On Monday 12 November, we launched our sidecar savings trial. Over the coming months, the trial will be rolled out in a number of UK workplaces, and workers will begin to make contributions towards the start of 2019.
So, how will it work exactly? In this blog Matthew Blakstad, our Assistant Director, talks us through the finer details and workings of the trial.
Question: For workers using the sidecar model it will feel like they’re using a single savings tool. But, underneath the surface there are two distinct savings jars: an accessible emergency savings account and a traditional defined contribution pension pot. How are the contributions distributed between the two?
That’s absolutely right. Rather than having a separate pension pot and emergency account, this hybrid approach combines the two. Doing so enables the flow of money to be managed in a smarter way that fits more naturally with people’s financial lives and preferences. The idea is that this approach will help to create a better balance of shorter and longer-term savings for each individual saver.
For workers, it’s also an easy and straightforward savings tool to use. A large part of this simplicity is thanks to the payroll mechanism that enables a regular flow of contributions to be split between the two pots. Once an individual has signed up, set their emergency savings target, and decided how much they want to pay in each pay period, on top of their normal auto enrolment contributions, the rest is done for them. So whilst they’re busy with work and home life, their emergency savings pot will be steadily building up so it’s there ready for them when they need it most. And, if they reach the savings target, they’ll then start saving more for retirement.
The savings tool being trialled is called ‘Jars’. It works like this:
- The saver signs up at a dedicated Jars portal (which takes 5-10 minutes)
- The saver selects the amount to save for each pay packet and their savings target (editable defaults will be offered as a starting point)
- Savers will open a new instant access savings account. This will be their emergency savings jar, that sits alongside their existing pension savings jar.
- Their chosen contribution is deducted from their salary each pay period. At first contributions go into the emergency savings jar.
- Once the savings target is reached, the salary deduction will be sent to the saver’s pension in addition to their normal auto enrolment pension contributions.
- The saver can take money out of their emergency savings jar as often as they want. Whenever the balance drops below the savings target, contributions start going into the emergency jar again.
Question: How much extra will workers need to contribute in order to use the savings tool?
That will depend on the employer. When we asked consumers during focus group research, people tended to say that they’d want to contribute about £25 to £50 extra per month.
Workers using Jars will be able to set a savings contribution level and a savings target to suit their lifestyle. Editable defaults and relevant information will be provided to help them.
Question: Tell us more about the emergency savings account. At what level do you think people should set their emergency savings target?
The emergency savings target is completely up to the individual, so it can be tailored to their needs. Based on the findings of our focus group and desk research into the types and costs of financial emergencies, we think around £1,000 is likely to be an effective level for many people. The most important thing is that the savings target is low enough to be a realistic goal for the saver, whilst also being high enough to help protect them against financial shocks.
Of course, the results of the trial will tell us more. Over the next two years we’ll be looking closely to see how much people actually manage to save in the emergency account and how well varying levels of savings can help protect individuals from financial shocks. This will help us make recommendations about how to set the savings target in future sidecar-type products that may be available in the market.
Question: Will there be any barriers to accessing the money in the emergency savings account?
There won’t be a structural barrier to deter workers from using their emergency savings. Workers will be able to withdraw their money at any time, and for anything they deem ‘an emergency’. If we add barriers and restrictions that could slow down access and mean that savers resort to faster sources of borrowing, such as payday loans and credit cards. That’s exactly what we don’t want.
However, to help people keep their savings set aside for when they need them most, we will be labelling the savings account as ‘for emergencies’. Previous studies have shown how framing sums as ‘emergency savings’ can significantly impact the extent to which they are drawn upon for non-emergency purposes, even among very low income groups.1
Question: Will the balance in the emergency savings account attract interest?
Yes it will. Everyone saving into an emergency savings account will get a competitive rate of interest on their savings, compared to other instant access online savings accounts on the market.
The key thing here is getting the right balance of accessibility and interest rate. Whilst less accessible types of savings products may offer higher interest rates, the most important thing for this account is that people can access their savings immediately and without restrictions in case of emergency.
Question: Will savers be automatically enrolled into the sidecar savings trial or will they have to sign up?
Any worker that wants to use the sidecar savings model will need to sign up. We’ll be working closely with participating employers to help them roll out an effective internal communications campaign to encourage workers to take part.
Question: What do you think will appeal most to workers signing up to use the sidecar savings model?
The focus group research we conducted in 2018 with the Money Advice Service (now the Money and Pensions Service) provided us with some really interesting insights. As I touched on earlier, the idea of ‘having it done for you’ was really appealing to the savers we spoke to. Once a worker has signed up, the sidecar savings model takes care of everything automatically. There’s very little effort required to gain the benefit of having some emergency savings on hand, and, once there is an emergency savings buffer in place, of saving more for retirement too.
The peace of mind this would bring was also very attractive. Being more financially resilient, having a pot of savings for emergencies and being able to put more aside for retirement, was something that many liked the sound of.
A further point that came across strongly in the research was the attractiveness of positioning the emergency account as an alternative to short-term, high-cost credit. The idea that the savings tool could keep them from falling into the hands of “sharks” offering expensive loans, really resonated with the focus group participants.
Question: Can you tell us more about the ‘Jars’ branding? Why won’t it be called ‘sidecar savings’ when introduced to workers?
If you asked a person on the street what ‘sidecar savings’ are, I think they’d look at you blankly.
For consumers, the phrase doesn’t mean anything.
At Nest we believe that the use of clear, jargon free language is vital when communicating with consumers. That’s why we’ve decided to use a simple name and logo instead.
This branding also fits with the idea of mental accounting. That is, our tendency to think of savings, or physically put our money, into different jars for different things. Whether that’s a jar for our retirement, a jar saving up for a deposit on a property or a family holiday, and another for emergencies.
Question: And finally, how will you measure the impact of the sidecar savings approach?
Over the next two years, we’ll be following workers on their savings journey to understand:
- Who sign ups to use the savings tool? What levels of participation do we see? Does it attract new savers?
- How do people use the savings tool? How much do they save? How often and why do they withdraw money from their emergency savings? And does it help them to save more for retirement?
- Does the savings tool have a positive impact on workers’ financial resilience and wellbeing?
We’ve been working under the guidance of the Principal Investigator on the trial, Professor David Laibson of Harvard University, as well as with our research partners at the Money and Pension Service to design a research approach to evaluate the trial. The research team will work closely with the savings technology provider Salary Finance and participating employers to collect data that can be analysed to understand the usage and impact of the savings tool. We’ll also track the groups through a series of surveys run by Nest Insight over the two years.
1 Soman, D. and Cheema, A. (2011) Earmarking and Partitioning: Increasing Saving by Low-Income Households. Journal of Marketing Research. United States: American Marketing Association.
Last updated: 28 November 2019