Why payroll savings should be the next big thing
Among the four pillars of employee wellbeing, benefits to support the personal finances of members of the workforce typically lag behind those assisting workers’ physical, mental and even social wellbeing. But financial wellbeing policies were a growing priority for companies even before the cost of living crisis and, as it continues to bite, employers are looking to support employees with their workplace savings.
Respondents’ future plans for their financial wellbeing strategies show incremental shifts in benefits provision, rather than radical rethinking. For example, according to the REBA research, there is more emphasis on financial education, which 34% intend to introduce in the next two years, than engagement with products that might benefit lower-paid workers such as payroll savings. Just 14% plan to introduce new government schemes, such as help to save and opt-in payroll savings (see panel). One fifth already do this.
Almost all employers (95%), plan to offer pension contributions above auto-enrolment minimums, or already are. And there is an emphasis on savings practices that benefit senior or higher-paid workers. More than half (54%) either already or plan to offer a cash alternative to pensions when the lifetime allowance is reached. Nearly half (49%) provide long-term incentive plans or intend to in the next two years.
The savings products set for the biggest growth in the next two years are savings via tax-free wrappers, such as ISAs (19% of employers plan to introduce), and medium- and short-term savings (18% intend to bring in). But these measures will still benefit only around one-third of the workforce. Another concern in the Financial Wellbeing Research 2022 is the finding that just one in five employers check for pensions savings gaps by gender and barely any do for other characteristics.
Providing specialised support for low earners is in the top three priorities for 34% of respondents and support for families and dependants for 31% of respondents. Financial wellbeing strategies might be in their infancy, but workplace saving is clearly high up the agenda for businesses.
Payroll savings: the safety net of the future?
Thanks to auto-enrolment, workplace pension scheme participation rates are now at record highs. That success has been driven by legislation, automatic payroll deduction and the need for employees to opt-out – all of which have made it as easy as possible for employees to save for retirement.
Could payroll savings do the same for building financial safety nets? Payroll savings schemes make contributions regularly from employees’ pay into a savings account via payroll. There are three main models defined by MaPS:
- Standalone: automated payments are made directly from an employee’s pay into a savings account
- Repay and save: automated payments are made directly from an employee’s pay into a savings account in addition to paying off a loan.
- Linked to a workplace pension (sidecar): automated payments are made directly from an employee’s wages into a savings account, as well as automated contributions into a workplace pension. When a cap set by the employee is reached on a sidecar savings account, any extra flows into the workplace pension, accessible at retirement.
In 2021, MaPS trialled the standalone approach, working with a credit union to provide the savings account and two large public sector employers. The NEST pension scheme has also been trialling a sidecar approach.
MaPS’ research found that of 109 surveyed employees, 59% had never or rarely saved before joining the scheme. Of new joiners, 68% went on to continue to contribute the same level of savings every month and 21% increased the amount they saved.
However, achieving widespread adoption of payroll savings may prove hard. In 2021, then pensions minister Guy Opperman wrote to all FSTE 100 chief executives to ask about their payroll savings plans. Fewer than half replied.
