Why payroll savings is a great idea – and how the finance industry can deliver it

There is now a strong consensus behind the benefit of offering cash savings in the workplace, alongside a pension. There is widespread kudos for Nest Insight’s work on this, plus their financial backers and delivery partners, to bring it from a fringe idea in the UK to a generally accepted ‘good thing’ that should be pursued more widely.

But how? There is little consensus about how to take it forward from a policy perspective. There is talk of ‘removing barriers’ to payroll savings – but its uptake will inevitably be limited if it is only voluntary.

Any move to compulsion needs detailed consideration of the policy design options and their impacts. The upcoming Pensions Review is a good opportunity to do that, as part of its analysis of pension adequacy in the round.

There may be lessons from overseas. In 2022, the SECURE 2.0 Act in the US introduced Pension-Linked Emergency Savings Accounts (PLESA) and short-term loans. Loans have been more popular, but the PLESA is now coming to the market across the pond – credit again to Nest Insight for bringing this to the attention of UK policy circles.

There will be lessons for the UK, but it is quite a different market and may not be sufficient for effective policy here.

How to make payroll savings work

Organisations across and beyond pensions – including the Institute for Fiscal Studies (IFS), the Lifetime Savings Initiative (LSI), Hymans Robertson and the Resolution Foundation – have all given high-level suggestions about how payroll savings can be integrated into the UK pension system. None of these have had much pushback, but they have different starting points.

“Any move to compulsion needs detailed consideration of the policy design options and their impacts. The upcoming Pensions Review is a good opportunity to do that.”

So if workplace cash savings were mandated in some way, like automatic enrolment or stakeholder pensions before it, it’s necessary to identify the options and their pros and cons.

The first question to ask is whose duty it is, and how it interacts with employer duties under auto-enrolment.

A duty on pension providers to offer a cash savings account as part of a qualifying auto-enrolment scheme could be delivered by the Department for Work and Pensions (DWP) changing pensions legislation.

But it’s not quite as simple as that. Either the schemes would need to operate a cash fund as part of the pension, which would pose questions about pension tax treatment and charges; or these firms would need to be regulated as a deposit-taker themselves by the Financial Conduct Authority and the Prudential Regulatory Authority, which is a big step; or they would need to partner with a firm that can already do that.

The alternative would be to place requirements on employers. This might make it HM Treasury’s job, rather than DWP’s – it depends on the nature of the duty.

You don’t need me to tell you that extra duties and costs for employers aren’t popular right now, but there are intermediate steps with a lower burden. These include a permissive regime, where cash saving is offered as an option as part of the auto-enrolment framework; or something more like stakeholder, where the requirement is only to offer an account with no (or very limited) obligation to pay into it.

What would it look like?

Related to this is the decision about what the savings vehicle is, what the market for those vehicles looks like, and how it would be regulated.

This could include pension providers, banks and building societies, credit unions with a pedigree of workplace saving, or fintechs working across financial services and payroll.

However, the regulatory systems for each are quite different, meaning payroll savings may need a bespoke set of rules. If it is not commercially attractive to anyone, the government would need to consider whether a provider of last resort is needed, as well as how it fits with Help to Save or other government initiatives.

Next, the parameters of the scheme would need to be set. Would the cash savings be built up before the pension, or in parallel? The IFS proposal is to remove the lower qualifying earnings threshold for auto-enrolment, currently £6,240, and place additional contributions arising from this change into a liquid savings account.

This approach of ‘a bit of both’ could help people to develop short- and long-term savings habits. On the other hand, it could mean not very much of either.

If part of the problem is that pension saving is not in some people’s interests because they have no emergency fund, it may make more sense to build the latter up first – as suggested by Hymans Robertson.

Important questions to answer

There are multiple interlinked questions about the money going in and coming out – most of these choices can be left to employers in a voluntary system, but any compulsory policy framework would need to address them.

• Is everyone enrolled, or just lower earners based on their pay?
• How much of their income should be paid in? The IFS proposal gives a useful starting point of 3% of £6,240, but this arises from the accident of how auto-enrolment band earnings were originally set and have evolved.
• Would people continue to save automatically up to a certain amount – a cash limit, or a proportion of salary? Elsewhere in government, they are very keen on people not saving too much in cash.
• What would be put in place to prevent another small pot problem, and ensure it works for those with multiple jobs?
• Who pays in – employers or just employees? Would contributions receive tax relief or any other incentive?
• What restrictions would there be on taking money out?

If only the employee pays in, it naturally allows for a simpler system with much more flexibility in accessing their cash. There just wouldn’t be as much of it. If there are any incentives, like tax relief, then the government would act to limit savers’ ability to recycle the cash.

Other government schemes, like Help to Save and the Lifetime ISA, understandably have strict conditions on access, but these conditions have likely affected uptake.

There are various options for limiting money out, with pros and cons. One is to require savers to prove it’s an emergency, as proposed some time ago by StepChange. Or it could be used within a certain period, as with Help to Save. The PLESA has a $1,000 annual limit on emergency withdrawals from the linked account, for example.

Other issues to consider

The interaction of trade-offs between emergency saving, saving for a home and saving for retirement would also need to be addressed.

Nikhil Rathi, the FCA’s chief executive officer, was right to criticise the notion that pensions and housing are entirely separate tracks in his recent speech at the JP Morgan conference. These questions are a subject for another column, but the stock answer of accessing a pension for a deposit cannot be the right one, at least by itself.

The engagement challenge would also be important in this space, to avoid a lost accounts problem, and to help people choose whether and how to save. There are various policy levers to help savers do that.

“Buying a first home. Paying down a mortgage. Building a pension. Drawing on housing wealth later in life. These are not isolated events – they are junctions on the same financial journey.”

Nikhil Rathi, FCA, speaking at a conference in March

It would be great to see pensions dashboards – most likely private sector ones – come together with Open Banking and Open Finance to see data such as income, credit, means-tested benefits, savings, estimated retirement income and mortgage affordability in one place, with support in place to make sense of it and make decisions on the basis of it.

I have mostly listed the questions and options here, rather than answers. These are exactly the kind of areas that Phase 2 of the Pensions Review provides the opportunity to consider in detail, along with the adequacy of pension contributions.

All of these things are within sight, but they need vision and collaboration to deliver them.

Rob Yuille is head of long-term savings policy at the Association of British Insurers.