Employee debt worries: Coming home to roost?
Salary advances remain commonplace in the UK, but is there a better way? Howden's Steve Herbert explores the drawbacks for both employers and workers, and proposes a possible improved solution.
Few people are ever sad to see the back of January. Not only is the month dark and cold, it also has the significant perception handicap of following the bright and cheery end-of-year festivities. It’s also often the month when the Christmas credit-card costs come home to roost too.
It follows that for many employers this is a month when they can reasonably expect to see an upturn in the number of workers asking for salary advances. And recent research by Howden Employee Benefits and Wellbeing found that 64% of employers still provide their workers with such support.
The desire of employers to help their employees in such financial stress is, of course, laudable, yet doing so overlooks several key concerns for both parties.
From the employer’s perspective, there is (of course) the obvious impact on cash flow and risk of default. But more significantly is the danger of favouritism. Do employers offer the same advance facilities for all employees or only some, and how to avoid setting a precedent in the selection criteria?
Then there is the knowledge gap. The employer is unlikely to be fully aware of all the underlying issues behind the financial problems. Could the underlying issue be related to a change in family circumstances, a health condition, or an addiction problem? Or might the employee just be sinking under a pile of unaffordable debt already? Offering an advance without such pivotal knowledge could well make things worse not better in the end.
The reality is that employers would be well advised to find a better and more robust solution to such requests, and one that helps solve this often difficult and delicate issue.
Enter the new kid on the Employee Benefits block – Workplace Finance.
By partnering with the employer, finance providers are able to offer loans based on more than credit score and affordability assessments alone. Criteria such as service history - and importantly the ability for repayments to be made via payroll deductions - make a significant difference to many lending decisions. The result is that finance can sometimes be offered where it might otherwise be declined, and often at affordable rates that may not be available elsewhere.
The Workplace Finance approach avoids any precedent-risk for the employer, and affordability will also be assessed by the provider too. Should the risk of further lending be too high, then signposting towards appropriate debt management / financial education support will be undertaken to help employees take control of their finances.
It’s also worth noting that most Workplace Finance providers also offer (and encourage use of) a range of savings products for employees too. This is important, as those employees who seek salary advances often need to do so as a direct consequence of having no savings to fall back on. It follows that just a small amount of rainy-day money can make all the difference, and help employee escape the debt spiral which is so prevalent across the UK today.
So Workplace Finance is clearly a step in the right direction. And when offered alongside Workplace Financial Education offers a composite solution for employers to better assess and manage the risks of providing loans and salary advances to workers.
Finally – and certainly not least – it’s worth remembering that a financially stressed employee is unlikely to be as focused and productive as the employer would wish. It is therefore very much in the employer’s interest to provide what support they can in this important area.
For more information on Howden’s Financial Wellbeing services please contact [email protected].
Steve is Head of Benefits Strategy, Howden Employee Benefits & Wellbeing, and is an award-winning thought leader on Pensions, Employee Benefits, and Human Resources issues. He is occasionally accused of making Employee Benefits interesting.