22 November 2018
Post-Wonga Rainy Day Solutions
Could sidecar savings be the answer?
By Frank O’Nomics
How much money do you have set aside for “emergencies”? For over a quarter of the UK working age population the answer to that question is – nothing. For 42% the sum available is less than £500. The result is that a significant proportion of the UK households have insufficient funds to cope with almost any kind of financial shock, whether due to a loss of earnings or, for example, the need to repair a car which is essential for transport. It is not surprising then that many have resorted to payday lenders but, with the collapse of Wonga and greater regulation generally, those on low incomes with poor credit histories are likely to struggle to find anyone to lend them money. This is a particularly bleak scenario, especially if trade wars and Brexit mean that we may be on the brink of a new recession. Nevertheless, there are proposals for a long-term solution and some firms that are prepared to adopt it. Step up – Sidecar Savings.
NEST Insight, a body responsible to the Department of Work and Pensions but generally independent of government in its daily operations, has been looking for partners in a research trial of a scheme that will join up pensions and short-term savings to create a broader environment of financial wellbeing. In most respects the introduction of pensions auto enrolment has been hugely successful. Of course many are still not saving enough for their retirement, but the 8 million who have signed up to auto enrolment (to save £82 billion in 2016) are improving the situation significantly and the prospects of a nation of retirees falling upon the help of the state has receded. However, while their long-term finances will look better, the short-term outlook remains perilous. That necessary car repair could mean that pension payments get cancelled, spending on essentials gets reduced, or they lose earnings because they can’t get to work. Some may be able to borrow from friends or family, others, without recourse to the likes of Wonga, may resort to other usurious lenders – the kind sitting at the back of the pub enforcing repayment with the help of a couple of heavies. Others may even resort to their own criminal activity. All of these solutions mean a big hit to productive capacity and are bad for the economy. 40% of workers say that money worries have made them feel stressed, 1 in six say this has affected their ability to concentrate and 1 in 20 have missed work over the last year due to money issues.
The proposed solution is for a hybrid savings product which combines a liquid emergency savings account with a defined contribution pension. This would look just like savings made under auto enrollment but the amount paid would be a split into two accounts. Once the sum in the liquid (emergency) account hits a predetermined cap any additional money goes into the illiquid pension element. If funds are withdrawn from the liquid account (to pay for that car repair) contributions are again divided until the cap is re-attained. The process may take some time to create a more financially resilient population, but given the pace at which auto enrolment was taken up we may be pleasantly surprised.
At this stage I’m sure that many will be thinking of some obvious potential flaws in the process. What constitutes a financial emergency? Not being able to fund an overseas holiday might not be as serious as a lack of food on the table, but how can you stop someone accessing their savings on that basis? Given that historically people have not managed to set any money aside, due to the fine balancing act involved in managing a limited disposable income, one could be forgiven for thinking that this scheme will make no difference. Further, from an economic point of view many will argue that the system will be inefficient. For those paying off mortgages or car loans the interest they pay will be far greater than anything these liquid savings will earn, and they may be better paying down their debts. The ultimate criticism is that forcing people to save for things beyond a pension is pushing the “nanny state” too far – we should have the right to decide whether to spend or save, and buy what we see fit. Nevertheless, the very act of having money set aside should discourage people from trying to access it for day-to-day expenses (the idea of “set and forget”), and the opportunity cost of short-term saving is one that many will understand given the fear of the unknown against which it protects.
What is needed then are some employers to start to engage in the experiment and one notable entity has just signed up. For some years the shoe repair company Timpson has been one of the more enlightened and philanthropic employers in the UK. They have been a long-term campaigner for prison reform and have proactively sort to address recidivism by employing ex-prisoners and running pre-release training in several prisons. It is then highly appropriate that this firm should adopt the trial of a sidecar savings scheme given that a financial shock could be the trigger for reoffending. The 5,600 employees at Timpson will start to make contributions to a sidecar structure at the start of 2019. Support for the trial will be provided by the JP Morgan Chase Foundation and the Money Advice Service, and workers participating will be monitored for two years to assess how many sign up, how much they save and whether there is any impact on their financial wellbeing.
Whether sidecar savings schemes will make much of a difference to the general lack of financial security in a large proportion of UK households remains to be seen. It might just be a modern version of the old office “Christmas Club” where people set aside money throughout the year to be able to cope with the period of greatest expenditure. However, it is worth a try and anything is better than letting people negotiate with that man with the thickset colleagues.
