The Financial Inclusion Centre (FIC) has published compelling evidence on how credit union payroll saving schemes help build financial resilience and support wellbeing especially for employees in the low to mid income range. FIC analysis also found that the payroll savings model also helps credit unions provide access to affordable loans to lower-medium income workers.
Advisers and HR specialists have an important role to play in encouraging employers to provide payroll savings so contributing to the challenge of building resilience against future financial shocks and supporting financial inclusion.
The FIC created a charitable community interest company Action for Financial Inclusion (AfFI) eighteen months ago to create the ‘Work and Save Scotland’ initiative. It supports Scottish employers to establish schemes for their employees through two of Scotland’s largest credit unions, Capital and Scotwest (with more CUs joining).
AfFI’s success and our research shows how worthwhile it could be for workplace advisers, employee benefit consultants and HR advisers to bring Work and Save to the rest of the UK.
In research, conducted with Fair4All Finance and the Swoboda Research Centre, published in 2023, FIC surveyed 7,500 borrowers from seven credit unions whose loan repayments were deducted from either payroll or from certain types of benefit.
The results are striking. Not only were loans more likely to be granted but repayment performance proved much better too: just 4% of payroll-based loans fell into significant arrears compared with 10% for other lenders.
The research found that credit union loans offer significantly better value than commercial lenders with typical APRs of 43 per cent compared to 343 per cent for some home-collected credit and 1,260 per cent for high-cost, short-term credit products. People who borrowed £500 over 12 months from non-credit union lenders ended up paying close to £400 extra over the term of the loan.
Seven out of ten borrowers agreed that this type of lending – when packaged up with a savings element – helped them to save more regularly than before.
Another research project and report published in 2021 by the Financial Inclusion Centre, thanks to funding from the Money and Pensions Service, provides further evidence of improved financial resilience and wellbeing specifically from savings schemes.
This project involved two major employers in the Yorkshire region, Leeds City Council and NHS York, with Leeds Credit Union providing the savings plan.
Looking at findings from the £17,500 – £24,999 income band, 69 per cent of payroll savings scheme members reported saving every month compared to 44 per cent of workmates. In terms of persistency, 74 per cent of credit union members using payroll savings saved roughly the same every month compared to 43 per cent of workers not in the scheme.
Those low-mid income workers in the payroll savings scheme rated their satisfaction with their overall financial circumstances as higher than their non-enrolled peers.
Research carried out by CIPD in 2022 found that in the UK over a quarter of employees say money worries affect their ability to do their job with a third saying cost-of-living financial worries have negatively impacted their productivity.
The study tested different methods of engagement, which may interest advisers and HR specialists looking at savings scheme design and participation.
Offering a prize draw incentive was the most effective. It resulted in 75 per cent of new joiners selecting to save via payroll deduction and offered the best value for money, at a cost of about £17 for every new saver who signed up for payroll deduction.
Our research leads to suggestions for policy changes. First, payroll savings could make a significant contribution to MaPS’ strategic goal of getting two million more people who are squeezed financially to start saving by 2030.
Secondly, for employees on up to median wages, the government could allow payroll savings to be deducted from gross rather net wages. Thirdly it could offer employers tax relief on matched savings and/or allow employers who establish payroll savings schemes to offset the cost against corporation tax.
Payroll saving would help employers demonstrate they are meeting their social obligations in terms of ESG.
With or without such incentives, it is worth exploring as part of a solution for addressing employer concerns about their employees’ financial resilience.
Credit Unions can offer advice on set-up. Indeed, in our experience and after some work on initial set-up, the process is reasonably smooth and brings the promise of being greatly beneficial for many employees.
The prize is a workforce in a better place financially and a business with higher productivity. The employers you advise will benefit from your pointing the way to these savings.