The financial impact of COVID-19 has not yet been fully realised. But the immediate impact of employees being furloughed, placed on technical leave, or shortened working hours — reducing their pay — has brought job insecurity and financial wellbeing into sharp focus. Even before the pandemic hit, employers were showing increasing interest in supporting their employees’ financial wellbeing, and now there is a new, unexpected source of financial strain. With the focus on basic financial education and training to support employees through difficult times, what else can employers do to create a more financially resilient workforce for the future?
Reframing our relationship with money
In solving financial problems, people often have to face harsh truths about how they see money and how they use it. This can mean changing long-standing behaviours and attitudes, which is not easy for anyone.
Debbie Falvey, Head of Defined Contribution Pensions, Health & Benefits, EMEA at Aon says it can be hard task to upend the way we think about money and change our habits:
‘Our relationship with money is deeply rooted, and these problems are self-perpetuating in a lot of cases. The biggest impacts can be made through basic financial planning principles, explained in an accessible and actionable way.’
Aon tackles this by focusing resources on explaining and encouraging eight healthy financial habits:
- Get in control
- Spend less than you earn
- Understand how compound interest and inflation works
- Understand the different types of debt
- Invest in what you understand, and have a clear plan
- Protect those you love the most
- Understand tax
- Understand your employer benefits
Get control and spend less than you earn
Fewer and fewer people have the savings they need for the unexpected. The response to the COVID-19 pandemic showed people were not prepared for a sudden loss of income, and while in the short-term panic buying was order of the day, it quickly became apparent that large sections of the population were reliant on government aid, as well as the businesses that employed them.
It is recommended that someone should have between three and six times their monthly outgoings put aside for a rainy day, however for most this is difficult to achieve.
Different groups vary, but in the UK 15% of people have no savings at all, with a quarter of people unable to make their way through a single month without wages.
With the populations of only three nations, Luxembourg, Sweden, and Germany, saving the advised 15—20% from their incomes on average, the problem is widespread.
Debbie is seeing similar savings trends across geographies:
“Most countries have the same fundamental problems with personal finances; lack of savings and debt. First and foremost, people need to be able to deal with a financial emergency. The reality right now is that employees are dependent on their employers having the right provisions in place should the worst come to the worst.”
Debbie Falvey, Head of Defined Contribution Pensions, Health & Benefits, EMEA at Aon
Understand how compound interest and inflation works and understand types of debt
There are many factors that have contributed to the lack of financial resilience. Among Millennials, 39% say social pressure from peers has caused overspending. Having a friendship group who are on higher salaries, for instance, can put people in uncomfortable social situations, and make them feel that they have to keep up.
Overspending — fuelled by a culture where credit is easy to acquire — can lead to unintended but significant consequences such as bankruptcy. Technology has made access to credit easier still, with loan and credit applications made simply and quickly through mobile devices, and while banks are offering digital savings solutions too, if one is not inclined to save, credit is still the easier option.
Debbie believes the development of modern consumer markets has played a huge part in the development of these attitudes:
‘We have an increasingly disconnected relationship with our money — be it through one click online shopping, easily available credit facilities, or simply using the tap of a card over cash. This has led to a loss of control over our personal finances, and it can take a real effort to close the distance between what is easy for individuals, and what is financial reality.’
of Millennials say social pressure from peers has caused overspending
Today purchases can be made at distance. By linking bank accounts directly to apps, companies have smoothed the way to fast decisions through single-click transactions and free delivery services — streamlining the way we consume — and removing the tangibility of cash purchases. The instant gratification that comes with online shopping has created a must-have-it-now mindset, amplified by marketing techniques, which has created a feeling of entitlement towards luxury, non-essential items.
At the core of a shift in attitudes must be the realisation that what is important to an individual today, can have direct effects on what will be important tomorrow; making the connection between the two will allow people to make better decisions. Understanding good debt versus bad debt and the real cost of credit cards are key topics in starting an attitude change.
Invest in what you understand and have a plan
When it comes to savings, the 50/30/20 rule is not an option for some; the cost of living can easily be more than 50% of a person’s earnings after tax, and the gap is widening. 40% of all Europeans are not saving for the future, with that number as much as 60% in poorer countries. For those who are able to save, there are some useful rules-of-thumb to allocate savings for the medium and longer-term, creating realistic goals and balancing today with the future.
Holidays, recreation, and fun
What good is living if you cannot enjoy it? But if you cannot enjoy the fun because you have paid for something with credit which later causes stress, that is no good either. Having something to look forward to can increase your happiness in the short-term, making the discipline of saving a source of positive mental wellbeing. So rather than using credit, aim to save for your holiday or luxury item.
Employees may also have aspirations for their children to be able to spread their wings and achieve their full potential by embarking on higher education. With the cost of education an increasingly difficult hurdle, especially for those from lower income families, this might play on someone’s mind.
Defined benefit pension schemes are becoming a smaller part of the retirement mix, and the minimum employer contribution to modern schemes is not enough. The UK’s pension shortfall is bigger than its entire economy, while other European countries have no savings for future pension obligations at all. To protect themselves in the future, the employee mindset needs to shift drastically towards long-term saving — Millennials and Generation Z will not enjoy the later lifestyles of Baby Boomers.
As it stands, personal savings plus government provisions will leave many on less than minimum wage in retirement, and with retirement ages being pushed back periodically there may come a time when an increasing number of people face competing challenges for their financial and physical wellbeing as they work into retirement.
Protect those you love the most, understanding tax and employer benefits
While many employers do offer excellent benefits packages, many are disengaged with these provisions until much too late. Whether they are unaware what is available to them, or they do not believe they need to think about things until later in life, these attitudes can leave them in a position where they cannot afford to retire. In order to reach a sensible replacement rate for retirement, it is advised that the average earner saves around 15% of their income after tax.
Many employers provide excellent benefit packages that provide for employees and their families for illness, death, or hospital bills, but not all employees understand these benefits and the part they can play in creating financial security, which in turn can alleviate financial stress. Explaining these benefits in the context of real-life situations can make them more relevant and valued.
In order to reach a sensible replacement rate for retirement, it is advised that the average earner saves around
of their income after tax
Aon is well placed to help employers improve the financial resilience of their workforce. Well One — the financial wellbeing and health platform by Aon – is an accessible, easy-to-use portal that provides a lot of the tools people need to be able to make changes to their financial management. The information, resources, and software it provides allow people to take control over their finances, and help the employer get under the skin of exactly how employee habits affect their emotional wellbeing.
Debbie believes the door is wide open for employers to fill this gap and create better wellbeing in their workforces, but also to create a more certain future for themselves:
‘There’s nothing stopping employers educating their workforces. There is a clear regulatory difference between what constitutes financial advice, and guidance. Education and the right resources for employees are available now — and can make the world of difference.
The risk of not helping employees take this step is far greater to organisations than continuing the dynamic of employee dependency.’
But financial wellbeing is a two-way street, and requires employee commitment to solving their current and future financial situation. It starts with each individual understanding where they stand financially right now, and looking at the options available to create a secure future. Debbie says employees need to start taking more responsibility:
‘To avoid a financial wellbeing meltdown and avoid stress, poor mental health, and increasing physical health claims, employees need to take personal responsibility for their finances.’
While change is often the only certainty, our support is guaranteed.
Speak to an adviser to discover how you can improve the health and wellbeing of your team.