The importance of financial wellbeing – and financial resilience – has been made clear by the impact of Covid-19. Financial resilience is the ability to cope financially when faced with a sudden fall in income or an unavoidable rise in expenditure; in other words, having a financial buffer in place or access to savings that can see you through a difficult patch.
The UK has never been a nation of savers. Even before the pandemic, The Money Advice Service estimated that 16 million people have less than £100 in accessible savings; an amount which wouldn’t 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 or any other expected circumstances that may have come along.
Lack of financial resilience or stress relating to financial stability can negatively impact mental health, which impacts every area of life, including the workplace. The mental health of employees is becoming more of a consideration through company benefits, and financial resilience should be included within that too.
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.
For many employers, contribution to employee pensions are likely the second biggest people cost, next to pay; funding for a future event that the employer doesn’t see. Add to this a low engagement rate, especially amongst younger employees, and it’s difficult to see the return on investment.
Offering workplace savings benefits offers the opportunity for employees to build up accessible savings for their shorter-term financial needs. This allows them to concentrate on meeting shorter term financial priorities, without neglecting the longer terms savings goals because it allows them to manage both at once. Engagement levels with pensions are improved as they’re given the tools to manage all of their savings, having a positive impact on longer-term financial needs also.
Workplace savings shouldn’t just be 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 a pension 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’s 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 driven 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 financial needs. Pensions are often discussed as their own entity, rather than within the larger context of financial wellbeing along with life plans and goals. Pension redirect forces the employee to consider their short-term savings needs in relation to their long-term savings needs – the now versus the future if you like. It’s not a binary decision.
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’s 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.