The power of payroll deduction to empower individuals

01 November 2021

Matt Bland, The Co-op Credit Union chief executive officer, discusses the advantages of savings schemes for both employers and employees

The statistics are stark. When the Money & Pensions Service (MaPS) – a government-backed body tasked with enhancing the nation’s financial well-being – published its UK Strategy for Financial Well-being in January 2020, the scale of the problem was intimidating enough. 11.5 million people with less than £100 in savings to rely on; 22 million with no plan for retirement; 5.3 million children with no meaningful financial education. Add to that the impact of the pandemic and the problems are even scarier.

If you are one of the lucky ones, you are probably sitting on more savings than you would have had without the pandemic happening at all, having had no chance to spend or go on holiday like you would have ordinarily. What’s more, your house has likely appreciated in value to a significant degree and any stocks and shares you hold – either directly or through your pension – have done very nicely indeed.

But what about those less fortunate? Those who have seen work become even harder to come by or faced an income cut through furlough; those who recently lost the £20 weekly uplift in Universal Credit (UC); those for whom the planned National Insurance (NI) increase from next April represents a significant new burden. The lucky amongst them are those whose already non-existent savings have transformed into new, but manageable, debt – those with debt have already seen it balloon to unsustainable levels.

This really is a story of two countries – a great financial divide separates those with financial resilience from those without; haves and have nots. The Dickensian echoes are hard to ignore.

But what can we do about it? It might be helpful to start by reflecting on how it is that those who have done well through this pandemic have managed it. Is it through their hard work and ingenuity, their grim determination? Well, for many the answer is probably yes. I would venture to suggest, however, that there will be some who have seen their already relatively cushioned finances buoyed through no particular effort on their part. Savings accumulated simply by a lack of opportunities to spend; assets growing in value through the vagaries of supply and demand.

In this, there lies a kernel of insight that provides us with an opportunity to think differently about how financial well-being for all might be enhanced and, most importantly, how the payroll professional can provide a crucial mechanism for doing so. The insight points to the benefits of interventions that make good decisions and good outcomes the default position – you have to go out of your way not to do the right thing.

Daniel Kahneman is a Nobel Prize-winning psychologist and economist whose best-selling books, most famously, Thinking, Fast and Slow, based on learning from many years of research in the field of behavioural psychology gave birth to a whole new field of enquiry – behavioural economics. You might know this as ‘nudge’.

What ‘nudge’ theory says, first of all, is that people make bad decisions and do so habitually. They suffer from inertia, or inaction, when action is required. They perceive the future overly optimistically. They put off difficult decisions with long-term or uncertain consequences while focussing on other issues nearer at hand (think climate change). What these tendencies result in – not all the time, but far too often – is irrational decisions which are not in our own interests. Nowhere is this more pronounced than in the field of personal finance.

So, what’s all this got to do with being a payroll professional you might ask. Well, in addition to identifying the problems that drive poor financial decision making, ‘nudge’ also demonstrates there are ways to construct financial products and services – as well as those in a whole range of other sectors of the economy – so that a ‘good’ decision is the default decision.

A great example of this is the hugely-successful automatic enrolment (AE) pension scheme, where millions of those who were failing to save anything at all for their retirement are now actively saving into a pension simply because to not do so, they had to actively opt-out – and as payroll professionals know better than most, the vast majority didn’t even think about opting out. It was a no-brainer.

It is for this reason that payroll-deducted saving and loans facilities which encourage good habits are so effective – payroll deducted services like those offered by credit unions. In 2017, the Fairbanking Foundation – a charity committed to improving financial well-being for consumers – published a report which investigated the credit union practice known as save as you borrow (SAYB). What it found has profound implications for the power of ‘nudge’ and payroll’s crucial role.

SAYB works by credit unions asking their members to save a small amount (perhaps £10) alongside their loan repayments in an account they cannot access until the loan is repaid. It creates a saving default which is straight out of the ‘nudge’ handbook, and it uses the opportunity of a positive reason for concerted action – a borrower wants access to a reasonably-priced cash loan to buy something they want or need – to create a new habit which is good for them but not directly related to the purpose of their action, i.e. to save. In many cases, the borrowers have never been able to save before.

Based on Ipsos MORI survey evidence from 1,200 members across seven credit unions located across the UK and operating in both communities and workplaces, the Fairbanking Foundation report found the SAYB mechanism was hugely successful. Whereas before borrowing from the credit union, only 26% of the 1,200 respondents were saving regularly, after having borrowed from the credit union under a SAYB model, 71% confirmed they intended to save regularly thereafter.

To put that into context, that means the cohort almost exactly went from savings rates reported to the MaPS in its 2015 survey for households with an income of £13,500 or less (25% regularly saving) to those of households with an income of £75,000 and above (76% regularly saving). That is, this bridges the divide so brutally exposed by the pandemic that we began looking at.

And there is more – because with payroll deduction-collected loans, credit unions set up a deduction amount linked to the SAYB repayment plan, but thereafter (once the loan is repaid) simply allow the full amount previously consisting of loan payment and savings to roll into savings there is a double-whammy ‘nudge’ effect as savings accumulate much more quickly once the loan is repaid.

The impact of poor financial well-being on mental health and, in turn, performance and productivity at work is well reported. It has been estimated that one in four lose sleep over money worries; that 59% of those with money worries say their performance at work suffers. And we all know how stress and poor mental health are amongst the most common drivers of health-related absenteeism in the modern workplace.

Credit union payroll deduction schemes offer an opportunity to reduce the price your people pay to borrow. But that’s only half the battle. More important by far is how we turn borrowers into savers and help our people build financial resilience. It is here that the credit union payroll scheme really comes into its own.

By harnessing the insights of ‘nudge’ and pioneering thinkers like Daniel Kahneman, the SAYB technique – coupled with payroll deduction – can truly transform the savings behaviours of your workforce, with untold benefits for you as an employer, in terms of both reduced cost from poor health and absenteeism, and the enhanced commitment and loyalty that comes from being valued as an employee for whom their employer takes a real interest in their well-being.