The 3 D’s of Covid

What impact has Covid-19 had on financial wellbeing? Our head of insight Nick Watkins explores on how the pandemic has affected the UK Strategy for Financial Wellbeing goals for financial education, saving, credit use, debt advice and pensions.

When we launched the UK Strategy for Financial Wellbeing in January 2020, we had no idea that the first Covid-19 cases would be detected in the UK later that same month, or that within weeks the entire country would be in lockdown. Nearly eighteen months later we are only just emerging from what we all hope is the worst of the health crisis. Now seems a good moment to review what the impact might be on the UK Strategy Goals and financial wellbeing generally.  To support this analysis, the Money and Pensions Service (MaPS) commissioned five separate rapid evidence reviews on financial education, saving, credit use, debt advice and pensions.

At first sight, some of the data seems paradoxical. There has been a widely reported fall in GDP and employment, the number of Universal Credit claimants has increased significantly as has the use of food banks. Yet aggregate savings have increased, and between March and October 2020 households repaid £15.6 billion of consumer credit.

What is clear about the pandemic is that: 

1. It has been highly divisive
2. Much of the financial impact has been deferred 
3. Digital access, skills and confidence have become more important.

Divisive 

The pandemic has not impacted everyone financially in the same way. Some have been unable to work and so lost some or all of their income; the FCA estimate that nearly one-third of adults experienced a drop. Others have continued to work on a full salary but without the cost of commuting or socialising. Many of those looking to enter, or re-enter the job market have been denied a break (nearly half a million 18-24 year olds were unemployed in the three months to Oct 2020).

Whilst discretionary expenditure on holidays and hospitality was taken away from everyone, for large chunks of the year, at the same time there have been increases in essential expenditure. Working or schooling at home requires digital devices and internet access, as well as meals and a warm home – for most the heating will have been on more than normal. This essential expenditure will be a higher proportion of the total for those on lower incomes.

The differential impact is quite stark. Those in the higher income groups are more likely to be able to work from home and maintain their income, whilst reducing their expenditure. It is these consumers who have paid down their borrowing and built up their savings.

At the other end of the spectrum those working in sectors such as retail or hospitality and those on variable income or insecure employment have suffered badly. So too have those who have had to give up work or reduce their hours to look after children or other relatives, or recover from illness or bereavement. These groups are disproportionately represented amongst the young, those from ethnic minorities and those with children; especially women and even more so single parents.

Deferred

At the start of the pandemic and the economic reaction to it, many assumed that demand for debt advice would increase dramatically. In fact the number of debt advice consultations fell after the first lockdown as the sector adapted to the closure of the face-to-face channel. Notwithstanding the lack of capacity, much of this decline in demand was due to government-led action. The Coronavirus Job Retention Scheme gave many 80% of their income whilst payment deferrals for mortgages, loans and other mainstream credit temporarily reduced the costs of servicing borrowing. For those in more financial stress, ‘forbearance’ meant that bailiffs couldn’t reclaim unpaid debts or landlords evict tenants in arrears.

Whilst this support has undoubtedly helped consumers survive the immediate economic consequences of the pandemic, this has deferred rather than denied the problems. Credit card and loan repayments will be higher, unpaid rents will be pursued and pension contributions that have been lost or reduced will need to be made up.

Digital

Lockdown, social distancing and other preventative measures put an immediate stop to many activities. For much of the year it was impossible to attend lessons, lectures, offices, festivals or events, let alone go down the road for a meal or think about a holiday abroad. Businesses and other organisations were forced to look for digital alternatives. In many cases this accelerated existing trends. Online shopping and contactless payment use both soared even amongst older consumers who had been slower to adopt. Online sales for 2020 as a whole were 46% higher than for 2019 and in June 2020 online shopping peaked at 33% of all retail spend. Zoom or Teams meetings became commonplace for not just office workers but school children, students and social events.

But again this has been divisive. According to the Edge Foundation, 12% of state school learners in the UK received more than five hours education per day via a digital platform, compared to 39% of private school learners. For those on low incomes, the cost of suitable hardware and internet access for two or three children at home can be prohibitive. The same source estimates that 1 million school age children don’t have access to the internet. Digital exclusion is even more divisive now than before the pandemic. 

Impact on the National Goals

 

The UK Strategy National Goals were defined before almost anyone had heard of Covid, lockdown or social distancing. Whilst all the implications are yet to be seen, and our major survey won’t report until the autumn, there are certain conclusions we can draw.

Financial education

Education generally has been seriously affected and existing inequalities exposed and amplified. Financial education risks being squeezed out by a focus on deficits in core subjects, behaviour and mental health. Whilst the pandemic may have changed parents’ attitudes towards money and made them more receptive to the financial education of their children, they too may focus on rebuilding their own lives after the pandemic.

Saving

Our savings goal is based on those in our Struggling and Squeezed segments who are of working-age. These segments are much more likely than the Cushioned to have lost income and drawn down savings during the pandemic. That being said, some lower-income consumers have been able to save and there is a stated change in attitudes towards saving that is particularly noticeable in the youngest age cohort. However, the lag in credit repayment and arrears, as well as any increase in redundancies, may yet thwart these intentions.

Credit use

Whilst aggregate consumer borrowing fell during the pandemic this was mainly due to repayment by higher-income consumers whose expenditure fell, often involuntarily. Relatively few of these consumers are in the catchment for our credit use goal. Instead, it is those on low and/or variable incomes who use credit for essentials and these are the same people who have suffered most during the pandemic – the key workers, renters, parents especially lone parents, those with disabilities or poor mental health, those from ethnic minorities and the self-employed or gig workers.

Debt advice

It is clear that the demand for debt advice will increase over the next 12 months. Hopefully the significant investment in digital and other remote channels will help the sector meet this need. Particular challenges will be meeting the needs of the digitally excluded and those who have never before needed debt advice and may therefore be less able to navigate the system.

Pensions

Covid may have reduced people’s overall level of financial confidence. It has definitely affected many people’s mental health and this in turn can affect their ability to plan for the future. The pandemic will have certainly impacted the amount that people are saving into their pensions – whether on furlough or more seriously through job loss or inability to claim any form of income. Another major concern has to be around the potential proliferation of scams as more firms enter insolvency and the need for even greater awareness and understanding on the part of consumers.

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Learn more and download insights on how Covid-19 has affected each National Goal, and explore the UK Strategy for Financial Wellbeing.