Consensus in the pensions world at the moment is the government must mandate increased auto-enrolment contributions. The 8% default minimum in 2019 will still be well short of what is needed.
Given this, it is strange to see the pension scheme at the heart of auto-enrolment, the National Employment Savings Trust (Nest), calling for a policy that would potentially reduce pension contributions.
Save for a rainy day
Nest is trialling a so-called sidecar option that would place a percentage of auto-enrolment contributions into a liquid savings account, like a bank account, until a certain threshold is met.
This would be a rainy day account, built up alongside the pension, and would allow for withdrawals in case the saver needed money because of, for example, a broken boiler.
If money was taken out of this pot, a chunk of auto-enrolment contributions would start going back into the sidecar until it once again reached the cap.
Matthew Blakstad, head of Nest’s Insight division, says a key factor for the policy trial, which was developed with the Money Advice Service (MAS), was the amount of consumer debt and lack of liquid saving we are currently seeing. According to Nest’s research, a quarter of adults have no rainy day savings.
‘Where the real need seems to be at the moment, and where MAS is very focused, is making sure people have a financial buffer on hand,’ Blakstad says. ‘When you look at savings rates in the UK, fewer than half of people have £500 on hand, which is roughly the amount you need to deal with a normal financial emergency.’
Trial and error
Blakstad says the policy, which will be trialled among Nest members in the first half of 2018, is going to be designed with financial emergencies in mind, with the money quickly accessible for savers.
The Nest research does note a number of obstacles for the sidecar. This includes new legislation to allow for it within auto-enrolment, but it is a policy the Department for Work and Pensions (DWP) is thinking about.
Charlotte Clark, director of private pensions at DWP, is on Nest’s advisory panel and is ‘very engaged’ with the idea, according to Blakstad.
The concept of the sidecar also featured in a recent Pensions Policy Institute (PPI) report, commissioned by Old Mutual Wealth. In that paper, a sidecar option was brought forward as part of a plan for the self-employed to address their big fluctuations in income.
Jon Greer, head of retirement policy at Old Mutual Wealth, says the sidecar model can be a positive incentive to save, particularly for the self-employed.
‘Having some form of liquid saving gets over this concern about locking away your money,’ he says. ‘Having separate pots of money for different things is quite a powerful driver for savings.’
Struggle for auto-enrolment
But Tom Selby, senior analyst at AJ Bell, believes the plan is not what is needed for auto-enrolment at the moment.
‘There is a problem here in that we are telling people the current minimum is not enough, and yet we’re potentially talking about diverting payments above the minimum into something else,’ he says. ‘If there was evidence that people, in particular lower-income groups, would more likely stay in if extra contributions above the minimum could be paid into a savings account, then that is worth exploring. But we need to get the auto-enrolment minimum to an adequate level first.’
With minimum contributions still at 2%, the government has a tough push ahead for the next phase of auto-enrolment. It is apt to be discussing the future of auto-enrolment in the same month the man who essentially laid down the principles on which it was founded was awarded the Nobel Prize for Economics.
Richard Thaler, the US economist, is the founder of nudge theory in economics, the school of thought that inspired auto-enrolment in its reliance on members’ inertia to not opt out and to accept contribution increases.
This weakened government is barely capable of pushing through existing legislation, let alone planning new policies. Despite the DWP taking an interest in the sidecar, it is unlikely to appear in policy in the immediate future.
That said, it is an interesting concept worth thinking about; especially when solutions are needed for the vast swathes of consumer debt and lack of short term-savings this country is currently facing.