We are a nation of tea drinkers, dog lovers and hard workers. A nation that prides itself on getting up in the morning and heading in to work.
The Office for National Statistics (ONS) confirms this, given it estimates the employment rate sits at a record 76.5%. A success story for a government that, in light of recent events, has little to shout about.
This figure should mean 76.5% of the working age population has access to disposable income, can appropriately provide for themselves and their families, and is able to save for the future.
Spoiler alert – it doesn’t.
Far from the promise that ‘work pays’, research by the Joseph Rowntree Foundation (JRF) and the Institute for Fiscal Studies found that 60% of those in poverty are from working households. This undermines the concept (and political promise) of a meritocratic society where working hard will guarantee a good quality of life.
The JRF calculates the poverty rate is the same as it was two decades ago, despite the employment rate being five percentage points higher. So while there are more people in work than ever there are also more people using foodbanks, in problem debt and more children living in poverty despite having working parents. How did we end up in this mess?
The face of poverty
Poverty is a relative term. It can be challenging to define what it looks like given it intersects with so many aspects of a person’s life. Yet with the poverty line constantly referred to in newspaper headlines and academic reports it is vital we create a benchmark.
The definition used by a number of international organisations including the UN and the World Bank is that being in poverty means you cannot afford the basics in life such as food, clothing and shelter.
In its report, Serving All: Exploring the role of businesses in developing financial security, wellbeing and inclusion strategies, the Financial Inclusion Alliance (FIA) has created a new term – the poverty zone – that attempts to demonstrate the wider struggles being in poverty can cause. It defines the poverty zone as employees who do not just have a low income and insecure work, but who also are regularly unable to meet their basic needs in a sustainable way.
“The poverty zone affects your whole life; it’s like a gravitational pull from a dark star,” says Norman Pickavance, co-founder of the FIA. “You get into a place where you can’t get credit, you’re living on fine margins, and then these things start to pull you down. Soon enough your mental health is affected and you can’t do the things you used to do.”
The problem is a lot more serious and wide-ranging than some employers may be aware of. Businesses may, quite reasonably, think that because they pay the National Living Wage their employees have enough to live on. But Pickavance warns it is not that simple.
He says: “Living in the poverty zone means a whole world of traps and issues that you would never believe are going on. Employers may find that they are investing in people’s salaries but are not getting the productivity back they would hope for because the money isn’t going far enough. I’m not pointing the finger at businesses, but instead the rest of the ecosystem.”
Once in the poverty zone it can be extremely difficult to escape. This is partly due to a poverty premium – a punitive system where it costs more to pay for food and services. This can come from having to use more expensive utility pre-payment meters, not being able to buy in bulk or access a larger supermarket where cheaper options are available, or paying more to access credit.
Emma Steele is an investment manager for the Fair By Design fund at Ascension Ventures. She works alongside the Fair By Design campaign team, hosted by the Barrow Cadbury Trust, to end the poverty premium in the UK and argues that part of the issue comes down to a lack of understanding.
“It’s a complicated term given when you break it down there’s different sectors and focuses. Financial inclusion and access to credit and cash flow management tools is a key driver, as is fuel poverty and a lack of digital inclusion for some.”
Experiences within the poverty zone can vary. For some it means not being able to make it to payday and relying on expensive forms of credit, or not having enough savings to cover a sudden cost such as a boiler breaking. According to StepChange research 70% of workers in problem debt have experienced some form of life shock in the past two years.
During times of crisis those most vulnerable often turn to payday loan companies that promise to give them money fast. These loans are usually set at extremely high interest rates, meaning they are very challenging to pay back. What started as a top-up to help an employee make it through to payday could then see them spiralling into debt if the money cannot be paid back.
Taking out a payday loan means it’s also extremely difficult to borrow money from regular high-street lenders, punishing those with the least in the bank with further financial woes. Their credit history is largely affected, damaging their ability to access credit.
The gig economy
Those under financial pressure are four times more likely to suffer from both depression and anxiety. It can also lead to sleepless nights, distractions at work and a general lack of productivity, which drains employee stamina and morale.
And so the spiral keeps spinning downwards. In fact the working poor are six times more likely to produce substandard work, according to financial wellbeing service Salary Finance.
