What do employers and savings providers think about an opt-out approach to emergency saving via payroll?

Our workplace emergency savings research programme is focussed on understanding the role workplace saving could play in improving financial wellbeing in the UK, and how it might best be supported and scaled. Alongside evaluating the impact of workplace saving solutions on employee financial wellbeing, we’re also exploring the views of employers and savings providers, and the challenges they may face in turning these innovative savings solutions from an idea into a reality that works effectively for the masses.

It’s estimated that around 11.5 million people in the UK have less than £100 of savings to fall back on.1

What’s the case for opt-out payroll saving?

There’s growing awareness of the importance of having accessible, emergency savings on hand to help protect against financial shocks, and the role that these short-term savings play in improving overall financial resilience.2

Recent Nest Insight research found that there’s a need and demand for saving through payroll when employees are asked. 8 in 10 employees said they think it is important to save money for an emergency, and 6 in 10 thought that a payroll savings product could help them, rising to 8 in 10 amongst those struggling with bills and financial commitments.

Research by StepChange found that if a household has £1,000 saved, this reduces its chances of falling into problem debt by almost half.3

Despite this, take-up remains stubbornly low. Nest Insight consulted over 30 different providers of workplace saving and established that savings take up is usually below 5% and very rarely above 10% in an opt-in context. Where it is higher, this is often the result of decades of effort in improving visibility within organisations, or savings being included alongside repayments for loan customers. We think this is because behavioural and cultural barriers get in the way of people translating their intent to save into action.

What does an opt-out approach to payroll saving involve?

The aim of this approach is to increase participation among people who want to save through payroll for the shorter-term but don’t get around to it, whilst at the same time preserving the choice not to save for those who don’t want to or can’t. An opt-out approach to payroll saving would mean that employees would automatically start saving a default amount into an accessible savings account each time they are paid without having to do anything themselves to set this up. They would be given the choice to opt out of payroll saving at any time and would be able to make changes to the amount they save. We believe that the automatic nature of this approach will reduce barriers to saving by decreasing sign-up friction and overcoming inertia – people’s tendency to do nothing when faced with a decision.

Our recent research with employers and savings providers

There’s increasing interest in the idea of employers adopting an opt-out approach to workplace payroll saving, and there are early indications that this approach could contribute to boosting financial wellbeing at scale, particularly for those households on low to moderate incomes. However, this is quite a new idea and there are some significant considerations for both employers and savings providers.

To gain insight into the perspectives of employers and savings providers, we conducted roundtable discussions and interviews in late 2021 and early 2022. The full details of our findings are shared in our report: Opt-out payroll savings: a new way to support financial wellbeing in the UK? Industry and employer perspectives (PDF).

Summary of employer and provider perspectives on opt-out payroll saving

IssueEmployer perspectivesSavings provider perspectives
Organisational fit
  • Growing awareness that employees want and need support with saving.
  • An opt-out approach feels more appropriate in some organisational cultures than others.
  • Most would like to seek employee and union feedback on the idea.
  • Some employers would be interested in offering opt-out payroll saving to a subset of their employees, such as those with lower income.
  • Strong fit with the purpose of credit unions, building societies and commercial workplace financial wellbeing providers.
  • The commercial viability of savings provision is often interdependent with other products. Savings product take-up would need to be carefully balanced with other areas of business.
Legal and regulatory barriers
  • Most thought regulatory change would be required for an opt-out approach to be feasible.
  • Some employers thought employment contract change could be a viable route.
  • Most thought regulatory change would be required for an opt-out approach to be feasible at scale.
Implementation and administration
  • Would need to be straightforward and easy to integrate with payroll systems – more challenging in some organisations than others.
  • Would welcome support with scheme design such as how to set a default saving amount.
  • Some providers more able than others to bulk create accounts and manage data flows.
  • Steps might need to be taken to manage dormant accounts.
Engagement
  • Important that employees are supported to actively engage with their savings.
  • Important that employees are supported to actively engage with their savings.

