workplace.
This article is provided by Cushon.
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