Payroll-deducted saving schemes

True Financial wellbeing in the workplace

“Financial wellbeing is about feeling secure and in control of your money. It is knowing that you can pay the bills today, can deal with the unexpected, and are on track for a healthy financial future. In short: feeling confident and empowered.”

The Money and Pensions Service (MaPS) is transforming financial wellbeing in the UK: to ensure every person feels more in control of their finances throughout their lives: from pocket money to pensions.

Why? Because when they are, communities are healthier, businesses are more prosperous, the economy benefits and individuals feel better off.

Help build employee wellbeing

Physical, mental and financial wellbeing are all closely linked.

Supporting employees’ financial wellbeing as part of an employers overall employee wellbeing and benefits strategy has benefits for both employer and employee, but many employers find it difficult to navigate the host of conflicting sales promoted schemes.

Saving through your payroll is one of many ways to champion financial wellbeing in your workplace.

What is payroll saving?

Payroll saving is making regular savings directly from an employee’s pay. An employer deducts the amount the employee wishes to save directly from wages via the payroll.

Many payroll software and services already offer capabilities for payments from wages to a second bank account.

Similarly to pension savings, the automated ‘set and forget’ nature of this process makes it easy for people to save by making it habitual and effortless.

These are not the unregulated Employee Salary Advance Schemes (ESAS), or Early Wage Access schemes where employees are not receiving actual wages but receiving short term unregulated credit, loan, salary advances or short term borrowing.

Payroll savings schemes aim to help people build a savings buffer or support goals-based saving by diverting a proportion of pay into a savings vehicle each month.

Three types of payroll saving scheme

• Standalone: automated payments are made directly from an employee’s pay into a savings account.
• Repay and save: automated payments are made directly from an employee’s pay into a savings account in addition to paying off a loan.
• Linked to a workplace pension (sidecar): automated payments are made directly from an employee’s wages into a savings account, in addition to automated contributions into a workplace pension. When a cap set by the employee is reached on a sidecar savings account, any extra flows into the workplace pension, accessible at retirement.

Benefits of a payroll-deducted saving scheme 

Attract and retain employees 

There is evidence emerging on the impact and appeal of payroll savings. In 2015 the Chartered Institute of Payroll Professionals showed that 55% of employees aged 16-65 would like their employer to offer a payroll saving scheme.

Two 2020 Cushon surveys show that 72% of employees surveyed want access to a workplace savings scheme and 92% of employers would implement a workplace savings scheme.

Improve productivity

Research shows that 8 in 10 UK employees take their money worries to work, affecting performance. Savings schemes minimise financial stress and improve productivity by providing this automatic service. (Close Brothers, The Financial Wellbeing Index, 2019)

Support available to employers 

There are a number of financial product providers that work with employers to offer payroll-deducted savings, loans and salary advance schemes range from credit unions to fintech providers.

Financial education and guidance on money management are important to help decide if payroll-deducted savings meets needs – it should not be presented as a substitute to contributions to a workplace pension, nor should people set up a payroll savings scheme without considering first if they are on top of any debt commitments.

The MaPS, set up by government, is an impartial provider of money and pensions guidance on money and the largest funder of debt advice in the UK.

Evidence your business case

Before deciding whether to offer a payroll scheme and which provider to go with, employers should always consider the financial wellbeing needs of their workforce, for example through a survey, to help build a business case.

Evidence your approach further with our insights and MaPS-funded research on payroll saving.

Evidence for sidecar payroll saving

BT, StepChange, the University of Glasgow and Timpson are taking part in a research trial of sidecar savings, where staff can opt into automatic deductions from their pay into a liquid savings pot, alongside contributions into a workplace pension. Early learnings show that employer support for the idea and product design is high, and there is a strong sense the salary deduction mechanism could be a very effective way to initiate a savings habit.

Employers are reporting that payroll savings can reduce the need for them to offer additional types of financial support, including loans and salary advances, that can require more intensive administration.

The ongoing trial makes the savings tool available to a wide range of employees, including people on a low income, part-time and seasonal workers.

Evidence for payroll saving with a credit union

NHS York and Leeds City Council worked with Leeds Credit Union to run a payroll savings scheme, and tested incentivising savings and using staff champions as role models. 70% of employees enrolled in the scheme saved every month and were 18% more likely to do so than non-members.

Increasing engagement with behavioural science

A project with Capita and Level Financial Technology will explore how best to encourage the uptake of payroll savings by applying behavioural science to improve employee engagement. The project will also investigate different approaches to encourage payroll savers to increase saving levels.

So what’s the challenge with early wage access schemes

Often these schemes imply that employees are gaining access to their pay on demand, or that the money being paid over is actual wages. They are often sold on a basis of employee wellbeing with no cost to the employer. To good to be true?

They operate under what the Financial Conduct Authority describes as Employee Salary Advance Schemes. They set out their views on these schemes and their risks:

• Lack of credit regulation. The regulatory and statutory rights and protections, from which borrowers under consumer credit agreements benefit, do not apply.
• Lack of transparency about cost. The amount of the transaction fee might be a modest sum. However, there is a risk that employees might not appreciate the true cost and how this compares with credit products such as loans.
• Dependency and repeat use. It is more likely to run short towards the end of the next payday, leading to a cycle of repeat advances and escalating fees.
• Lack of visibility for credit reference agencies. Credit reference agencies which might result in unaffordable loans being made

Often promoted as a means to combat pay day loan sharks, the fees for the use can also be significant in comparison with alternate options.

It is indicated that a typical advance is around £50 Being taken 5 days before pay day. At a fee of £1.95 this works out at an equivalent of 248% on an annual basis. Of course gaining an advance of £100 halves that percentage etc. So sometimes not as cheap as may be perceived.

Does your payroll offer savings options

Many payroll software and services already offer abilities for part of an employees wages to be paid into an additional bank account such as a payroll deduction savings account. Does your payroll offer this as an option already?

PAYadvice.UK 26/10/2021