Zero-hours contracts are often discussed in HR magazine and other media outlets as we watch the gig economy expanding. A record 974,000 people (3% of the workforce) were reported to be in a zero-hours contract between October and December 2019, according to the ONS.
The nature of this work means a lack of income security and an inability to prepare and save accordingly, one of the key elements needed to provide a buffer against poverty.
As with many societal issues it is often minorities who bear the brunt, with in-work poverty affecting ethnic minorities more frequently than white households.
One in eight black employees are currently in insecure work, while the national average is one in 17. The JRF also found evidence that different BAME groups are clustered in certain low-wage low-progression occupations.
The gender gap
The issue also disproportionately affects women, with the FIA estimating 61% of the working poor are female.
“The face of poverty and the working poor in Britain is a female face,” says Pickavance. “Almost twice as many women are working on zero-hours contracts than men.”
One of the reasons for this is the types of jobs women often take up, such as care work, cashiers and cleaning. Often the lowest on the pay scale, they offer little if any career progression opportunities and have the least income security because of the flexibility they demand.
This makes being a working mother particularly difficult, given women often have to choose between working a shift or childcare responsibilities. And with a part-time nursery place averaging £6,600 per year women are often forced to work in part-time roles to balance the books.
Being unable to work full time also means women can’t save appropriately and may fall below the automatic threshold for a pension scheme, creating an insecure financial future.
Pickavance adds: “Women in the lowest 20% pay band are five times more likely to suffer depression, which of course affects performance. Constant money worries reduce your cognitive ability by 13 percentage points – the impact is significant.”
Women also make up the traditional customer base for high-interest loans, in particular working mothers balancing part-time work and childcare costs.
Research from single parent charity Gingerbread found that single parents, who in 90% of cases are mothers, are more likely to be low paid and less likely to progress out of low pay compared with other groups including parents in couples.
The charity reports that a lack of flexibility, working part time, and costs of childcare are all major barriers to progression out of low-paid jobs.
Laura Dewar, policy officer at Gingerbread, says: “Too many single parents are stuck in low-paid work that doesn’t make the most of their skills. When these employees can progress they escape low pay and financial insecurity, but at the moment the cost and logistics of childcare and lack of flexibility means many single parents have no option but to work part time.
“This stops them from being able to take up new opportunities for them to progress in the workplace such as training or networking in the evening.”
However, many single parents quoted within Gingerbread’s research said that employers could play a pivotal role in facilitating progression by offering more mentors to help with work plans and building confidence.
What can HR do?
Workers are suffering, and our attitudes on what we think poverty looks like need an overhaul. Workers should not feel embarrassed or ashamed of speaking to their employer about their financial situation.
This creates a challenging set of circumstances for HR where it can be difficult to know who to help or what to do. It may not hold the purse strings, but the function is far from powerless.
For Caroline Nugent, HR and OD director at the Financial Ombudsman Service, spotting the signs is a fundamental first step. She says: “In certain jobs there’s this expectation that you have to look after your money, but poverty can be caused by a number of things. For example, if you’re divorced and you have a new partner you may be trying to keep two mortgages going.
“Or when your member of staff goes to social events and doesn’t buy a drink, or not wanting to put into collections or Secret Santa, there could be an issue there that could trigger a conversation around personal finances.
“I had a member of staff who started to take some sickness and it was so out of character – it was always the last couple of days of the month. We realised it was because they couldn’t afford to travel in to work. Those are things that HR should be getting managers to be aware of; you have to pick up on things that other people won’t pick up on.”
Nugent suggests one solution is for businesses to reconsider their current benefits programmes. She says: “Payroll often pays employees early before Christmas, but that means it’s then six weeks until the next payday. Are we actually helping people by doing that?
“We also do a lot of home working, you should be able to do your job at home from chief executive down. This can help people not pay expensive train fares.”
Solutions can often be found once there is a basic understanding of the specific challenges facing the employee base. For example, recognising that many of its staff were having to shell out more than £1,000 to pay for rental deposits the Financial Ombudsman Service set up a rental deposit loan scheme.
This is where employees can borrow the money and pay it off in their monthly salary, meaning people can get a roof over their heads without being forced to borrow large amounts off payday lenders.
Some companies, such as Direct Line Group, are taking things one step further and increasing the wages of all staff while offering the chance to grow a savings pot.
