How is the cost-of-living crisis affecting what employees want from their benefits packages?

cost-of-living crisis
  • The cost-of-living crisis has employees demanding pay rises in line with inflation, but many employers are unable to afford this long-term.
  • Benefits that support financial wellbeing and education, including day-to-day budgeting and discounts, can help pay stretch further without raising pay.
  • Employers should focus on practices that are sustainable and work for their business, while communicating and compromising with staff.

The ongoing cost-of-living crisis is a subject on every employer and employee’s minds at the moment, and which looks set to dominate agendas in 2023.

Paul Shires, commercial director at Health Shield Friendly Society, says: “Inflation is naturally having a profound impact in every way. Looking at the forecast for inflation, people are quite sure it’s going to come down, but even then it will still be very high. We’re going to be living with this for a while longer yet, and it’s going to put continued strain on household budgets.”

Following as it does a turbulent few years dealing with the fallout of Covid-19, as well as trends such as ‘the Great Resignation’ and ‘quiet quitting’, this should only steel employers’ resolve to engage and support their workforces.

However, this is not simple when organisations are also feeling the pinch, and might be unable to swing an inflation-busting pay rise.

Francesca Peters, HR lead at IWG, says: “We know that employees up and down the country and across industries are feeling the pressures that the cost-of-living crisis has brought on. People are facing higher bills to pay coupled with less disposable income and this kind of financial stress can have a knock-on effect, not only in their personal lives, but also at work.

“Employers need to be prepared to support their employees in any way possible throughout this year, including through financial or mental health support or increased flexibility.”

The question of pay

The Chartered Institute of Personnel and Development’s (CIPD) Labour market outlook, published February 2023, found that 55% of employers are planning to increase pay this year. However, there is something of a vicious cycle here, with 57% of these businesses planning to raise prices in order to cover the cost of higher wages; only serving to increase the pressure on living costs.

For many employers, pay rises at the level needed to keep pace with inflation simply will not be possible, warns Alasdair McGill, managing director of accounts and consultancy firm Ashton McGill.

He explains: “First of all, if you can afford to pay something more, then do that, whatever that looks like. But inflation is running at around 10% to 11%, and [employers] don’t want to just give their staff a 10% or 11% pay rise, because generally they can’t afford to. The cost-of-living crisis is also impacting the sales side for a lot of businesses, so there’s a double whammy, because sales are down but costs are going up, and their staff are saying they need more money or help. It’s really difficult to work a path around that.”

McGill adds that business might also be reticent to hike pay to match inflation, as when rates do eventually drop, they could end up paying far above market rate. Pay rises also mean National Insurance (NI) and other payroll costs going up, at a time when margins are already being squeezed. For many businesses, Covid-19 forbearance measures such as the Coronavirus Business Interruption Loan Scheme (CBILS) are now having to be repaid, adding yet more pressure.

This environment has led to many businesses opting for one-off payments to help staff cope. These do not change an employee’s contract, but can address immediate financial needs. Nevertheless, there is only so far these payments can go, and employers will need to take a longer-term, more sustainable approach.

For Ashton McGill, the secret to sustainable pay rates is to avoid linking them to inflation entirely. The business has a transparent algorithm, with the real living wage as a base, then pulling in factors such as seniority, performance, care allowances and bonuses. This is then tweaked to reflect the economic environment, but is less focused on immediate changes.

Financial education and wellbeing

For those employers wary of hiking pay to unsustainable levels, the alternative might be to bolster their approach to financial education and wellbeing.

Many providers of existing benefits, such as pensions, will have education modules to increase awareness of the financial provisions on offer. In addition, others can be brought in to provide a more tailored approach, helping individual employees tackle their concerns and learn budgeting habits that will make their pay stretch further.

Tim Middleton, director of policy and external affairs at the Pensions Management Institute (PMI), says: “Financial education is beneficial at any time, but now, with the prospect of a lot of people making quite significant changes that could have very significant long-term implications, that would be really helpful.”

Middleton notes that this is not just about helping people make their pay stretch, but ensuring that, at a time when many might be tempted to drop out of pension saving, for example, they do not make rash decisions that could affect their financial wellbeing down the line.

The PMI’s research, published in January 2023, finds that due to the cost-of-living crisis, 13% have already reduced their contributions, while 20% are considering doing so in the next 12 months, and 7% have ceased them altogether.

While some change might feel necessary for employees to be more comfortable now, employers should work pensions, and the significant effect pausing contributions can have down the line, into the overall financial wellbeing conversation, and try to steer staff towards at least getting professional advice, either through the business or independently.

Feeding finances

One way to help employees continue with important later life savings, while also addressing current needs, might be to go beyond education and actually provide tools and benefits that free up the money to keep saving.

“People have been looking for ways to save, and top of the list will be things like Netflix subscriptions, gym memberships; maybe they’re rethinking holiday plans,” he says.

“As they work their way down the list, depending on what their financial requirements are, there’s this issue of pensions contributions, and they’ll be weighing up the pros and cons of making a short-term saving now to have some more extra cash.”