A need for regulatory comfort and guidance

One perceived barrier to employers and providers choosing to implement an opt-out approach to payroll saving is current regulation. Nest Insight has previously shared an overview of what we understand the regulatory considerations to be: Opt-out payroll saving: the regulatory considerations (PDF). These include considerations related to:

  • employment law
  • data protection law
  • financial services regulations.

These rules and their accompanying guidance were not developed with this scenario in mind and so there are some questions of interpretation – for example, should money that is paid direct from
salary into an instant access individual savings account in the employee’s name be considered a deduction? Could legitimate interests be legal grounds for an employer sharing data with a provider to create a savings account for an individual?

A couple of pioneering employers have found a legally compliant way to implement an opt-out approach within the current regulations, with promisingly positive early results. But in these cases a contract change, or a pre-employment consent step have been required. To most employers and providers, navigating these considerations still feels novel, complex and potentially risky. Only if these regulatory considerations are addressed and relevant guidance or easements are communicated is it likely that this kind of approach could be adopted at scale in the UK.“Now I have savings, I’ve never had savings before, that’s a nice feeling, my financial situation is improving… I thought it was a good idea. I never would have sorted it out myself. I didn’t have to do anything, that all came through the post and in emails – it was all done for me.”
SUEZ employee

Potential solutions

Despite the current challenges, most of the stakeholders we spoke with believe the opt-out payroll savings model is worth exploring further. The potential benefits at individual, organisational and societal levels are high, and, because the savings are accessible and the sums of money involved are small, the risk of harm appears low.

If government and regulators wished to encourage greater adoption of opt-out workplace savings models, we believe there are a number of approaches that they could consider, including:

  • Regulatory and legislative changes: Changes or clarifications to individual regulations and legislation would allow for individual barriers to be overcome. Given there are a number of regulators overseeing different aspects of legislation pertinent to opt-out, a simpler approach may be to introduce a single act that allows for an employer to offer opt-out payroll saving should they wish.
  • A product carve-out: Like LISAs or Help to Save, it may be possible to carve out a new financial product category that has the solutions to the opt-out regulatory considerations built into it. As such, providers could offer this product for employers wanting to offer opt-out payroll saving to their employees, with exemptions to some of the current regulatory requirements as long as certain rules are followed.
  • An amendment to the Pension Act 2008: Some pension providers already offer both illiquid and liquid cash accounts (used for those in retirement). It could be possible for them to combine these into one wrapper allowing for a small amount of liquid saving within the pension account.
    Consideration would need to be given to how to make the savings component available to those who opt out of pension saving or those who are ineligible for auto enrolment – the very people who perhaps stand to benefit most from short-term saving.
    This route could potentially make it easier for smaller employers to be able to offer opt-out payroll saving, if the pension provider they have in place to meet auto enrolment duties also made this facility available.

Next steps: building the evidence base

Nest Insight is working to build the evidence base around the impact of an opt-out approach to payroll saving on employee financial wellbeing, including exploring:

  • How does payroll savings participation vary under an opt-out approach versus opt-in conditions?
  • How do employees feel about the opt-out approach?
  • What is the impact on savings behaviours? Are people active users of their accounts?
  • What is the impact on financial wellbeing? What is the interaction between payroll saving and other behaviours such as borrowing and pension saving?
  • How does opt-out payroll saving affect auto enrolment pension saving, if at all? Does this differ by socioeconomic or demographic factors?

If your organisation is interested in taking part in our research trial or similar savings schemes, or would like to find out more, please get in touch: insight@nestcorporation.org.uk

Jo Phillips and Emma Stockdale, Nest Insight

References

1 Financial Capability in the UK (2018) https://www.fincap.org.uk/en/articles/financial-capability-survey

2 Nest Insight,Workplace emergency saving: a landscape review of existing evidence (2021) https://www.nestinsight.org.uk/wp-content/uploads/2021/07/Workplace-emergency-saving-a-landscape-review-of-existing-evidence.pdf

3 StepChange Debt Charity, Becoming a nation of savers (2015) https://www.stepchange.org/Portals/0/documents/Reports/BecominganationofsaversStepChangeDebtCharityreport.pdf