AXA research shows that more than 10 million UK employees admit their financial worries are affecting work performance. In Britain 1.4 million people have taken time off work in the past 12 months as they struggle to cope financially, with 1.2 million so consumed with anxiety that they spend more than four hours a day worrying. On that basis it seems likely a more financially ‘comfortable' workforce will be a more productive one.
One of the key financial considerations for individuals is making adequate provision for retirement. With the shift away from defined-benefit pension plans towards defined-contribution plans, the responsibility for saving for retirement has shifted from the employer to the employee. That trend is likely to continue. It comes at a time when many employees are anxious about their overall financial circumstances, the multitude of financial demands they have to balance, and day-to-day solvency.
What are the barriers that employees face, and that enlightened employers can drive benefit from overcoming:
Barrier one: Living as if there is no tomorrow
Properly known as ‘hyperbolic discounting', this refers to the tendency to believe we will have the self control to stick to a long-term savings plan at some time in the future, while preferring immediate gratification today.
Solution one: Automatic enrolment into a pension scheme
Far too many people who qualify for a company pension scheme have not actually taken one up. When thinking about the future, many people imagine themselves spending less and saving more. However, when faced with the actual choice, many end up spending too much and saving too little. Automatic enrolment can have a huge affect on take-up through playing on people's tendency towards procrastination and inertia.
Barrier two: People don't like to ‘lose' - even if they are actually gaining
Otherwise known as ‘loss aversion', this is a perception that losses are more painful than the pleasure received by gains. In the case of retirement, people find it hard to put more money aside into their pensions if they will see their take-home pay drop.
Solution two: Automatic increases into the pension plan every time a pay rise is given
The ‘Save More Tomorrow' programme ensures that participants can save without ever seeing a loss of take-home pay. All you need to do is tick a box, and then every time you get a pay rise, a percentage of that increase goes into your pension pot. According to economists Richard Thaler and Schlomo Benartzi, schemes using auto-increases in the US have increased the average employee savings rates from 3.5% to 13.4% over four years.
Barrier three: Procrastination
I've already identified inertia and procrastination as dead weights to activity. Anything involving effort tends to be put off, as is the case with making the active decision to join pension schemes or increase the contribution rate into the scheme.
Solution three:
While the paternalism of solution one is an approach, more fundamentally we need to address simple and engaging approaches to information, education, engagement and fulfilment, contained within a variety of savings vehicles to suit life stages.
A simple thing that employers can do to support their staff to stay on top of their finances is make the provision of time and information a workplace offer. AXA supports this through its My Budget Day initiative that encourages employees to set aside just 15 minutes a week to review their finances. Information and engagement tools are made available in document and web form, plus a route for advice when needed is also part of the offer. Just 15 minutes really can make all the difference, and an employee more at ease with their financial management is likely to be both a more productive employee and an employee providing greater value for the benefit of their employers.
Paul McMahon is managing director of corporate benefits at AXA.
According to AXA, the comparison table below illustrates the positive impact that ‘Save More Tomorrow' plans can have on retirement savings
Flat contributions
Age at start of plan | Fund at retirement based on flat contributions (7% growth) | Fund at retirement with Save More Tomorrow contributions (7% growth) | Percentage Increase |
20 | £402,000 | £627,000 | +56% |
30 | £190,000 | £296,000 | +56% |
40 | £83,100 | £128,000 | +54% |
The figures in the table are based upon someone who earns £20,000 at outset and pays 5% per annum throughout their lifetime. The figures in the third column are calculated on the same basis but contribution rates start at 5% in year one then increase to 8% over 3 years.