Supporting Financial Wellbeing in a Recession
We’ve taken a look at the trends we’ve seen during lockdown and throughout 2020 as well as what the period after the last recession could teach us about employees’ needs in 2021, and how it might impact on employee benefit strategies for the next couple of years.
The UK and much of the world are in recession. In 2019 many commentators were stating we were overdue a recession, with them historically occurring every 8-10 years, and the last one having occurred in 2007 / 2008. However, I don’t imagine that any of them were predicting world events would unfold in the way they have in 2020.
What the last recession taught us about peoples’ priorities during and following a financial downturn.
In 2008 / 09 the employee benefits landscape looked very different. In 2009 Employee Benefits Magazine was still print based, Flexible Benefits, and the technology needed to run them was very much the hot topic in the industry. However, the Editor still needed to explain the difference between Flexible Benefits and Voluntary Benefits in every article.
The top five benefits were Dental Insurance, PMI, Childcare Vouchers, Holiday Buy / Sell and Cycle to Work. As we know Childcare Vouchers are now quite different, however, they still form a part of 82% of benefit schemes, the other four also remain very similar today. Except for Cycle to Work, which, despite its surge in popularity this year has seen a consistent decline, and now only appears in 20% of schemes down from 26% two years ago.
What is noticeable is how many more options there are now with new options like DNA testing, GP services and financial education all rising up the list. In fact listening to a Webinar by Benefex on Financial Wellbeing in Times of Turmoil they stated that they have seen Financial Education providers rise from around 10 to over 120 in the past couple of years. Whilst competition is obviously good to ensure innovation, this breadth of choice makes it almost impossible for anyone to know what to offer.
In 2020 our focus is on wellbeing, and has been for the past few years. With flexible benefits well established and the technology required to run them prolific in larger employers, we have learned that employee health and happiness has a direct impact on their productivity, and their employer’s bottom line. Once again financial wellbeing needs our attention.
Back to 2009; there was a fear that the tax savings from Salary Sacrifice would be taken away, which, as we all know came true in part, however, for those that failed to take advantage of them, they missed out on 8 / 9 years of savings and benefits for their business and employees. Which just shows how important it is to spot the trends early, and not be afraid to jump on them, where they show value for employees and / or employers.
Following the last recession Employee Benefits Magazine research showed a rise in the provision of, and demand for, Voluntary Benefits, as companies sought to help employees’ money go further unable to offer salary increases, and employees looked to get all the help they could. Although there has been an increase in demand and provision of risk benefits during the Pandemic, with many providers predicting premiums will rise in 2021, it is not unreasonable to expect a similar switch to voluntary benefits in 2021.
Throughout lockdown there have been a number of reports about how UK households have saved record amounts of money. This may seem unsurprising as there was little for people to spend their money on, however, it is symptomatic of all financial downturns, as people start to worry more about their financial security. What was surprising was the level of this saving, in April to June this hit a record level of 29.1%, which, is more than double the previous record of 14.4% set in 1993.
This is not a new phenomenon, in times of uncertainty, when people are worried about losing their jobs, and concerned that the value of their single biggest asset, their house, is under threat they cut spending and start saving. Following the last recession UK household savings increased from 6.5% in 2008 to 12.2% in 2010.
The challenge is going to be how to support employees to maintain this habit, if perhaps at a lower level. The UK economy will need consumers to start spending again, if it is going to get back on its feet, and it is going to do everything it can to incentivise them to do this.
With only 30% of the UK working population having savings equivalent to 3 months’ income or more, we need to try and help people not to fall back into their same bad habits. Of course we want them to start spending again, however, in a healthy way. We want to help them get out from the burden of interest and fees they’re paying on their debt, which in turn will enable interest rates to rise, incentivising people to save more.
Financial policy doesn’t provide any incentive for people to save, with the current interest rate set at a record low of 0.1%, and with an ever increasing possibility of negative interest rates, savers get little return for their money.
Therefore the main incentive is to get out from under the burden of existing debt, pay off credit cards and high cost loans, and where possible build up a cash buffer to provide security in the event of a loss of income.
As is usually the case the picture is not even across all demographics, the Bank of England has found that households with an income under £35,000 ran down their savings during the lockdown, while those earning more than £35,000 increased their savings.
In September consumer spending grew by 2% year on year, suggesting that consumers want to start spending again, and when restrictions really start to lift, the pent up demand from being locked away will cause a spike in spending, the question is how long it will last.
So what could / should employers do?
Firstly employers need to look at communication, benefits teams have been diligently adding and improving employee benefit schemes for years, however, according to Gallagher 65% of employers don’t have a pre-defined budget for communications.
You can have the greatest benefit scheme in the world, however, if employees don’t know about it or understand it, then it’s worse than worthless. In fact, Unum state in their 2013 report that poorly communicated benefit schemes cost UK employers £470,000 per 1000 employees in the UK because of increased turnover and sickness, a figure that was re-confirmed in 2018.
