Could AE savings sidecars be an easy win for the new government?

Stephanie Hawthorne looks at how the Labour administration could join up the dots with AE

clock • 10 min read
Could AE savings sidecars be an easy win for the new government?

An easy ‘win’ for the new government could be to increase minimum auto-enrolment (AE) contributions and combine it with an extra-flexible easy access savings side car, says Stephanie Hawthorne.

The biggest pension priority for the new government must be to rectify the paucity of pension savings in the UK. This inadequacy merely scratches at the surface of the pensions story. Many adults cannot even cope with the financial vicissitudes of everyday life. Half of UK workers would struggle to pay an unexpected expense of £300 in an emergency according to Nest Research.

No wonder, increasing their pension contribution to a more realistic level seems just like ‘pie in the sky.' But it need not be so. Successful pilot schemes using ‘opt-out' workplace savings schemes from Nest Insight, if adopted more widely, could shine a possible light though this money miasma.

Today, savers have to choose between spending on immediate needs, saving for emergencies and long term saving for retirement. Yet there are no half measures as the UK pension system is highly illiquid from the workers' point of view. The temptation is to forgo the pension contributions when the purse strings are tight let alone budget for any increase.

The AE minimum enjoyed by most UK workers is just 8% of qualifying earnings. This is abysmally low and will fall far short of providing a comfortable living standard in retirement. Employers currently have to pay just the minimum 3% while the employee pays 5%.

That legal minimum was set in 2012, unchanged in 14 years, despite the pensions consensus that contributions must rise or there will be millions of pensioners on the breadline in days to come. Indeed, many experts and trade associations would like to see AE contributions rise to 12% of earnings with the employer and employee sharing the extra burden equally. There is never a good time to increase employers costs or indeed the demands on the typical worker but we cannot put off unpalatable choices any longer.

Perhaps the simplest way to improve pension outcomes is to reshape pensions and end their illiquidity – at least to their members – while at the same time raising contributions. This would sugar the bitter pill of less money to spend today.

I am not alone in this – the Resolution Foundation have suggested that 2% of any additional pension contributions could go in a savings side car with easy access to this section of their savings rather than at present money being locked away until age 55 (increasing to 57 by 2028) except in cases of terminal illness.

An AE savings sidecar is the perfect vehicle for this. Nest Insight has shown that this could be done fairly easily. A win-win. Small nudges or micro changes can help boost individual's savings without them even noticing this is happening and leading to modest but satisfying nest eggs building up over time.

Payroll savings

Indeed, Nest Insight has long championed AE workplace savings sidecars. In these vehicles, savings are made via payroll each pay period to help employees create a persistent savings habit. It is an auto-payroll savings model, like the auto-savings model that many customers have set up with banks and which seem to work well. If workers want to start saving, they don't need to do anything. Everything is done for them. Only people who don't want to save have to take action.

Unsurprisingly, when workers had to take positive steps to opt-out rather than opt-in results were impressive. Data from Nest suggests 53% of employees participated in emergency saving through an autosave (opt-out) approach, compared to just 1% among those who had to opt in to save.

Since the very first pounds were saved by employees at Timpson in July 2019, followed by workplaces BT, ITV, StepChange and the University of Glasgow, the savings tool, known as ‘Jars', has been offered to over 80,000 employees across the UK through Salary Finance and the Yorkshire Building Society.

By trialling the savings tool in a variety of workplaces and over multiple years, Nest Insight has seen workers engaged, saved and accessed savings in different settings and over time – across a period that included a global pandemic and a significant rise in the cost of living.

Initial idea – savings jars

The initial Nest trials were based on the Jars sidecar saving solution. Its mechanics are simple with just six steps:

  1. Sign up If your employer offers Jars you can sign up to save via payroll.
  2. Choose settings You choose how much you want to save from each pay packet and set a savings target. You can change these settings at any time.
  3. Open savings account You open a new instant-access savings account. This accessible savings ‘Jar' sits alongside your existing pension pot.
  4. Save every pay day Your chosen saving amount is moved automatically from your salary each pay day into your Jar.
  5. Auto rollover to pension saving Once you reach your savings target, your future contributions are sent to your workplace pension pot, on top of your normal pension contributions.
  6. Use your savings when you need them You can take money out of your accessible savings Jar as often as you want. Whenever the balance drops below your savings target, your payroll saving starts going back into your Jar to fill it back up

Withdrawals are of smaller amounts, mostly under £100, for essential expenses that occur relatively frequently, such as paying bills, topping up pre-payment gas and electricity meters, paying for school trips or uniforms, paying travel fares, for doing a big food shop or to be able to participate in a social event such as a birthday party or work drinks. The pot is replenished each payday and then partially or wholly depleted during most pay periods before it is topped up again. The savings account balance therefore cycles up and down but overall stays quite flat.

Providers and employers could celebrate the savings habit, for example by acknowledging milestones like three months or six months of regular saving.

In one Jars user's words: "It worked, I just felt like I was prepared for Christmas last year. I didn't feel like I was on the back foot in the new year. January was then a normal month, not having to catch up. It helped me feel a bit more in control."

