Low levels of short-term savings are having a significant impact on employee wellbeing, and this looks set to get worse as the cost-of-living crisis deepens.
Delegates attending a Corporate Adviser round table event on balancing saving priorities, expressed concerns that this was likely to worsen significantly, unless more could be done to address this problem.
One of the key takeaways from the event was that this isn’t just a problem affecting the lowest paid employees in the workforce. LCP’s head of financial wellbeing Heidi Allan said that this is a far-reaching problem affecting all sectors, and higher earners as well as those on below average incomes. In fact, she pointed out that the problem was particularly prevalent among middle and higher earners.
She explained that LCP has been researching financial wellbeing for the past four years. “Last year was the first time that we saw the biggest financial strain falling on higher earners.“
Covid, and then the cost-of-living challenge has thrown in a few curve balls that have put financial plans into disarray. Previously, living costs may have been affordable, but this is often not now the case. Those earning between £70,000 to £100,000 often have large debts and relatively low savings rates. Many are feeling the pinch and are starting to struggle.”
This, she said, was the cohort that is most likely to have less than a month’s savings to hand. “It really is quite stark.”
This is a problem that is likely to get worse as mortgage costs increase, leaving many facing significant increases in monthly repayments as current fixed-rate deals expire.
Cash squeeze
These perhaps surprising results were backed by others on the panel. Hargreaves Lansdown senior corporate distribution manager Ian Foster said the firm’s financial resilience barometer, published in July backs these findings. “We’ve found 30 per cent of people are going to have to make a fundamental change to their spending patterns this year, just to keep their head above water basically. So we clearly haven’t seen the worst of it yet.”
This is helping to push the issue of financial resilience further up the corporate agenda, with those in senior management positions also feeling the pinch. Many are all too aware of the dire effects this can have on productivity in the workplace, as well as on employee health and wellbeing, and are looking at a range of solutions that can help address these issues, which will include a reviewing current employee benefit provision.
As a result more employers are looking to encourage shorter-term savings provision as a way of building resilience, and ensuring employees avoid a vicious cycle of debt, said Buck DC proposition leader John Yates. He pointed out that there are around 11.5m people who have less than £100 in savings in their account. “These people might not be in debt at present, but if the washing machines blows up then they are likely to move into debt to fix this problem.” With interest rates rising this can quickly be a huge burden on incomes he added.
There was particular discussion about whether there needed to be a different focus when it came to ‘generation rent’ — the increasingly growing cohort of employees who were not yet on the housing ladder, many of whom might now be in their 30s or beyond.
Did it make sense for this group of employees to be channelling money into retirement savings when this money might be better used accumulating money for a deposit? As some on the panel pointed out, if people ended up renting in retirement this was likely to have a more detrimental drag on their wealth over the longer term.
Should the industry be doing more to address this issue? Allan agreed that this was a big issue, particularly for younger workers, and should be part of a wider discussion around saving in the workplace. “It has never been so difficult for people to get on the property ladder as it is now. I think this is an issue that probably has not been on the radar but should be part of wider discussions around financial wellbeing.”
Housing challenge
She pointed out that the high cost of housing created a number of potential future problems. “It’s not just those paying rent in retirement. The average age of first-time buyers has risen considerably, so we’ve got a higher percentage of people that have got 30- and 35-year mortgages, which means in some cases there will be people paying a mortgage for the first 10 years of their retirement who may not necessarily have the means to pay these mortgages down.”
Those attending the event were unsure whether the industry should be explicitly telling younger workers to save for mortgages ahead of pensions — or whether a clearer distinction should be made between homeowners and housing ‘have-nots’. There were concerns that explicit recommendations to prioritise saving for a deposit over pensions could veer into advice.
Hargreaves Lansdown corporate distribution manager Emma Jeffery said she did not think a one-size fits all approach was necessarily helpful.
She said: “I certainly think there is not enough education around this. We need to look at how to improve financial education and literacy to enable people to make better financial decisions.”Yates agreed that improving financial education should be a priority and said that for him this needed to start in schools.
However he added that encouraging millennial and generation Z workers to save for a housing deposit could help boost engagement levels. “For most younger employees this is the priority, not saving for a retirement that is decades away.”
However he questioned whether terminology is always helpful, and may also be putting people off engaging with savings generally. “Most people don’t wake up saying I’m going to save into a pension. But they don’t wake up saying I’m going to sort out a lifetime Isa either. “
In terms of engagement it might make more sense to call this a home buying savings plan, or something along those lines. But we also need to ask whether we are confusing things by having too many buckets. Would it be simpler to have a retirement fund, but you’ve got the ability to withdraw money in certain circumstances, such as buying your first home.”
Simplified communications
This could also address some of the inherent complexities in the current system. Patel pointed out that there needs to be far greater simplification across the savings industry. “We have to put together a four page factsheet explaining the different types of Isa products. It explains they can only pay into one stocks and share Isa every tax year. It’s very cumbersome. And that’s on the basis that the employee hasn’t got their own Isa, which could restrict what they pay into any savings product offered through the employer. There’s a lot of talk about simplification in pensions but this is something the government needs to look at across the wider savings industry. This would make it a lot more accessible and understandable to far more people.”
Finally, the panel discussed the impact of the recent Budget announcement that will see the pensions lifetime allowance abolished from next year. Although this has been generally welcomed across the pensions industry, consultants at the debate thought it could slowdown the progress being made to develop more flexible workplace savings options.
WTW co-head DC consulting Jayesh Patel says: “I think the abolition of the lifetime allowance is good news for pension savings. It’s likely to mean higher earners, those with larger pension pots, moving back into workplace pension schemes as they are not worried about the tax implications of hitting these allowance.” As he points out this is likely to include C-suite executives and decision makers at companies, which is likely to invigorate discussion about the workplace pension and whether it is delivering for all.
But he pointed out that some of the more flexible saving options have been developed precisely to cater to the needs of this cohort. “What we have been talking about today is how to ensure that this flexibility is extended and how it could benefit those at the other end of the income spectrum. We’ve seen progress on this to date but I would see the Budget announcement as more of a hindrance.”
Yates agreed that greater flexibility was being driven by these higher earners and “the foot may come off the accelerator on this” if, as expected, many move back into more tax efficient pension savings.
Gallagher Benefit Services benefits consulting director Jason Cannon added: “It’s a difficult one but it is still quite early days to see what the effects of this Budget announcement will be.“
A lot of the development around corporate Isas has come from a need to cater towards higher earners, but this does not mean this will go backwards. There is also a lot more interest in financial wellbeing now so we will see how this develops to serve other segments of the workforce.”
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