Thanks to NEST and their think-tank NEST Insight for a scorching day on top of the National Theatre which yielded some real thought leadership.
Delighted as I was to lock horns with some very bright students (and Tom McPhail) in a debate on the need for forward planning, the highlight of the day was a discussion on helping those who have been excluded from pension saving to save more.
I sat next to Charlotte Clark of the DWP (the wisest of owls) and when I initially didn’t get it, she explained. If we are ever to get savings rates above 8% of the band, then we are going to have to give those just getting by, the chance to join in. Otherwise auto-enrolment will become too intimidating for those who struggle to save.
Here’s what “feed and skim” is about.
Feed and Skim is just a working title I gave what I saw, it is not NEST’s title and I am sure there is a better characterisation. But it will do for starters.
The ideas is that for people who are saving into NEST on the auto-enrolment scales, a second account is offered. This is not offered by NEST but by a firm licensed to take deposits and capable of taking a separate feed from payroll. In the presentation I saw this was likened to the sidecar beside the motor-bike.
Money is “fed” into this account as part of the auto-enrolment deal, it is an additional voluntary contribution – though it could work as an opt-out, rather than an opt-in.
The idea is that this money would build up a side-account which would be available to the saver to pay for emergency bills.
But if this account was not touched and exceeded a certain amount, it could be “skimmed” by prior agreement with the member, into the NEST account – to be used for later-life.
The sidecar idea is the brainchild of Jeremy Smyth, here’s how he introduced it.
Tapper got confused!
Initially I thought that this was “scope creep” from NEST and that a Government agency was moving into a space traditionally occupied by banks and credit unions.
I apologise to NEST for throwing my toys out of the pram and telling them to stick to pensions!
In the clear light of day I can see that this arrangement could be used by any workplace pension provider as a way of helping those nervous about committing to higher saving rates to stay “in”.
Tax and all that
Frankly, this feed and skim arrangement is going to be about as popular with lah-de-dah middle and high earners as Christmas Clubs. Most of us who pay appreciable amounts of tax (or national insurance) are unlikely to want the help of a “feed and skim” arrangement; those who want this help should not be especially concerned that it will not have the Government incentives that you (should) get saving into a pension. (Don’t forget many low-earners don’t get the incentives if they are in net-pay schemes).
But by the same standards, the majority of money being “fed and skimmed” should be paid out of gross earnings – simply because of the higher tax thresholds we have these days. So I don’t see this as a tax-driven scheme.
What makes it attractive?
There seem two advantages.
The main advantage is that it helps people to get used to saving more from pay than they have been used to. It creates good habits and confidence among those who have been excluded in the past.
While the money is in the “sidecar” , it is accessible; but once people have shown to themselves that they can keep a balance of more than a certain amount (say £500), then there is an opportunity to invest the money for the future which can be taken simply by breaching a pre-set time at which an agreed balance has been maintained.
We saw an interesting presentation from a lady from Harvard that showed that having more than one purse, with one purse available to spend from, and one locked, savers would build long-term savings quicker than by having one great big purse. (I think the research was done in India as there was a lot of talk of rupees).
The slides are here;
So both from the savers point of view, and from a societal perspective “feed and skim” makes a lot of sense.
What next?
It’s a shame that rather than poncing around at the ABI yesterday, the new pension and financial inclusion minister, Guy Opperman, had gone to the NEST insight conference. I am sure this would be right up his street, he has been helping a regional bank in Hexham Northumbria , which is doing good things with local credit unions. The Pensions Minister needs to meet with NEST insight and get as excited about this as those in the room yesterday.
The next thing is for NEST to find some of their clients willing to get this trialled. That shouldn’t be hard, they have a lot of participating employers and are quite a likeable bunch!
We then need to see how well all this works in practice.
Perhaps one of the banks to use to set up these sidecar accounts, would be the Pension Minister’s Tynedale Community Bank in Northumbria!
Thanks to NEST for a great day and for the most welcome beer after!