The research arm of mastertrust Nest is planning to trial a new savings product in 2018, which will split contributions between a pension pot and a “rainy day” fund, in an effort to improve short-term financial health.
The proposal reflects growing concerns among academics and campaigners that the illiquidity of pensions, combined with the volatility of spending patterns, could be deterring the most hard-pressed households in society from saving for their future.
To solve this problem, the trial product would split pension contributions between a standard Nest pension pot, and an external bank account or liquid fund for emergency spending.
You’re much more likely to get people involved in saving if they don’t feel locked down
Sian Williams, Toynbee Hall
Once the level of emergency savings reaches a satisfactory threshold, all contributions would likely be diverted to the pension pot.
Nest Insight, the team behind the proposal, is currently working in partnership with the Money Advice Service to analyse the needs of savers in lower income brackets.
The trial product, scheduled to be tested between 2018 and 2020, is being developed alongside researchers at Harvard University, and other pension providers can join in. The team’s research will be made publicly available.
Savings trial will include volunteer employers
Matthew Blakstad, head of Nest Insight, told the unit’s 2017 conference that the typically low-income makeup of Nest’s membership made it the ideal vehicle for such a trial.
“Lots of people are savers, but have no emergency fund,” he said, explaining that auto-enrolment contributions might leave them unprepared for short-term financial shocks, such as unemployment and damage to property.
“From the point of view of Nest, that’s going to give them worse outcomes in retirement,” he said.
The proposal cannot currently be achieved through the auto-enrolment process, as contributions must go into a pension in their entirety.
The trial would therefore be carried out with volunteer employers, and the combined contributions in the arrangement would have to be higher than the auto-enrolment minimums, to facilitate the payment of the excess into the short-term account.
But Brigitte Madrian, Aetna professor of public policy and corporate management at the Harvard Kennedy School, who is working on the product design, said she hoped this regulatory barrier could be overcome.
“Ideally you would do it through auto-enrolment… into a set of joint accounts run in parallel,” she said.
Madrian said the short-term fund would most likely be held in a bank savings account, or invested in a liquid money market fund. However, Blakstad pointed out that scaling up such an operation would mean cash flows become more predictable, allowing for a slightly more aggressive strategy.
Will it work?
The success of the trial will largely depend on savers’ attitudes to the sidecar fund.
Limiting access to the fund would prevent savers dipping into their savings for non-emergency expenditure, but would ultimately make the product less useful in an actual emergency.
“We do know from other research on lots of different populations that non-retirement savings are valuable in helping people to smooth income shocks,” said Madrian.
But she conceded: “Because it’s not been really set up and actually tested we don’t know [how savers will behave].”
For some, that behavioural hurdle is too high for such a product to be successful. “I’m not convinced that people will make the connection between a sudden need for cash and their pension,” said Sir Steve Webb, former pension minister and director of policy at Royal London.
He said people using a sidecar account would most likely borrow to cover expenditure shocks anyway, because they pay so little attention to their pension arrangements. “The other worry is it never gets put back,” he said.
DWP blocks Nest drawdown in favour of industry innovation
The Department for Work and Pensions has decided against letting Nest offer drawdown after strong opposition emerged at consultation, opting instead to rely on industry innovation.
The current “broken” system is still ripe for reform, according to Sian Williams, director of the financial health exchange at Toynbee Hall, a charity working to combat poverty.
Flexibility is crucial in savings products for lower income families, she said, because circumstances change. “You’re much more likely to get people involved in saving if they don’t feel locked down.”
