NEST Insight is looking for large employers to take part in its sidecar savings research trial. The trial will test whether joining up pensions and short-term savings can create a better savings balance, and enhance the financial wellbeing of workers.
What’s the problem we’re trying to solve?
So far auto enrolment has been a huge success. Around 10 million people are newly saving, or saving more, for their retirement and opt out rates have remained low. However whilst many low to medium earners are now building up meaningful retirement savings for their later life, some of them are struggling financially today. According to Money Advice Service research, of the UK working age population only 44 per cent have £500 or more on hand and 26 per cent have nothing.
When a high or unexpected cost occurs, it can have a severe impact on people who don’t have enough ‘emergency savings’ put aside. We call this a ‘financial shock’. In order to cover the cost of a car repair, for example, people in this situation may have to:
- cancel pension contributions to free up cash
- borrow money from friends and family
- reduce spending on essentials, such as food
- take out a costly payday loan or use a credit card
- not fix the car, which may mean they’re unable to get to work and will incur a loss of earnings.
If not managed carefully, debts among low income groups can lead to debt spirals which can cause acute financial stress. Any severe or persistent pressure on liquidity can have a detrimental effect on health, which can in turn affect productivity and earning capacity.
And the effects are being noticed in the workplace. Over half of employers say that poor financial wellbeing has had a detrimental impact on their workers’ performance, according to Neyber research.
The sidecar model
The sidecar model is a hybrid savings product that combines a liquid ‘emergency’ savings account with a traditional defined contribution pension. To the saver it will feel like they’re using a single product but in fact below the surface there are separate savings jars. This approach allows the pension pot to remain locked up, and invested for the long term, while giving workers access to an amount of liquid savings.
Contributions, via payroll deductions, would be managed through a mechanism designed to create an optimal level of liquid savings, while also maximising long-term savings. This would be administered as follows:
- Contributions paid into the combined account structure would at first be distributed between the emergency savings account and the pension pot.
- When the balance in the emergency account reaches a predetermined threshold level, known as the ‘savings cap’, all contributions would start ‘rolling’ into the pension pot.
- If at any point the saver withdraws funds from the emergency account, and so reduces the balance to a level below the savings cap, future contributions would once again start being divided between the emergency account and the pension pot.
Under this model, total contributions through payroll would be set higher than the auto enrolment minimum. This has the advantage of increasing the total amount saved, while potentially increasing retirement savings in the long term. It also has the attraction of keeping the additional contributions accessible by creating an emergency buffer, helping to build short-term resilience.
The research programme
The trial is due to go live within workplaces over the coming months, with workers beginning to make contributions towards the start of 2019. Timpson will be the first employer to roll the trial out within their organisation.
Workers participating in the trial will be monitored for two years to assess sign-up rates, how much they save, and the impact on their financial wellbeing.
If you’re interested in taking part, or want to find out more, please email Matthew Blakstad or call 020 3056 3795.
Press release: NEST Insight launches its sidecar savings trial
Blog: How will NEST Insight’s sidecar savings trial work?
NEST Insight sidecar savings trial booklet (PDF)
NEST Insight sidecar savings trial (PowerPoint)
NEST Insight discussion paper, Liquidity and sidecar savings (PDF)
Liquidity and retirement savings: what’s the right balance (PDF).