Auto save (opt out) for more success

Nest Insight has taken its initial programme further. It is currently trialling an opt-out sign-up approach, similar to pensions auto enrolment, with SUEZ and their credit union TransaveUK, as well as Wagestream and two of their employer clients. Nest's trials of sidecar savings and opt-out emergency savings via payroll, conducted with the support of BlackRock, the Money and Pensions Service and the JPMorgan Chase Foundation, can be found here

Early results from the SUEZ trial show:

  • 53% employee participation in emergency saving among those who experienced the autosave (opt-out) approach, compared to 1% among those who had to opt in to save.
  • Autosavers have an average balance of around £130 in savings after 4 months, compared with an average balance of around £29 amongst opt-in savers
  • No impact on pension saving participation

Nest Insight has been working with major employers to trial ‘sidecar' and opt-out workplace emergency savings schemes since 2018.

Nest Insight managing director Will Sandbrook says: "The results of these trials show that an opt-out approach could be a game-changer, hugely popular with employers and employees and with a dramatic impact on participation rates over opt-in approaches. More than 90% of employees said they liked the opt-out scheme, whether or not they themselves chose to save: it's a powerful and popular nudge. And the low- and moderate-income workers who started saving via the opt out approach did so in addition to their existing pension contributions, on average, rather than reducing them."

He adds: "Joining up short and longer-term saving in one place via workplace schemes helps people manage the tensions between different financial priorities they have and can work with mental accounting. Building short-term savings supports retirement saving – people who have a savings buffer are less likely to get into arrears or problem debt and are more able to find the headspace to plan for the future. They are also more likely to be able to make additional pensions contributions and less likely to need to access their retirement saving early (post 55)."

Indeed, the cleverest elements of the Nest Insight sidecar concept is to make use of the existing AE payroll functionality, where sidecar would in essence be a new class of pension contribution.

Tim Gosling, head of policy at People's Partnership, provider of The People's Pension, stresses: "This would be relatively straightforward to deliver from a technology perspective rather than setting up a completely new IT framework from scratch. This is something that the payroll and pension industry could do itself at a relatively low cost and would not require an expensive government central delivery project."

Mercer partner and UK wealth strategy leader Tessa Page backs an autosave approach too. She says: "If it isn't automated, it doesn't happen!"

"Making side cars compulsory for rainy day savings as an employer offering seems a good idea," adds Irwin Mitchell partner Penny Cogher but she warns that "care needs to be taken to ensure compliance with the laws against the unlawful deduction of wages".

People's Partnership's Tim Gosling adds: "The side car could be combined with salary sacrifice… Here the gain from reduced NI contributions is used to fund the sidecar savings account. If sidecar were mandated by government, it would probably be sensible to make the cash account tax efficient, similar to ISAs, to avoid entanglement with the deep complexity of savings and investments tax rules."

Lane Clark & Peacock (LCP) partner Lydia Fearn adds: "It would be nice for the government to support better saving habits through tax incentives, but they may argue that the ISA regulations already provide an incentive to save."

More widely, autosave is not enough by itself to end financial struggles. Mercer's Page believes: "Employees need ‘product agnostic' guidance provided by a trusted source that isn't petrified of the Financial Conduct Authority and concerns around overstepping the guidance / advice mark, when in reality they are only giving guidance. Possible solutions include maximising the benefits of MoneyHelper's mid-life MOT, though we would love to see this extended to other ages."

She adds: "Online tools and digital services can also play a key role, as not all individuals want to engage in face to face or telephone guidance."

Conclusion

individuals have competing pressures on their budgets, and may have other financial priorities such as paying off debt. Page warns: "If introduced, opting out should be made simple and stress-free, so that individuals who need to focus on other financial priorities can do so."

Some would go even further and would even allow raiding the pension pot itself not just the savings side car. The Resolution Foundation points to savers in the New Zealand system – KiwiSaver. They can access their pension savings if they can provide evidence of an inability to afford ‘minimum living expenses', mortgage repayments, medical bills or some other situations.

In New Zealand, around NZ$1bn (£470m), approximately 10% of total contributions, was withdrawn by first-time buyers in 2022-23 to put towards their deposit. In South Africa, people are allowed to secure a loan to fund their deposit on a house against their pension savings.

Less radically, autosave is simpler and keeps the bulk of money safe in a pension free from temptation to cash it in. Sandbrook is keen to make it " easier for more people to save, including those working for smaller organisations, or who are self-employed."

LCP's Fearn speaks for many in the industry when she says: " I certainly support the notion of increasing AE minimum contributions, but allowing some flexibility of part of that may be the incentive individuals need to not opt out."

As a pensions journalist of over 30 years' experience, I believe making pensions a little bit more liquid to their members through a savings sidecar could be the catalyst that finally adds some jet propulsion to auto-enrolment with somewhat glacial progress since 2012.

As Penny Cogher concludes: "The success of the early trials means sidecars are likely to gain momentum. Perhaps this is a relatively easy quick win for a new government?"

Stephanie Hawthorne is an award winning journalist and former editor of Pensions World (1989 to 2017)

 

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