How to use behavioural science to help workers protect their finances

Benefits that offer financial breathing space are likely to prove particularly popular. But to maximise take up, they must be framed in the right way

The current cost of living crisis is set to have a devastating impact on people’s long-term wealth as well as their short-term finances.

As prices for everything from petrol to groceries shoot up at the fastest rate for 40 years, the temptation to plunder savings and investments to make ends meet is both strong and immediate.

But while withdrawing savings or reducing pension contributions may help to ease the strain today, it will only serve to worsen people’s future financial wellbeing.

The challenge for employers keen to avoid the cost of living crisis turning into a long-term financial drama is therefore to find ways to convince employees to take actions that protect their tomorrows as well as their todays.

That’s no easy task, as persuading people to invest for the future is complicated at the best of times.

Behavioural psychology could be the key to supporting people to make better long-term decisions.

Hard times are here

‘Real’ disposable incomes (after tax and inflation) have been falling fast since late 2021.

According to think tank The Institute for Government, this is mainly due to “high inflation outstripping wage and benefit increases”.

Mortgage costs have also risen for many; the Bank of England base rate now stands at 1.75%.

And the bad news is that things are expected to get worse before they get better.

Energy analyst Cornwall Insight predicts the energy price cap – introduced by market regulator Ofgem in April this year – will rise to £3,582 in the autumn. That’s a jaw-dropping 80% increase on today’s cap of £1,971.

Tough decisions need to be made

Unsurprisingly, many families are struggling to cope with all these price hikes.

Office for National Statistics figures show 46% of home energy customers are already finding it hard to pay their bills.

And some are turning to unsecured borrowing to stay afloat. According to the Bank of England, credit card balances are up 12.5% year on year.

Investment levels are also being affected, with investment ISA figures from financial mutual Scottish Friendly indicating the lowest levels of money coming in for three years. The so-called pensions gap – the divide between the amount we are saving and the amount we need for retirement – is widening as a result.

According to the Living Wage Foundation, only one in five people is currently saving at adequate levels.

Part of the problem is that we are wired to respond short term rather than long term – even when times are good.

As Paul Davies, behavioural psychologist at Behaviour Consulting, says: “Psychologists have shown that deciding to put money into a pension feels as painful as deciding to give money to a complete stranger.”

So now that this is coupled with financial hardship in many households, how can employers stem the flow of money out of pensions and other investments that will help colleagues live better in the future?

Adapting to changing needs

The rising cost of living has had a profound impact on employees. So, reward and benefits strategies also need to adapt to continue to meet their changing needs.

Benefits that offer a bit of financial breathing space are likely to prove particularly popular, for example. But to maximise take up, they must still be framed in the right way.

Showing people how discount schemes can earn them a free Christmas dinner at the end of the year is one good example of this.

It’s an easy way to demonstrate the savings available, and it works for households of all sizes, as the size of the discounts earned increase based on their weekly spending.

When it comes to investment opportunities, meanwhile, behavioural science advocates concentrating on outcomes such as retiring earlier or buying a house.

“When presented with a high-risk portfolio, most people step away,”Davies says. “When instead presented with a portfolio which requires lower monthly payments (because it is higher risk) to reach their financial goal, people are more inclined to consider it because they’re saving money each month.”

It can also be helpful to highlight where colleagues may currently be going wrong, for example by providing them, with calculators showing how much more bang for their buck they could get from a Sharesave maturity by using it to pay off some of their mortgage or invest in an ISA or pension, rather than taking the money only to store it in a savings account where inflation leaves them with less than they paid in.