Where next on emergency saving?

In this blog, Nest Insight’s Executive Director, Will Sandbrook, reflects on our workplace emergency savings research programme, taking stock of the journey so far and our plans for the next stages. 

Where are we now?

Earlier this month we published two new reports from our emergency or ‘sidecar’ savings research programme. The first shares early learnings about the experience of employees who have been offered the chance to use a sidecar savings tool, known in workplaces as ‘Jars’. The second took a step back and surveyed the landscape of evidence around workplace emergency saving in the round. These build on earlier publications from this project, including two last autumn, and going right back to when we launched our plans for the research in late 2018.

Today, we’re delighted to announce new funding agreements with Blackrock, who are also becoming a strategic partner of Nest Insight, and the Money and Pensions Service, which will enable the expansion of our workplace emergency savings programme.

How did we get here?

Many of you will have heard us talk about this research before, but for completeness I’ll touch on the history of this project just for a moment. Way back in 2016, around the time we launched Nest Insight, we became aware of the work that Brigitte Madrian, David Laibson, James Choi and John Beshears were doing in the US, looking at the optimal design of a retirement system that was also being used to support people experiencing financial emergencies in the nearer term. I remember the slide David showed at a conference I attended where he challenged the notion that early withdrawals from pensions were all ‘bad’ leakage, suggesting instead that they showed an unmet demand for help with emergency saving. Of course, leakage, good or bad, isn’t a problem in the UK system, at least until people reach age 55, because pensions savings are inaccessible up to that point. But we already knew many of Nest’s members lacked short-term savings, and were intrigued by the idea of helping to address this through the plumbing of the workplace pension system. In particular, we wanted to explore a version of this that made short- and long-term saving complementary, helping people over the psychological barriers to saving more for retirement by making doing so a pre-commitment contingent on first helping them to build shorter-term savings and resilience. This is how the ‘sidecar’ concept was born, with its rollover of money into pensions, on top of people’s normal auto enrolment contributions, once an emergency savings threshold is reached.

Fast forward five years, and here we are: the sidecar savings concept is real, in the form of a workplace savings tool called Jars, provided by our partners Salary Finance, and it’s live in five UK employers from a range of sectors and available to nearly 80,000 people. It took a huge amount of work to get there – implementing a robust research trial of a live financial product is, it turns out, a massive challenge. But with the help of our collaborators we’re now in the exciting position to be able to share early learnings – we know the plumbing works, and the early signs are that those who use Jars really benefit from doing so. In the meantime, the idea of workplace emergency saving as somehow part of the pensions system has gone from a fringe idea to a mainstream discussion. What was originally conceived of as something forward-thinking employers and providers might offer to workers is now discussed as a potential evolution of public policy.

Putting pension saving in context

Conceptually, our current sidecar savings trials are part of a broader theme for us. They were motivated by a desire to challenge the conventional wisdom (within the pensions industry, at least) that most people weren’t saving enough for retirement and that the best thing they could do would be to contribute more to their workplace pensions. We’re not convinced by that. People, especially those in the Nest population, face numerous financial challenges such as managing debt (including student debt), meeting housing costs and saving to own a home or for a rental deposit, for example. And, in many cases, these savers have variable incomes or forms of income precarity. These challenges are intertwined – it isn’t particularly ‘efficient’ economically to hold high-cost debt while also saving, for example. This point can also be illustrated by the fact that if two people reach retirement with the same amount of pension savings but one is debt free and owns their home, and the other is renting and has debts to pay off, these individuals are likely to be in very different financial security positions. As we set out in our landscape review, there is growing evidence to support the assertion that improved financial resilience in the short-term acts as a platform for improved outcomes in retirement.

We wanted to join the dots on these issues of financial management and their impact on preparedness for retirement. Our sidecar trials were the first step in that exploration of pension saving in context. Since then we’ve been working on related research. For example, we’re looking at the relationship between borrowing and auto enrolment into pension saving and we’re also working to build more holistic data sets that enable a richer picture of financial behaviours.

Expanding our research programme

We’re excited to be moving onto the next stage of our work in this area by expanding our direct research into workplace emergency saving. The new funding agreements announced today with Blackrock and the Money and Pensions Service will allow us to continue to build on our work in this area, and we’re extremely grateful to both organisations for their ongoing support of this important research.

So, what will this programme expansion look like?

The current sidecar trials test a specific form of workplace saving through the Jars tool, and does so entirely within the traditional workplace benefits framework of a voluntary ‘opt-in’ benefit offered to employees. The signs are positive in terms of the appeal of the savings tool amongst both employees and employers, and there’s early anecdotal evidence of a positive impact on financial wellbeing, resilience and confidence among those who participate. But we also have to recognise that participation rates in Jars, as with other opt-in payroll savings schemes, has been low. Individuals benefit, but those benefits don’t aggregate well because of this low take-up.

