Will Sandbrook: How can we improve workers’ financial wellbeing today through to retirement?

Over half of employers say that poor financial wellbeing has had a detrimental impact on their workers’ performance, according to The DNA of financial wellbeing report, published by Neyber in May 2017. It is therefore unsurprising that this is an issue on many employers’ minds.

Auto-enrolment has certainly helped the UK take a huge step forward in improving and protecting financial health. Over eight million workers are now newly saving, or saving more, for their retirement. But, together we need to do more.

While many workers are starting to build up meaningful pension savings, some have very little or no money put aside for emergencies. According to the Money Advice Service, of the UK working population, only 42% have £500 or more in liquid savings and 26% have nothing.

If an individual is in this situation, where their bank balance is close to £0, the occurrence of a high and unexpected cost can have a severe impact. Everyday unpredictable expenses, like a car repair bill, could leave them with little choice but to seek money from elsewhere. Options may include turning to friends and family, using existing credit cards, or reducing spending wherever possible. But many might have to cancel pension contributions to free up cash or resort to high-cost sources of borrowing, which, if not managed carefully, could lead to debt spirals.

Being stuck in debt can cause excessive levels of stress, which, in turn, can have a knock-on effect on health, productivity and earning capacity.

So how can we help workers avoid these damaging situations? Access to some emergency liquid savings could be the answer.

In the past, it has been suggested that the defined contribution pension system could be opened up to allow early access to savings. Doing so, however, could lead to workers taking out large sums of money, leaving them with less for later life. This approach also blurs the distinction between a pension pot and a bank account, when, in practice, these products are designed to be used very differently.

An alternative option could be to create a hybrid solution that feels like a single product to the worker, but below the surface has separate savings ‘jars’ designed for different purposes. This concept has been advanced by Harvard Kennedy School, which has proposed an early access model that includes a ‘sidecar’ account. This approach certainly has the potential to positively impact workers and organisations and we are keen to see how sidecar savings might work in practice. To that end, we are planning a research trial with large employers next year.

How would the sidecar model work?

Workers’ contributions would need to be higher than the auto-enrolment minimum. When paid in, via payroll deductions, the money would be split between a liquid ‘sidecar’ account and a pension pot, with the additional contributions initially flowing into the liquid account. When the liquid balance reaches a specified savings cap, all contributions would roll into the pension pot. If a member takes cash out, the additional contributions would once again top up the liquid account until that threshold is again reached.  

This approach would allow the pension pot to remain locked up, and invested for the long term, while giving workers access to an amount of liquid savings. It also has the advantage of increasing the total amount saved, preserving auto-enrolment contributions, while potentially increasing retirement savings in the long term. But, relative to simply contributing more to a pension straight away, it has the attraction of keeping those new contributions accessible by creating an emergency buffer, helping to build short-term resilience.

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This approach certainly has the potential to positively impact workers and organisations.

Will Sandbrook is executive director of Nest Insight