Saving for today and tomorrow: how sidecar savings can help protect against the unexpected

Most households in the UK don’t have enough money in emergency savings to cover an unexpected expense, such as a higher than expected bill, a car break down or needing to replace an appliance. According to research by the Money and Pensions Service, only 44% of UK working age adults have £500 or more in savings on hand, and 26% have no savings at all.

This means that any financial shock could leave many people with little choice but to seek money from elsewhere. This may include turning to friends and family, using existing credit cards, or reducing spending wherever possible, including stopping pension contributions. But some people may have to resort to high cost sources of borrowing which, if not managed carefully, could lead to debt spirals.

The debt charity StepChange received a call from a new client every 49 seconds in 2019. Three out of four new clients identified a life event or income shock as the main reason for their problem debt. Previous StepChange research showed that having £1,000 of accessible cash savings could reduce the likelihood of someone falling into problem debt by 44%.

Why are employers concerned about whether their employees have savings?

Analysis by Salary Finance from before the Coronavirus crisis suggested that over a third of UK employees have money worries. This situation is obviously likely to be much worse in the current context. If persistent, financial pressures can cause excessive levels of stress which can have a knock-on effect on an individual’s health and productivity at work. Previous research by the Social Market Foundation found that:

four in ten workers (40%) say money worries have made them feel stressed over the last year
a quarter (25%) say they have lost sleep over money worries
one in eight workers (12.5%) report that money worries have affected their ability to concentrate at work
one in twenty workers (6%) have missed work in the last year due to money worries.

Money problems and mental health issues can be partners in a vicious cycle, where worsening financial difficulties can lead to serious health concerns, and vice versa. According to their research, around half of adults with a debt problem also have a mental health issue.

Employers are becoming increasingly aware of these issues and their impact, and are looking for ways to support their employees’ financial wellbeing.

What are sidecar savings?

For some time our collaborative research unit, Nest Insight, has been working on the question of how to make it easier for people to build resilience through emergency savings. One of our flagship projects, our ‘sidecar’ savings pilot, is all about testing how the structures that have been so effective in increasing pension saving can be harnessed to also help people to build emergency financial resilience. Payroll deduction, pre-commitment and the use of inertia combine in this model to help people build emergency savings alongside their retirement savings and, at the same time, to pre-commit to higher retirement saving in the future, once saving for today is in hand. We believe this kind of hybrid approach can be a central feature of a financial system that helps people build holistic financial security for now and for later.

Right now, households up and down the UK are having to try to cope with loss of income alongside all of the stresses and uncertainties of the Coronavirus crisis. Responding to the health emergency and working to save lives is clearly the first priority. But we already know that the economic impacts are also huge and will be felt by households today and long into the future. This is an unprecedented financial emergency – none of us planned for this. But it does put the need for emergency savings into sharp relief. The sidecar savings tool we are piloting is primarily designed to help people prepare for one-off expense shocks rather than severe income shocks. But we think it does lay some of the ground work for thinking about how different financial needs over different timelines could be met by hybrid savings products.

Who’s involved in the trial?

Nest Insight is currently running a trial of the sidecar savings concept in the UK. With the combined support of the Money and Pensions Service, the JP Morgan Chase Foundation and BlackRock, we are working with a research team led by Professor David Laibson of Harvard University and several employers in different sectors. In workplaces, the sidecar model will be introduced to employees as the ‘Jars’ savings tool. They’ll sign up online with the trial’s savings technology provider, Salary Finance, and get a new savings account provided by Yorkshire Building Society. The trial will also involve different pension providers, depending on the workplace schemes already in place at each employer.

So, how does the Jars sidecar savings tool work?

Employees who want to use Jars simply need to sign up online, decide how much they want to save from each pay packet, on top of their normal pension contributions, and set an emergency savings target. Changes can be made to the contribution amount and savings target at any time.

Their chosen amount is deducted from their salary each pay period via payroll deduction. At first this money will go into their emergency savings ‘jar’. Once the savings target is reached, the salary deduction will be sent to the saver’s pension pot, on top of their usual pension contributions. So, at this point, they’ll be putting more money aside for their retirement.

The saver can take money out of their emergency savings jar as often as they want. So, if their car or boiler does break down, they can dip into their savings to get it repaired. Whenever the balance drops below the savings target, contributions start going into the emergency jar again until their balance is built back up.

What does this mean for employees?

For employees, the tool is designed to be easy and straightforward to use. A large part of this simplicity is thanks to the payroll mechanism that enables a regular flow of contributions to be smartly allocated to either emergency savings or additional pension savings. After they’ve signed up, the rest is done for them. So, whilst they’re busy with work and home life, their emergency savings pot will be steadily building up and there ready for them when they need it most. And, if they reach their savings target, they’ll then start saving more for retirement.

As part of the trial we will be researching the impact on different areas of financial wellbeing and resilience, as well as who is most likely to use the tool and how they use it in practice.

What happens next?

At present, a number of UK employers have now either rolled out the trial within their workplace or are in the process of getting ready to go live. Timpson was the first organisation to sign up and begin their trial, followed by the University of Glasgow.

Jim Ross, Head of Pay and Pensions at the University of Glasgow, who are one of the organisations taking part told us: “We are extremely supportive of staff financial wellbeing and the idea that a sidecar savings scheme could assist people to save a little extra for their retirement and still have a ‘rainy day fund’ for immediate emergency access was very appealing.”

We’ll be sharing early-stage learnings later this year, with further reporting of results to follow through the course of the trial over the next couple of years. If you are interested in finding out more about sidecar savings and what it could mean for your employees, please do get in touch.

The author is Jo Phillips, director of research and innovation at Nest Insight.

This article is provided by Nest Insight.