With one in four employees admitting that financial concerns affect their ability to do their job, Kavitha Sivasubramaniam looks at why and how employers should help staff manage their debt
According to the Money Advice Service, the total number of people struggling with debt rose by about 100,000 to 8.3 million in the six-month period from January to June 2017. In addition, research carried out by the CIPD and Close Brothers found that financial concerns affected the performance of 25% of employees – which increased to 30% among public sector workers.
With all indications suggesting that the debt problem will continue to grow, along with the surge in popularity of credit cards, unsecured loans and car finance deals over the past year, it is perhaps unsurprising that Bank of England governor Mark Carney and his colleagues on the Financial Policy Committee are investigating whether this presents a risk to the UK’s financial system.
Heidi Allan, head of employee wellbeing at Neyber, believes the issue of debt can be looked at in two ways – one being the total amount of household debt, which is just approaching £13,000 according to latest figures from the TUC.
The other element of debt is in respect of day to day financial management, and 48% of employees surveyed for Neyber’s DNA of Financial Wellbeing report in January 2017 said that they regularly borrow to cover basic financial needs such as household costs, bills and food.
“One of the main methods of borrowing are credit cards, with 26% saying this is their chosen method of day to day financial borrowing, 14% are using their savings, 13% are using overdrafts, and 13% are borrowing from family and friends,” says Allan. “While we see the overall impact of large-scale borrowing, it often starts as these small amounts and spirals as things continue to escalate month on month.”
BRINGING PROBLEMS TO WORK
With an increasing number of people facing financial difficulty, it is no wonder these concerns affect not just employees’ personal lives but their professional lives too.
It can cause them to be absent from work and lead to poorer decision making when they are present. In cases where these individuals are losing sleep, it can also have an impact on their mental capacity and physical safety.
“Our brains are magnificent things but we only have a certain bandwidth we can cope with. If we have additional pressures, stresses or worries, we cannot leave them at home in the morning when we go to work. This reduced capacity naturally affects our ability to deal with seemingly everyday situations, including our focus at work,” explains Allan. “Add to that the time off to sort issues or due to stress and depression and the impact on the employer can be far reaching.”
Perhaps for this reason, there’s a clear focus on debt management in workplaces today. Data from Reward’s own research carried out with WEALTH at work found that financial worries increased stress levels for 66% of respondents, reduced productivity for 44%, and led to absences for 38% of those surveyed.
SPENDERS VERSUS SAVERS
So who exactly needs help? Although it may be easy to make assumptions about particular segments of the workforce needing more assistance with debt management than others, money management is essential for all employees regardless of sector. That said, an individual’s specific needs vary considerably according to age, salary, dependents, expertise, location and confidence levels.
Jonathan Watts-Lay, director at financial education provider WEALTH at work, advises against making sweeping generalisations and instead suggests considering the notion that some people are better at spending while others are better at saving.
“A lot of it depends on age, but this is just one factor and not the only factor. It’s very easy to generalise but doing so isn’t particularly helpful,” he says. “For younger people, earlier interventions when they first start thinking about debt can be really beneficial. Financial management is now part of the curriculum, which is great. They need to get into the right frame of mind for how to manage their money early on.”
Jeanette Makings, head of financial education at Close Brothers Asset Management, which provides financial planning and investment services, says that debt management is usually a problem for those who are lower paid or in industries with a large proportion of part-time workers.
“The younger population who start on lower incomes haven’t got rainy day fund set up so their financial resilience isn’t quite there yet. If they are a moment away from something going wrong they have no savings to fall back on,” she explains.
However, although these are the most obviously affected employees, it is important to remember that people can fall into difficulties at any time due to their personal circumstances, for example if they are going through divorce or are facing care costs for elderly parents.
“These costs can affect anyone and everyone inside the business. They can’t be underestimated,” Makings warns. “Employers are in an interesting position because most people get their money from their workplace rewards and benefits. That’s what gives them the chance to claw themselves out of debt and get onto the savings path.”
TOOLS AND RESOURCES
Once an employer has decided to support staff with debt management, there are a number of tools and resources that can help.
Employee assistance programmes often offer debt counselling and assistance once a problem has been identified, while employers themselves can provide some preventative measures, such budget planners to help people manage their monthly incomings and outgoings.
Organisations can offer a range of benefits that can help lower the cost of essentials rather than discretionary spending, for example, by offering discount vouchers for supermarkets or season ticket loans. Childcare vouchers can also be of value to employees with children. For pensions planning there are more sophisticated tools and calculators available, enabling employees to easily assess how much money they will have at retirement.
“It’s about getting people to understand the benefits and encouraging people to use them,” says Makings.
Some employers also offer payroll advances and hardship loans at a reduced, or even nil, interest rate. In parts of the world such as Spain and South America, the provision of workplace loans are increasing, but in the UK there is a reluctance to offer them among certain organisations due to a fear that such loans will simply increase debt.
