PP editor Jonathan Stapleton speaks to NEST Insight Unit head Matthew Blakstad about financial resilience, NEST's sidecar savings trial and the broader impact of AE phasing.
Jonathan Stapleton: Can you tell me a little bit about the NEST Insight Unit and your role within that unit?
Matthew Blakstad: So NEST, as most people will know, is a very large pension arrangement, we've got over 7 million members. And one of the things that that one of the things that that gives us the ability to do is carry out research, collaborative research, working with academics, charitable foundations, other bodies who have an interest in helping create better outcomes for people who are saving in defined contribution (DC) plans. And so the insight unit really works on a series of collaborative research projects that we think are necessary just to solve the immediate problems of helping people use NEST better, but actually the long term and thinking about how to create better outcomes for the whole DC population, not just in the UK, but but right around the world. And we do that with the support of funders, like the Single Financial Guidance Body, a number of charitable foundations and some of the asset managers, who have an interest in supporting that kind of work.
Jonathan Stapleton: Why do you think financial resilience is important, both from the short term and the long term perspective?
Matthew Blakstad: It's a really good question. People often wonder why NEST, which is obviously a big pension provider, is thinking about people short term financial resilience - surely, we're there to help people for the long term. But I think in the NEST Insight Unit, where we carry out collaborative research to really think about how to help the DC population get good outcomes. One of the things we've realized quite quickly is that you can't really help people deal with their long term savings needs without thinking about how things look for them in the short term; both in terms of their short term financial resilience and their short term financial capability. Just as just to give a bit of context to that, as we know, auto-enrolment been a huge success; we've got 10 million people now who, because they've been auto-enrolled, are going to get more income in retirement than they would have done otherwise. But when we look elsewhere, we also see that nearly half the UK population don't have £500 on hand in liquid savings. And that's the average cost of a financial emergency, which people might have every two or three years. So from that point of view, there's a big worry, I guess that you can be very successful at creating a nation people who are saving for the long term but if they're washing machine breaks down, they might end up in a situation where they can't access that money, they end up in costly debt, that could spiral into a situation where they could suffer from loss of financial wellbeing of psychological wellbeing - and that can impact your earnings power, your earnings capability, your attendance at work. And of course, it means that you're not contributing to your pension, because that's one of the first things that you would stop. And equally these sorts of debt spirals that people experience, they can ricochet right through into retirement. If we try to think about how to give people a good outcome in retirement, we can't just focus on how much is going into their pension pot.
Jonathan Stapleton: NEST has just launched it sidecar savings trial. Can you tell me a little bit about the rationale behind that?
Matthew Blakstad: Sure. So as I've said, we think it's really important to try to think about how people are resilient in the short term, that they have enough liquidity to be able to deal with the sort of financial shocks and pressures that hit us all unexpectedly. And so we've been looking at all the behavioral evidence that's out there - there's a lot of really fantastic work going on among among the academic community to try to understand how to help people balance their liquid and their illiquid savings needs. And one idea that really distract us is really, really powerful, which comes from a couple of us academics - Brigitte Madrian from Brigham Young University and David Laibson from Harvard University - is this idea of sidecar savings, or as we're tending to call it now, emergency savings, because that's what it's really about. And the idea is really simple. If you've got a population of people who are already being auto-enrolled into it mention, they are already saving in an illiquid pot, which you want to make as big as possible. All you do is add alongside that a small liquid pot, a savings pot, that they can access in an emergency when they need it. And when the employer is taking contributions from pay, they put a bit of money into the liquid pot as well as into the liquid pot. So obviously, the employer's making the minimum AE contributions into the pension, we're not talking about eating into those, and we can't, but what you can do is ask employees that they want to pay a little bit more out of their pay every pay period. And initially, all of that goes into the sidecar pot, because we think that's people's priority in the short term. And only over time, as they build up savings in that pot do you start moving some of that money into the pension pot. And so what that means is you can potentially, if this works, and we're testing it, but if this works, you could potentially find you're helping solve both people's short term financial needs and also the need that a lot of people have to save more for the future.
Jonathan Stapleton: How does the sidecar savings trial work?
Matthew Blakstad: Well, in practice, sidecar savings is is a pretty simple concept. And it's really built around the way that AE already works - we tend to think just about the enrolment part of automatic enrolment but, of course, a really important part of AE is that every pay period, you're getting a little bit of money sliced out of your pay, it gets put away somewhere for you and you don't really feel the pain of that money being taken away, because it doesn't hit your bank account before it gets saved. Really, we're just talking about extending that to sidecar saving. So if an employee has opted into sidecar savings, as part of the trial, what will happen is their employer will take a little bit more money out of their pay each period, that's maybe about £25 or £50 pounds, depending on what people have chosen to save. Initially, all of that money will go into a savings pot that's been set up, working with our partners Salary Finance, who are helping us with a trial; that's going to be put into a Yorkshire Building Society savings account, which is instant access, you can get that money online, and get it anytime you need to. Simultaneously, as they build up that pot. If anyone reaches a certain threshold, which for many people might be around ££1,000, we will say, well, they've probably got enough in their liquid pot, now we can start topping up their pension and start moving some contributions into the pension pot. And all of that's done through the same payroll mechanism that already manages auto-enrolment.
