Pension Funds Insider

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Sidecar Blues

Image for Sidecar Blues pension funds

It’s generally acknowledged that as a nation, we’re not saving enough. A lot of people don’t have any savings at all, and a lot more don’t have significant pension savings. Personal expenditure all too often rises to match income, so it’s hard for many people to save, and even harder to voluntarily commit funds to a retirement scheme which they can’t get at again for decades. But we need to do both.

So how can we? In November 2018, NEST started trialling a combined savings tool, the ‘sidecar savings model’, where a liquid ‘emergency savings’ account (the ‘sidecar’) is linked to a traditional defined contribution pension pot. The idea is to see if joining up pensions and short-term savings in this way can create a better savings balance, and enhance the financial wellbeing of workers.

This hybrid savings tool has been introduced in participating workplaces as ‘Jars’. Timpson was the first employer to roll the trial out within their organisation of over 5,600 workers; followed by BT, StepChange, and The University of Glasgow. Jars allows employees to set up regular payroll deductions to save money into their emergency savings jar, provided by Salary Finance, and, when they reach their savings target, to save more into their existing workplace pension on top of their normal auto enrolment pension contributions.

Last December Nest Insight published a briefing paper focusing on the experience of participating employers. Support for the idea and product design is high: it seems there’s a strong sense among employers that the salary deduction mechanism used by Jars could be a very effective way to initiate a savings habit. It reduces the time and effort required to choose and set up a savings account. The value of convenience is often under-estimated.

However, employers mainly view Jars as a way to support employees to save and build up an emergency savings buffer. The retirement-saving pre-commitment mechanism, designed to help people save more into their pension, is seen as an important but secondary benefit. This is because, whilst they recognise that most people in the UK are not saving enough for their retirement, they feel that auto enrolment already goes some
way to support longer-term savings and a larger gap remains in helping people build up short-term savings.

How do workers feel about it? The next briefing paper from NEST will focus on the experience so far of employees to whom the savings tool has been offered. NEST already acknowledges the bigger challenge so far has been in building awareness and engagement among employees. Currently they need to actively sign up themselves, and many don’t get around to it. Thus the sidecar model doesn’t
capitalise on the inertia principle (‘what you’ve never had, you don’t miss’) as neatly as auto enrolment, where employees must actively opt out.

The programme might stall unless employee engagement can be ramped up significantly. So NEST is planning to explore whether financial incentives and alternative joining mechanisms, such as automatic or active choice enrolment, are effective ways to address this barrier, along with the issue of affordability.

Timely support has come this month from the One Nation Conservatives group of Tory MPs. In a report titled “One Nation Pathway to Recovery”, they urge the government to consult on introducing a new sidecar savings mechanism nationally, and consider building it into the existing pension auto enrolment policy.

What needs to be recognised is that neither employers nor employees alone can save enough for stable retirement, and voluntary provision is not going to be sufficient. The trick is going to be how to bring both on board the ship without adding an unnecessarily heavy burden of legislative ballast.

Ian Neale, Director, Aries Insight