This time last year I wrote in HRZone about why 2020 should be the year that employers offer their people financial education. I argued that the financial strain employees were facing was negatively impacting their mental health and their work. I warned that without action, things would get worse. What I didn’t know then, was just how bad things would get and how much employees would struggle.

In the UK, nine in ten people say they struggle with financial literacy. They feel under educated and ill prepared to make the financial decisions they need to make on a daily basis. 

On the 16 March 2020, the government’s Health Secretary Matt Hancock advised the House of Commons that any unnecessary social contact should cease, and the country went into its first lockdown. Shortly after, the government announced a series of measures to assist businesses and their employees through the Covid-19 pandemic. One of the most significant of these measures was the Job Retention Scheme, which allowed employers to obtain a HMRC grant to cover 80% of an employee’s wages for those staff that were furloughed (kept on payroll, but not working). This scheme set in motion a level of government borrowing not seen since the Second World War.

Towards the end of last year, Chancellor Rishi Sunak said the economic emergency caused by Covid-19 had only just begun. The UK economy is not expected to return to pre-crisis levels until the end of 2022. This is important for employers to understand because it means your people will continue to struggle financially for at least the next two years, and while the bounce back following a recession will lead to 6% growth in the economy next year, employees’ finances may take much longer to recover.

Eroding financial resilience

The pandemic eroded financial resilience for millions of employees in 2020. We started the year with some of the highest levels of personal debt and a stagnant savings habit that left most employees poorly prepared for time away from work or with reduced wages. As of mid-October 2020, ten million jobs had been furloughed. The majority of these employees saw their wages decrease by 20%. By the end of 2020, employees were twice as likely to run out of money by the end of the month compared to before the pandemic. Nearly half of all families in the UK have been forced into debt because of the pandemic.

Towards the end of 2020, Citizens Advice Bureau estimated that six million UK adults have now fallen behind on everyday bills because of the pandemic. Rent arrears total almost £1 billion as millions fall behind on council tax, energy and broadband bills. The long-term impact the pandemic will have on employees’ finances and subsequently on their mental health will be significant. Even for employees who haven’t been furloughed or lost their jobs, a huge divide is appearing in this country. While some are falling into debt and others have burned through their savings, some employees have seen their savings improve as forced lockdowns made many of us spend less. In the UK there has been a total net improvement to consumer savings of £85 billion according to the Bank of England. As lockdowns began to ease, however, this good some have done to save money is starting to be undone and consumers have resumed normal spending and borrowing.

This is also important for employers to get to grips with, because it highlights just how diverse and fast changing employee’s financial wellbeing needs are. While some employees are struggling to get to the end of the month, others are sitting on money, unsure what the best thing to do with it. The challenge for employers is how to support both groups of employees and everyone in between.

When employees have the tools and information to make better informed decisions and to feel power over their financial situation, they handle their money better and they are happier. The good news for employers is that they are then less distracted and more focused at work. Last year, PwC found that workplace financial wellbeing even breeds loyalty at work.

I’ve spent a lot of 2020 (not to mention the last eight years or so prior to that) talking, researching and writing about workplace financial wellbeing. Based on what I’ve learned, these are my top five tips for employers in 2021.

Financial education

In the UK, nine in ten people say they struggle with financial literacy. They feel under educated and ill prepared to make the financial decisions they need to make on a daily basis. The OECD says this lack of financial literacy not only negatively impacts recessions, but the more financial education people have, the better their country weathers a recession.

“Even in the absence of the crisis, developments in financial markets, demographics, economic and policy changes all point to the importance of financial education,” said Andre Laboul, Head of Financial Affairs Division at the OECD.

Many other experts agree. Among the lessons of the last recession was the need for every single person to have a much better understanding of financial products and economics. As we enter a new recession, we have the advantage of knowing that when financial literacy is higher, people borrow less, and in countries where borrowing is less, recessions don’t last as long or go as deep. While financial literacy cannot predict or fix a crisis, financial education plays a significant role in economic recovery. I firmly believe it’s something that every employer should be offering in 2021 – whatever that education looks like.

From my experience this year, those employers who heeded the warnings and supported the financial wellbeing and financial education of their people before the pandemic were able to better support their people through it. While we had no way of knowing the pandemic was coming, what we do know for a fact now is that many of your employees will struggle with money in 2021 and this will negatively impact your business.

Insure your people’s future

The largest debt report in the UK tells us that most problem debt is caused by a common collection of predictable life events, most of which employees can insure themselves against. Long-term ill health like cancer, poor mental health, job loss and death of a family member are real wellbeing risks all employees face, but they can also all be insured against these things. Research by The Big Lottery Fund, however, reveals that people don’t understand insurance and the choice is too much; there are almost 1000 insurance providers in the UK.

Within an employee benefits platform however, employers have the ability to offer travel, life, income, pet, gadget insurances etc. Employers are able to reduce this choice down, making it easier for employees to make a selection, understand insurances and get covered against the unexpected things that can really harm our financial wellbeing. This year we have seen record numbers of employees taking out new insurance policies to cover their life, income, travel and families, as the pandemic gave us a real life example of the importance of good insurance cover.

Stop encouraging debt

Although the economy was strong before Covid-19 and unemployment was at a 40-year low in both the US and UK, average lending across most major economies was at record highs, particularly in the UK. Debt is a huge handicap for a prolonged economic downturn. Employees can be tempted to borrow at a time when they usually wouldn’t because of low rates for smaller amounts that we are seeing at the moment. I caution employers to think carefully, however, about offering access to money as a benefit for their people.

The latest 2020 research shows that by giving people access to extra credit they become significantly more likely to use it. So, allowing employees to access their pay earlier may very well encourage them to do this and spend more than they usually would. Also, when people have new credit lines open to them, they become more likely to use their savings as discretionary spending and instead view the credit line as their potential buffer or rainy-day fund – this exposes the employee to risk, especially at a time when so much will be uncertain.

Encourage saving, no matter how small

The virus taught us all the importance of having savings to fall back on to make up for furlough shortfalls and redundancies. Establishing an emergency fund is the most important step employees can take to prepare for a potential sharp economic downturn, with over half of financial planners identifying it as the top priority – and 84% including it in their top three priorities. This year, 78% of UK employees say the pandemic has made them realise they need more savings.

The habits we need to form to start saving and the knowledge and education that makes us do this better and feel in more control can easily be provided by the employer. Even the actual savings facilities can be done through payroll now. A savings buffer of any size can take the sting out of unexpected bills, so educating and showing your people examples of why saving is important can help them to form the small savings habits they will need next year.

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Put employees in control

Whether they want to do something useful with their savings, pay off debt or save money where they can, employees need your help. With little support elsewhere, employers have a unique opportunity to help their people with their largest wellbeing concern coming out of the pandemic.

Financial security may be a key to happiness according to a Princeton study. The results indicate that people with more positive financial attitudes are happier and have higher financial literacy. Aviva also found that overall happiness and self-esteem were influenced by our sense of financial control and not by how much we earn. Giving employees the tools and education to help them make smarter choices about their money creates positivity, confidence and control.

Employees who feel in control of their money situation or have a plan, are more likely to save money, have better financial behaviour, feel less anxious about their financial situation, and feel more secure. The opportunity here is that employers can help to make their people feel better about the number one wellbeing concern they have leaving 2020. If your people aren’t happy and healthy, your business isn’t thriving.  

Interested in this topic? Read Is your financial wellbeing strategy up to date following the Covid-19 crisis?