“It’s fair to say that one size does not fit all and everyone requires differing levels of support, information and guidance. What is most important from the employer and employee perspective is to provide choice,” says Allan. “Providing a range of support mechanisms – be that face to face or online – as well as products including protection and money management resources, are vital but none more so than providing information and education. Without knowledge and awareness, people in vulnerable positions can be left open to exploitation – payday lenders are a great example of this.”
She believes that employers need to ensure they offer financially inclusive, fair and transparent products combined with education, support and guidance to help people improve their own situation.
“Often small changes to habits can have big impacts in respect of understanding where their money goes and how to best make it work the hardest for each person,” Allan adds. “Even simple things like building the knowledge of credit scores among the workforce and helping employees to understand how they can improve their own scores could mean the difference between utilising mainstream financial products or a spiral into negativity with less mainstream solutions.”
Employers can also take advantage of free financial resources that are easy to access says Ian McMath, CEO at Sodexo Engage.
“One option is a third party financial adviser. HR can point employees towards helpful government resources too, such as the Citizens Advice Bureau. However, employers need to be wary about giving direct advice, as they need to remain impartial and there are strict regulations here to protect employees.” he says. “Employers can do their bit by helping employees manage the day-to-day costs of living, however. For example, they can provide employees with access to discounts on products they would be purchasing anyway. Offering this kind of help can go a long way to promote positive employee wellbeing, and importantly, showing that you’re an employer that really cares.”
With real wages stagnant and the cost of living rising, staff of every age group are struggling. Financial wellbeing support is crucial to reduce stress levels – improving job satisfaction as well as productivity.
The recent autumn budget revealed that economic growth had been slashed dramatically from the predicted 2% earlier this year to 1.5% which in turn also meant productivity was also expected to be lower due to slow wage growth and lacklustre investment. Financial stress costs the economy £121 billion a year and people with debt worries are twice as likely to develop major depression which can lead to lost productivity and absenteeism.
Utilisation of the policies that have been put in place such as the increase of personal allowance to £11, 850 from April 2018 and the increase of the lifetime allowance for pension savings, there is hope for financial reprieve, Watts-Lay believes.
“Many employers now offer a cash alternative to remaining in the pension scheme but unlike a pension contribution, the increase in pay is subject to income tax and national insurance.” He adds. “Alternatively, employees could look at diverting contributions into another type of tax efficient savings vehicle, an ISA for example which is remaining unchanged at a limit of £20,000. Many employees now look at their workplace to offer a variety of workplace savings schemes alongside pensions. It’s good to see that many employers are now starting to adapt their reward and remuneration packages for employees, to offer them more flexible and tax-efficient solutions for saving.”
PREVENTION OVER CURE
Tim Perkins, co-founder and director of financial education provider Nudge, believes that employers can help their people improve their money management by giving them access to financial education to enable them to gain the skills and knowledge they need.
However, with more than 40 organisations in the UK now describing their solutions as delivering “financial wellbeing”, it’s important to understand the different options, drivers and implications of each. For example, if an employer is looking for a holistic education – covering a broad range of subjects – debt-based education from a payroll loan provider or pensions education from an asset manager might only provide part of the solution.
“Regardless of the specific tools, the foundation to any help must be financial education. Not only will this focus on prevention rather than cure, it can provide employees with the context, clarity and confidence to better manage their money every day,” Perkins says. “It’s important that people can understand the true cost of borrowing and how to prioritise their debt, as well as the basics of budgeting.”
Organisations that provide financial education are taking a proactive approach and there’s also a moral case for doing so, says Watts-Lay.
“If you’re providing pension or other financial benefits you should really explain them to your staff,” he adds.
Watts-Lay explains that some organisations will chose to offer education if they know they’ve got a number of employees with debt problems to make it clear that they are here to help. However, in terms of advice, he says not much regulated advice is provided by employers because it usually has to be paid for.
A PART OF EVERYDAY LIFE
In the future, Makings says that if employers want effective workers they must look at how to get most out of them, including how best to engage and retain them. This involves creating an environment in which they can work to their best ability. She adds that employers should help them understand what support is at their disposal.
“Although employers are not responsible for solving employees’ problems they can provide signposting by showing them what’s there to help them help themselves,” Makings explains. “Debt management is a normal part of life and a normal part of financial planning. For example, a mortgage is a debt and it’s about understanding how to find best one on the best terms. It’s part of the education framework.”
Most people wouldn’t go to their employer for help with debt but this should be normalised so that they feel more comfortable doing so, she adds.
Perkins agrees that assisting with debt management will become more popular among progressive organisations in the future since they have much to gain and little to lose from doing so.
“Increasingly employers are understanding that helping their people better manage their financial wellness is just as important to boosting engagement, improving productivity and becoming an employer of choice, as a robust strategy around physical and mental wellness,” says Perkins.
And with more financial products and services on the market than ever before, now is the perfect time for employers to support their workforce and put their money where their mouth is.