Research: NEST Insight: Liquidity and sidecar savings

Auto enrolment is creating a new generation of savers across the UK. Millions of people are building retirement savings, often for the first time, yet many of them have little or no money on hand to protect them from the effects of unexpected financial shocks. An innovative new behavioural approach to short-term and long-term savings may offer a solution.

Key findings:

• Illiquid retirement saving has improved in recent years thanks to auto-enrolment. However, liquid short-term savings are often perilous.
• 26 per cent of working-age adults have no rainy-day savings, and only 42 per cent have £500 or more on hand.
• Researchers at the Behavioural Insight Group at the Harvard Kennedy School in the US believe there is an optimal balance between liquid and illiquid savings, and go on to propose greater integration between these systems. Their proposed mechanism, the ‘sidecar’ account, builds on the success of auto enrolment by additionally introducing an optimised level of liquid savings.
• The sidecar model reflects the logic of a hybrid product by recognising that different financial products with different financial goals are likely to have different design features.
• The sidecar approach has the potential to lead to better financial outcomes in retirement for low- and moderate income savers.

NEST Insight, a research unit set up by NEST Corporation in association with Vanguard have begun work to test this concept.