Therefore the first thing that employers need to do is to tell their employees about the amazing benefits that they already offer. Not only will this help employees understand the value that they offer them, whether it is saving for retirement, providing income if they’re sick or saving money on a TV. As Unum have shown it will also make a significant impact on the employer’s bottom line.
This does depend on employers offering benefits that appeal to their employee demographic. Employers have to walk a fine line between appealing to everyone and not overwhelming people with too much choice. This will be helped by effective communication but making sure you have the correct benefits is fundamental to a successful scheme.
One area that blurs the lines between benefit and communication is financial education, however, whatever camp you put it in, it is an extremely valuable tool for employees. There’s never been more information or more choice available, yet this makes it even harder to know who to trust or which provider to choose, many companies rely on their consultants to help them make this choice.
In our last email we shared our top 6 benefits for 2020, and in the email before that we shared our guide to building personas for your employee demographic. These should help you to choose benefits to suit your colleagues needs.
More and more companies are stating that they will continue their work from home and flexible working policies after we have got Covid-19 under control, Deloitte is the latest, saying that it will shut four of its 50 UK offices, and offer the 500 staff affected full-time, Work from Home contracts. Whilst this only impacts around 2.6% of their workforce, for other companies the percentages will be much higher.
This will likely have a few consequences; firstly it will mean that people spend a lot less on travel to and from work, which in turn will mean that there is a lot less demand for Season Ticket Loans, and potentially less demand for car schemes. There may be other consequences such as a reduction in spend in cafes and on childcare, as people are no longer tempted to get an extra hot, double foam, chai late with coconut milk on their commute, and because without their commute they now have time to drop children at school before they start work.
However, before you throw out the season ticket loans, car schemes and cancel the fruit order. Of course not every job can be done from home, and not everyone wants to work from home. We should strive to find a balance between helping employees to save for the future, and making their salary go further.
The concern is that for those who still need to commute, fall in demand will mean that prices need to rise, which, will again disproportionately impact the lower paid. Meaning they will rely on employers’ support even more than ever.
What can we learn from previous recessions and recent trends, and how can it help us build a strategy for employee benefits moving forwards?
We know we need to encourage people to save for their retirement. Over 12,000,000 (33%) are not saving enough for retirement, and with 25% of people pausing or reducing pension contributions during 2020, it will be important to encourage employees to re-start these as soon as possible.
At the same time we need to focus on the immediate term as well. We need to help employees to maximise their savings, and avoid taking on more, expensive debt. Payroll ISAs and other savings schemes such as Payroll Saving with Credit Unions can have huge benefits including access to exclusive borrowing at low rates, helping employers keep clear of the potential minefield of payroll borrowing, whilst still supporting employees to make better financial decisions.
Whilst there are a plethora of new providers offering flexible pay solutions, and salary advances, there are a number of questions about these. Are they helping employees to avoid payday loans or are they robbing Peter to pay Paul? The FCA issued a useful statement about these, and the considerations that employers need to think about before implementing them.
It’s worth noting that they can be useful, low cost ways to cover unexpected bills, but the underlying issue remains a lack of savings to cover any emergencies. It may be possible to set a policy that allows people to apply for a salary advance of X% of salary once or twice a year, to try and ensure employees aren’t getting themselves into more financial difficulty, but still have access to emergency funds.
Benefits that don’t cost a lot but help employees’ money go further.
Once you have managed to build a suite of benefits that encourage employees to save in the long and short term, but provide emergency support if they need it, then you may want to consider benefits that help their salary to go further, hopefully helping them to save more, and require support less.
Our focus at Travel Accounts is on making holidays more affordable, as the biggest expense after food and shelter, and the one most missed by people during lock down, people are going to spend money on holidays in 2021 and we can ensure they do not rely on credit cards and loans to afford one.
Other popular options include technology and bikes, cars and transport, dental and pet insurance as well as retail discounts and vouchers.
There are a number of other options to help employees make the most of their money, however, these tend to require employer funding, which, is likely to be harder to justify in the short term. Whilst some of the more quirky benefits may be put on a temporary hiatus, no more beer of the month, or weekly Bubble Tea stand in reception.
Instead employers may be better to focus on the biggest expenses employees experience on a recurring basis, helping to reduce these by a few percent will have a much bigger impact on employees’ finances and they are often free to implement and run.
We’ve focused on financial wellbeing, because despite experiencing the biggest threat to our physical wellbeing in generations, for most people the greatest impact will have been on their emotional and financial wellbeing.
When looking ahead to 2021’s enrolment, ask yourself one question;
In the face of increasing costs, reducing investment values, renewed freedoms and excitement about getting Covid-19 under control, what do employees need to help their money go further, whilst they get out and start enjoying themselves again?
Travel Accounts are a zero cost benefit that helps employees make the most of their time off. Holidays make people happier, healthier and more productive. Get in touch to see how we can help. Article written by Mike Bartlett, Director at Travel Accounts.