Our research found that in one workplace, 98% of people who say they think Jars will help them have not yet signed up. As was the case with workplace pension saving before auto enrolment was introduced, the force of inertia is strong and often gets in the way of an intention to save translating into action.

These insights, coupled with our long-term desire to build on the overall ‘pension saving in context’ theme, have helped shape our plans to expand this work in a number of ways:

  1. Launching a new trial later this year to test the impact of opt-out approaches to payroll savings: With the Financial Conduct Authority (FCA) regulatory sandbox, we’ve already been working on the design and regulatory aspects of a workplace emergency saving tool for which employees are automatically signed up if they don’t choose to ‘opt-out’, preserving the choice to not save for those who don’t want to or can’t. We’re confident that, in a trial setting with some workarounds in place, we can test a version of this which is compliant and will give us a proper read on the impact that switching the default joining approach from opt-in to opt-out might have on take-up.
  1. Understanding and addressing legal and regulatory barriers: We’re already clear that there are significant legal and regulatory barriers which would likely make the adoption of this model at scale by employers difficult. So, a second strand of our expanded work will be focused on understanding and explaining these barriers, and exploring the ways in which they could be addressed to make this a more attractive and viable proposition for employers who want to support their employees in this way. As part of that, we plan to publish a regulatory considerations paper in the autumn and convene an expert working group to consider these issues in more depth.
  2. Researching how best to communicate with employees about ‘opt-out’ payroll saving:
    How you communicate an opt-out model to employees is likely to have a significant impact on how well it is understood, and on the extent to which people understand their options and are empowered to make choices that suit them. So, we’ll be conducting in-depth research into how such an approach can best be communicated.
  3. Forming new research collaborations: We’ll be looking to form research collaborations with a number of workplace savings providers with a view to identifying further research trial opportunities – be they opt-in or opt-out, based on different types of savings platform, or potentially going beyond the ‘emergency’ savings frame to also explore goal-based saving and other savings timeframes beyond those of retirement and immediate-term emergencies.

Challenges in trialling an opt-out model

Of course, none of this is without challenge. Operationally, as I’ve already said, running our current sidecar savings trial has been a huge undertaking. We’ve had to recruit savings partners, work with them to develop new tools, recruit employers who are not only willing to offer Jars but to do so in a research setting where they had to accept aspects of the design that were developed to generate data, and be willing to share that data. We’ve had to agree multi-lateral collaboration agreements and data-sharing approaches. We’ve had to raise significant research funding to support a complex multi-year trial. And, we’ve had to do all that while employers, and the economy at large, have had to deal with a global pandemic and national lockdowns. Many of these challenges will be repeated as we seek to expand our work, though the benefits in terms of employee financial wellbeing could be considerable, along with the reputational benefits for those involved of putting themselves at the forefront of tackling an issue of growing importance.

With an opt-out trial, there are also specific challenges that we need to be aware of. Communicating the opt-out model well to employees is critical to ensure that they feel in control and empowered to save if they want to, or to choose not to if it’s not right for them. Opt-out models for emergency saving also have some behavioural complexities not found in the pensions version of auto enrolment. With pensions, which are by definition a long-term product, leaving savers alone at the initial point of enrolment and letting the savings habit bed in before focusing more on how to engage them with their savings, seems to work well. But with emergency savings, it’s important that people can and do use those savings whenever an emergency hits. Therefore, to some extent, you may want the fact that people are being enrolled into emergency savings to be more front-of-mind for them, to ensure people use their emergency savings as actively as we seem to be seeing in the current trial. But this in turn raises questions: such as could this up-front engagement lead to higher opt out rates than we’ve seen in pensions under automatic enrolment; and what level of opt out might be appropriate in this context? We’ll need to set realistic expectations about the impact of switching the default, which may not be as profound as the impact of inertia in a pensions context. These trade-offs illustrate a core tension within opt-out models, where the evidence from the pensions literature highlights that these models get people saving, but that the default behaviours are sticky and don’t necessarily give rise to increase financial capability or engagement. So, getting the design of the process and the communications right is critical.

But these are all reasons for robust research in this area – research which we are now able to kick off thanks to the support of our partners in this programme, Blackrock and the Money and Pensions Service. We think there’s a huge amount to learn in this area so that we can understand how best to help people to be properly financially secure – resilient in the short-term and with a platform to save sufficiently for the longer-term and into retirement. We look forward to sharing what we find.

Will Sandbrook, Executive Director of Nest Insight

If you’re interested in taking part in our ‘opt-out’ payroll savings trial, or would like to find out more, please get in touch with us: insight@nestcorporation.org.uk