Middleton notes that by helping people with those spends that might seem more frivolous, such as gym memberships, employers can head them off at the pass before they start making more weighty financial decisions, while also benefitting their wellbeing and engagement.

For Shires, this is also where health cash plans can come in. He explains: “Our research [published in October 2022] shows that 81% of employees say they’re going to reduce spending on routine healthcare, such as dentists and opticians. A routine dental checkup is likely to be the first thing to go when compared to buying food or paying for energy, naturally, and that might be OK in the short-term, but of course, they may just be storing up medical problems for a later date, which is a false economy as it’s going to cost a lot more in the future, in terms of time off work and personal expenditure.

“The people we know are feeling the pinch are younger age groups and lower paid people, those people embarking on building careers, who don’t always have the most robust benefits anyway. A cash plan is the perfect benefit, because it’s very affordable for the [employer], a fraction of the salary bill.”

LaingBuisson’s industry insights show that for £100 a year per employee, on average, employers can provide a company-paid health cash plan; this is less than half the cost of an average individually paid plan at around £248. Health cash plans not only address financial wellbeing in a cost-effective way for the employer, but also help to combat delays within the NHS, get or keep employees well, and reduce sickness absence; all of which is important for long-term sustainability and resilience.

Shires adds that 20% of all Health Shield’s claims are for a family member of the employee, showing that by simply rolling this benefit out to the wider family, employers can show their support for staff throughout their lives and minimise the potential stress and financial pressure of dealing with ill health.

Other health providers can also have an impact on employee financial wellbeing. For example, McGill cites Vitality as an option, through which employees can be rewarded for healthy habits with perks such as free coffee and cinema tickets, as well as accessing discounts on those daily items they might have foregone otherwise, such as gym memberships, smart watches and running shoes.

“The cost is fractional compared to the value of the benefits,” he explains. “We put more money in people’s pockets without increasing the cost base. For many people in our team, the cash benefit on a monthly basis is probably £50 to £100 because of all those free things or discounts. Those little things all add up, and from an employer brand point of view it’s positive too.”

A further way in which Ashton McGill has been putting money in staff pockets is through a piece of legislation that allows employers to gift staff with gift cards worth up to £50 – non-cash transferrable and not as part of their regular compensation package – through the government’s trivial benefits scheme. Ashton McGill specifically gives discount cards for local businesses, using the Scotland Loves Local Gift Card, which helps stimulate the local area as well as supporting employees.

Whatever the avenue, helping staff make savings on everyday expenditure, which might also include allowing them to work from home and save on the commute, is an important part of the wider fabric of financial stability.

Peters says: “The cost-of-living crisis is a concern across many and no age group is immune. Gen Z and Millennials are being heavily impacted by inflation. According to research published by Deloitte [in August 2022], nearly half spend their entire monthly income on living costs and two in five have taken on additional work to make ends meet. On the other side of the spectrum, older generations are in some instances delaying their retirement.

“Hybrid working is one way employers can help employees cut daily costs in an effort to help all generations, as not only is working locally better for employee happiness, but reducing long daily commutes also saves significant money too.

“Data suggests that hybrid working can save employees up to £328 a month on train travel and up to £128 a month if they commute by car and adding that up annually can make a real difference.”

Short-term savings to sustainable outcomes

Most employees dealing with the current pressures on their finances will want to think short-term; this means added pay or bonuses, day-to-day budgeting or discounts, and anything that helps with immediate savings.

However, it is still important to think long-term, and encourage staff to do so as well. Part of this is about communication: by framing savings made now and long-term facilities such as pensions, for example, together in a wider discussion about sustainable financial wellbeing, employers can continue to address broader issues while helping with immediate needs.

Implementing sustainable practices also applies to businesses themselves. Employers should examine their working practices, most notably office and hybrid working, and ask whether these fit with employee needs in the ‘new normal’.

McGill says: “Deeply thinking about working patterns is important. Too many people say we just need to get back to the office, but why? It makes sense for some businesses, but at the same time, I still challenge them, because [during Covid-19] they managed to work from home. So, does it have to be every day?”

Indeed, research published by Bloomberg Intelligence in February 2023, finds that 73% of London office workers would leave their job if flexible working practices were removed, while 64% would demand a salary increase in line with inflation in order to tempt them back to the office full-time.

It is clear, then, that employee wants are malleable; an organisation might not have to buckle to the pressure of unsustainable pay increases if it takes the time to consider what compromises might be made, what alternative employee needs could be catered for that lessen the need for pay rises.

Peters says: “Start by having a regular and open dialogue with teams. Employers will get the best talent and ultimately better performance by tailoring their packages around what their employees want and need in their daily lives.”

McGill adds that this should not be seen as a transaction or an antagonistic environment, where employee wants are pitched against an employer’s capabilities.

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He concludes: “We want to employ people who want to make a difference rather than just turn up and do transactional work. So for us, it’s about the whole package, and holistically supporting our team, rewarding them both by paying well, and also thinking about the wider aspects of their life.”