Jonathan Stapleton: You've done a lot of research into how people might react to sidecar savings. Can you can talk a little bit about that and tell us about the findings?
Matthew Blakstad: We were working very closely in in exploring the sidecar idea with savers, we're working very closely with the Single Financial Guidance Body, who is helping fund the project and also supporting us on the evaluation of the project. And so we went out with with with them and talked to a number of people in our target population. So this is people on moderate or low incomes who've tried to save in the past, but have really struggled. And that's that's not uncommon, you know, a lot of us do struggle to keep our savings habit. And we talked them through the sidecar idea, talked about the idea that the employer would help them save in this way. And we got a universally positive reaction to it. And the things that people particularly liked about the idea where the idea that it would all be handled by the employer, that the money wouldn't be locked away or hidden from them, it would be very accessible, very easy to get to, but just by the idea that they were earmarking it or or apportioning it into a separate pot that was being managed and the contributions were being managed by the employer, they felt that that would help them if you like, have a bit more self control about the way that they use their money.
Jonathan Stapleton: We talk about this being emergency money - is that part of the behavioral nudging you are trying to do?
Matthew Blakstad: That's absolutely right. There's a lot of behavioral research to show that this idea of earmarking, in other words, I'm going to put this jar on the shelf, and I'm going to write 'this is only for bills' on the jar, that that that mentality really, really helps control people's behavior, even with very, very low income workers. Just putting some money in an envelope, maybe putting a picture of the kids on the envelope really helps change people's behavior. So one of the things we've worked on quite hard is to try to think about what kind of labeling for this account is going to help give people the sense of what it's for. And a lot of people talk about rainy day savings. And initially, we thought that would be a really good thing to call it, a rainy day account. But actually, we find that when you say 'rainy day', people, some people think about money for emergencies, but other people might think about money to put aside for that dream holiday or for a longer term goal. So in the end, we landed on emergency savings, because that's the thing that everyone really understood described the purpose of the account.
Jonathan Stapleton: AE phasing ends in April, when total contribution rates for auto-enrolment increased to 8%. What do you think has been the overall impact of the phasing?
Matthew Blakstad: Well, I guess the simple answer to the question is that the impact of phasing is people are already saving more than they were when they were first enrolled, which is obviously great news and I think NEST isn't alone - if you look right across the industry all providers like us are reporting that, when the phasing increase happened in April 2018, there was a really minimal, very short-term impact on the number of people who are ceasing their accounts. And actually, the opt-out rate that we're seeing now is pretty much exactly the same as it was before the phasing increase happens. So on the surface level, that's really good news. And I think it's important to remember why the government introduced the phasing idea, it's based on another very good behavioral finance idea, which is the idea of save more tomorrow. In other words, people are more inclined to commit to saving more if you asked him to do it, not this year, but maybe next year, and maybe when they pay increases. And so this effect of moving the contributions up from an initial 2%, up to 8%, over a couple of years is a really good example of how to make that work. And for many people as well, because those increases happened at the beginning of April, that's happening at the same time as changes in things like tax bands and the minimum wage, and the living wage. And what that means is that actually a lot of people aren't necessarily really seeing a nominal impact, even though the savings rate is actually increasing. So all of that is a really good way to get people from saving nothing to saving more over time. And I think all the evidence that we see shows that that that method is working as we really expected that it would and we think as well, when the contributions go up a little bit more, in April this year, we're not going to see a particularly big impact on people's behavior.
Matthew Blakstad: But I guess the broader question, because you're asking what the broader question of automatic enrolment is, is that's great, people are saving more into a pension. But how's that actually affecting their whole financial lives, there's kind of an implicit assumption in the automatic enrolment policy, that when you get people to put a bit more money away for the for the future, that's going to come out of their spending. But of course, we know as well, there's a lot of people out there who have quite a lot of debt. And there's of course, a worry that if if you start getting people to lock more money away, that they might not be changing their behavior in terms of spending. And so that could be problematic. So we set out working with Legal & General Investment Management, who supported our our research project, to look at a population of people in NEST before and after the increase happens back in April last year, we just published a report on the automatic enrolment experience over time, that tracks that experience. And I guess that the important thing to say is the headline is it's good news, we find that people are really positive. A lot of people are actually feeling more confident about their workplace pension, as the source of income in retirement, particularly older people, interestingly, people getting close to retirement, are feeling more confident. And only a small minority of people feel that their contributions are too expensive, although that's something we definitely want to track over time. So the headline message is really strong
Jonathan Stapleton: You mentioned the impact on people's debt levels of AE. Can you tell me more about how AE is impacting on that?
Matthew Blakstad: Absolutely. I mean, I do want to stress that we do see a really positive picture in the results of our survey. And you know, there are there are plenty of people out there, actually a quarter people, are saying that came to save more. But we also see a lot of people who are experiencing debt and for some of them, using some of the measures that we put in the survey, that looks like problem debt. And so you've got to trade those two things off against each other. It's great that people want to save more but you can't rob your present to pay for your future if you like. And so the other thing that we're doing is looking at the at risk groups in the population and trying to see whether there are any groups that are experiencing a greater problem in terms of debt, and that's really where the research is going to take us going forward. AE has barely began and I think the really important thing for us in NEST Insight is to keep track of that and make sure that people's short as well as long term needs are being properly met.