Simon Linares, HR director at the organisation, says: “We are a successful company so wanted to properly award our frontline staff who do an important job. We didn’t want to have anyone below a certain level, so each year we increased our minimum salary.”
Inevitably this had a huge impact on the staff. He adds: “It makes a huge difference to whether your people feel proud to work for you. We also offer a free share award, which is a flat amount for every employee.
This allows people who don’t normally get to save to accumulate lump sums they could either keep for later or use for a rainy day.
“The return on investment was huge as people were more engaged and productive and people then stay with you. Rather than spending money on finding new people why not spend it on keeping the ones you’ve got?”
Some think that if all employers simply paid staff more then we could reduce the rate of in-work poverty. Yet raising the minimum wage isn’t a substitute for a decent social security system, low housing costs, affordable childcare or competitive energy prices. Nor should it be expected to be.
The introduction of the minimum wage in 1998, and its intention to improve the lives of millions on low incomes, demonstrated a significant change to the labour market. Yet despite it boosting hourly pay the legislation failed to address how often and when an employee can work and the type of work on offer.
To improve on this in 2015 the government brought in the National Living Wage, which was supposed to reflect the real living costs of workers. However, low-income families haven’t been able to keep much of this extra income because their benefit payments are reduced when they’re earning more.
Steele adds: “Everything can’t just fall on government, employers or corporates to do something. One of the issues is that working more shifts doesn’t leave you better off.
“We need to look at the household as a whole and the issues around isolation and exclusion when volatility of income is a big issue. Having an unpredictable income means you can’t plan and can’t access financial support.”
That’s why movements such as Fair By Design are so vital. The venture fund part of the programme invests to grow new and scalable businesses that will be of social benefit. The programme has so far invested in companies looking to equalise the credit, technology and energy markets.
The fastest-growing business within its portfolio is Wagestream, which enables employees to access their wages whenever they want instead of waiting for payday.
Steele says: “Wagestream realised that most employees struggle to make it to the end of the month and end up going to payday lenders just a few days before payday. Having more cash flow bandwidth is everything to them, so Wagestream developed a tool to empower workers to make sure they can survive an unexpected expense.”
The company has attracted lots of attention, boasting clients such as pub chain Stonegate. Steele adds: “It’s their intention to kill off the payday loan market through financial awareness, so this has attracted a huge amount of commercial capital.
“Two of the most established venture capital firms invested in them, proving you can have a business model with a large impact while retaining quite a lot of commercial benefits as well.”
Poverty is shadowed by shame and judgement. But thanks to the efforts of many key stakeholders employers are now creating an open and honest conversation and offering support where it is needed.
The hope for Dhiran Master, insights director and CMO at Salary Finance, is for the same thing to happen with poverty as happened with mental health.
He says: “There was a real drive in the HR community to destigmatise mental health so people aren’t as judgemental about it. We need to start to break down the taboo of talking about personal finances and realise that it can be discussed openly.
“Just because budgeting is scary or I find it difficult to manage my spending it doesn’t mean I’m a bad person. It just means I need some help, so we need to take a non-judgemental attitude to this in the same way we are doing for mental health. If we did this more people would talk about it and seek help and then more people would be healthier and happier.”
Linares argues it comes down to workplace culture. He says: “There can be a huge stigma and discomfort around talking about finances, particularly in a professional environment where people put on a suit and pretend they are comfortable.
“You either change culture by having open conversations or you don’t. You can’t have open conversations about one subject that aren’t safe to have about another.”
Introducing financial wellbeing programmes could help to break this taboo, as well as connecting employees with trustworthy financial advice.
Master adds: “We want to encourage employers to help these people. They may find these subjects scary and may not trust financial institutions, but they do trust their employer to provide resources that are safe.”
The challenge for HR is to convince senior management that this is needed. He adds: “If you’re a CEO or CFO who’s a natural planner, and you think ‘I’ve got my finances sorted and we pay our staff good wages’, you can be quite judgemental.
“Two years ago we were wondering whether or not there was a good business case for financial wellbeing. But the question now isn’t should I be doing it but how and when can I do this?”
This piece appears in the March 2020 print issue. Subscribe today to have all our latest articles delivered right to your desk