Context

In recent years, policymakers have promoted initiatives to encourage people to have both liquid short-term savings, as well as illiquid retirement savings. In the UK, there are a wide range of incentives and regulatory policies that support people to save for retirement and protect their savings. This has been strengthened recently by the introduction of auto-enrolment, which has resulted so far in over 8 million people starting to save, or saving more for their retirement. Whilst this has been a positive step for supporting individuals’ future financial security, initiatives to incentivise liquid savings remain patchy, with just over a quarter (26%) of working-age adults having no ‘rainy day’ savings. Given the need for greater emergency savings for working-age adults in the UK, combined with increased build-up of assets through auto-enrolment, the interaction between the two needs to be explored further, to see if illiquid savings can be unlocked when short-term financial difficulties occur. One potential approach is the ‘sidecar model’, where contributions are managed through a mechanism designed to create an optimal level of liquid savings, whilst also maximising long-term savings.

The study

Nest Corporation conducted this insight report in 2017. The aim of the report is to explore a potential approach to facilitate a greater interaction between retirement saving and liquid saving. It draws on research conducted by the Behaviour Insight Group at Harvard Kennedy School, which states that there is a potentially optimal balance between liquid and illiquid savings and proposes greater integration between these systems by using the sidecar model. The study appraises this approach, and highlights a feasibility study and trial that Nest Corporation plan to conduct in 2018.

Key findings

• • The model allows a risk-taking investment strategy in terms of pensions, without the risk of unexpected liquidity requirements. It also allows for a more traditional savings account model for liquid savings.
  • The model would be offered through payroll deduction in the workplace, which leverages the idea of ‘set and forget’ and provides a steady flow of savings contributions.
  • The model caters to the varying needs of different users as it generates an appropriate balance of liquidity for each individual saver.
  • A combined savings structure may be more suitable and more attractive to individuals than either short- or long-term savings products on their own.
• • In the UK context, the contributions would need to be greater than the default minimum for auto-enrolment. This would lead to questions around the most appropriate contribution level.
  • Auto-enrolment into a liquid savings product is not currently legal.
  • Employers are unlikely to consider this approach affordable.
  • There are questions as to whether the product would change people’s spending behaviours, or if they would continue to use the liquid account as another current account.
  • There is a lack of evidence around whether the approach would lead to more optimal responses to financial emergencies (for example, reduced reliance on high-cost debt).

Points to consider

• • There is no description of the methodological approach taken for this insight review.
• • This report is of relevance to policymakers as it provides insight into a potential approach that could be used to reduce the proportion of working-age adults who do not have any emergency cash savings.

Full report

NEST insight: liquidity and sidecar savings - full report