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08 Apr 2019
by Dipa Mistry Kandola

Could ‘sidecar savings’ change the way employees view pensions?

According to the Money Advice Services (MAS), only 44 per cent of workers in the UK have liquid savings of £500 or more to fall back on for emergencies. Statistics of this nature have prompted NEST Pensions to back a new ‘sidecar savings’ initiative, which offers employees a way to build up a short-term savings pot in a similar way to how they save towards their pension. 

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Participants in the new sidecar savings scheme automatically contribute towards both their pension pot (long-term liquid savings) and the sidecar scheme (new short-term liquid savings). The idea is that contributions are split between the two savings pots until the sidecar reaches a pre-determined threshold, after which all contributions will be paid into the pension pot. When the participants need to dip into the sidecar, thus reducing the total, the contributions will once again be split between the two savings pots until the threshold is reached. So why is this new initiative so relevant to an employer’s wellbeing strategy?

How do employees view their pension?
83 per cent of employees value their workplace pension1. However, only a quarter of employees believe that it is their responsibility to manage and understand their pension – with 54 per cent of employees believing that this responsibility lies with their employer/provider2. With this being the case, it is safe to say that the majority of employees value their pension but they also expect their employer to make important decisions about their pension on their behalf. Auto enrolment may have consolidated this view in employees’ minds; many people who previously did not participate in a pension now believe the minimum contribution is right, as not only is it predetermined by the State but employers also manage the “joining” and contribution elements.

Auto-enrolment is giving the majority what they want and addressing a growing concern about how people will afford to retire comfortably. 

It is not hard to understand that today’s problem – such as a fear of not having the cash you need – feels more pressing than a problem which is perceived as ‘way down the line’, like affording retirement. By combining short and long-term requirements, sidecar savings schemes could engage people who have otherwise been put-off by the inaccessibility of their pension pot in their times of need. 

What are the benefits of sidecar savings for employees?
Auto-enrolment has introduced large numbers of people to retirement savings for the first time and sidecar saving schemes can build on this. Not only do these schemes help to instil the practice of regular saving but, as contributions will be taken out of employees’ pay packets before they receive them, the schemes will not leave employees feeling that they are ‘missing’ the cost of their savings contributions. 

Furthermore, the sidecar approach might work better than simply encouraging individuals to begin saving into an existing or standard banking product. This is because of the psychological component of labelling the sidecar account as being for emergencies3.  

How would this change the way employees view savings?
A sidecar savings scheme has the potential to totally rehabilitate the ‘face’ of saving towards your future, offering financial stability and support to people throughout their lives – rather than just towards the end of it. Employees’ ability to dip into their sidecar savings pot will mean that they have regular touchpoints with their automated savings pot, something that people do not currently experience with their pension. This engagement with the short-term savings pot will help to make the long-term savings pot feel more ‘real’, which should encourage people to maintain or increase their contributions. 

Additionally, saving towards your pension suddenly becomes part of a wider financial wellbeing strategy, one which employees might have had difficulty conceptualising before they had a framework offered to them. 

In conclusion, I would  argue that sidecar savings are a useful adjunct to auto-enrolment and something that could be of interest to people who have not previously engaged in saving. 

The author is Dipa Mistry Kandola, head of flexible benefits services at LCP. 

This article is provided by LCP.

Reference

  1. Employee and employer attitudes to pension as a workplace benefit, B&CE Financial Services, October 2017

  2. Workplace Pensions Survey Autumn 2013, NAPF, October 2013  

  3. Five potential benefits of the sidecar savings model, Nest Insight, 21 May 2018

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