Living wage calculations do not include pensions “so the living wage is actually 5 percent short”, delegates at the Corporate Advisor Summit 2024 heard yesterday.
Will Sandbrook, managing director of Nest Insight, made this point as he discussed the ongoing problem of people undersaving for retirement in the UK.
He said that undersaving remained an issue even after the roll out of auto enrolment (AE), which has vastly increased the number of pension savers. By March 2024, more than 11 million people had been enrolled since AE’s inception in 2012.
Income volatility
However, while the number of savers has increased, the amount they are putting aside remains inadequate. One reason for this is the “pervasive impact of income volatility”, highlighted by research from Nest Insight published last week.
Sandbrook said: “Twenty-five million people in the UK live in households that are subject to some income volatility. One of the consequences of that is that people in those households are relentlessly focused on managing their money in the short term.
“They are often extremely good money managers, but they are thinking about today or next week, they are not thinking about retirement,” he said.
This issue, plus the fact that incomes vary widely between different groups of workers, prompted the public-benefit research and innovation body to call for “a whole life approach to pensions saving”. Such an approach focuses on supporting workers in balancing their financial needs before and after retirement.
Innovative sidecar model
Sandbrook emphasised the need for innovation and pointed to the positive results of a sidecar savings trial Nest Insight has been conducting with employers.
Sidecar savings work by combining liquid and illiquid savings, so combining short term emergency savings, for example, with workplace pensions. The savings are combined in a way that takes account of the needs and preferences of the saver.
Traditionally, initiatives that support short-term liquid savings and illiquid savings for retirement are done separately, which can cause tension between balancing your finances for today and the future, Nest Insight said.
However, by combining liquid and illiquid savings, the trial has found early signs that by finding an appropriate balance of liquidity, the sidecar savings model will enhance people’s overall financial wellbeing, both in the short term and in retirement.
Trial employers ‘love’ sidecar
For employers focused on the financial wellbeing of their staff, he said: “The employers that took part in the [sidecar] trial are all looking at ways to expand the sidecar to their whole workforce, they all love it.
“The challenge is it is hard for employers to convince themselves that there are safe, legal ways to do that. There are lots of different regulatory measures for employers thinking about doing it, which we worked through carefully in the trial.”
Nest Insight has urged the government and the Financial Conduct Authority to provide some regulatory clarity to confirm that “on the whole if you do it in the right way they are legal”, Sandbrook said.
He encouraged employers interested in implementing sidecar savings themselves to speak to the team at Nest Insight as they have plenty of learnings from the trial.
Asked if embedding sidecar savings into nudges that are already in place might be in the upcoming Pensions Review, he said: “I think at the Labour conference last week, the pensions minister [Emma Reynolds] did say that she thought sidecars should be considered as part of the review.”
How the sidecar works
In the trial launched by Nest Insight in 2018, a combined savings tool, known as the sidecar savings model, linked a liquid ‘emergency savings’ account to a traditional defined contribution pension pot. Employers in the trial, including BT, ITV, StepChange, Timpson and the University of Glasgow, offered the hybrid savings tool to employees.
Contributions were deducted automatically through payroll and managed to create an optimal level of liquid emergency savings, while also increasing long-term savings.
The trial was supported by the BlackRock Foundation, the Money and Pensions Service, JPMorgan Chase, a number of academics and technology partner Salary Finance.
- For more on innovation, trends and insights in reward, HR and employee benefits, plus senior level networking in beautiful surroundings, register to save your place at the Benefits Expert Summit 26-27 November, 2024.
