The Nest Sidecar project (now renamed “Jars”) has been sponsored by a number of leading financial services companies and some major employers  (including Timpsons and BT). This blog is an open letter to the Nest management from  Michael Johnson, in his capacity as Research Fellow for the Center for Policy Studies. To date, there has been no credible challenge to the theory behind Sidecar (developed in Harvard University), nor its practical application in the UK (the Jars project).

But the money and human resource being applied to testing the Sidecar has yet to provide any demonstrable results and it is good that a challenge is made to the received idea that we could or should be considering more assertive nudges to get lower-earning people saving through the Sidecar/Jars.

The following is the letter sent to Nest CEO, Helen Dean – and her colleagues by Michael Johnson, arguing that there are other and better ways of addressing the problems low-earners have with saving

Open letter to Helen Dean – CEO of Nest – from Michael Johnson

This graph shows the ONS’s Households’ Saving Ratio (S.14) since 1963 (ONS dataset DGD8). It prompts many questions, the answers to which could have significant implications for your Jars project.

Observations

• The most effective way to increase the savings ratio is to have a pandemic, but……
• the data can be very misleading because the ratio is an average, referring to a population that is the aggregation of 30+ million households’ data.  Means and medians are mere abstractions.  Ultimately we need to understand variation: the ratio tells us nothing about the distribution of savings, broken down by household income decile or socio-economic group.

Question

• Since March 2020, consumer spending has plummeted.  Has the cashflow into Jars substantially accelerated or, if not, why not?
• My hunches, and they are only that, are:

(i)             those who don’t ordinarily save anything (c.20% of households?) are still not saving anything because all their income goes on essentials such as food, rent and utilities, leaving little scope to cut back on frivolous consumption;

(ii)            those who save a little but have insufficient emergency savings (NEST’s core target audience) may be saving fractionally more, but not enough to mitigate the (day-to-day) financial risks that they are exposed to; and

(iii)           the wealthiest 25% (say) have been saving a lot more since March 2020: savings polarisation to the fore (within the top 2-3 income deciles).

If it turns out that NEST’s target audience has not saved (much) more in Q2 and Q3 of 2020 than Q1 2020, then one wonders when it ever will.  It would then be appropriate to question the effectiveness of the Jars structure.

Consumer credit

• In recent months people have been repaying consumer debt: there has been a £20.5 billion behavioural swing between March-June 2019 and 2020.  (Bank of England data),

• At the end-February 2020, total outstanding consumer credit lending stood at £224.9 billion.  At end-October 2020 it was down 9% to £205.5 billion.
• Average credit card debt per household exhibits a similar decline: it was £2,204 at the end of September 2020, down 15% from £2,595 end-January 2020.

Proposal: go with the behavioural flow

• NEST’s target audience is likely to include many low earners who are serial borrowers via consumer credit, paying APRs in excess of 25% on most credit and store cards (Amazon Classic charges 29.9%, Capital One 35%, Marbles 33%, Post Office 35%, etc.)

•  Link each Jar to the individual’s most-used credit or store card (the latter charge higher APRs), to harvest the “negadebt” (negative debt) yield: the very high risk-free return derived from repaying consumer debts.  If the APR were 30%, for example, then basic rate taxpayers would be effectively generating a pre-tax return equivalent to 37.5% p.a.

• The same risk / return logic applies to NEST’s illiquid (retirement) DC offering.  Ideally, contributions  should be directed first to repaying consumer credit debts, and only once these are cleared should any surplus be invested in (relatively low return) assets.  This approach could be modified by differentiating between employer and employee contributions: the former would always be invested, while the latter would first eliminate any consumer debt.

• And for millennials who aspire to own their first home, why not offer a Jar in the form of a Lifetime ISA, which provides a 25% upfront bonus and ready access (keeping the bonus) when buying the first home (which is the top financial priority for many millennials)?  And if were a change of mind, there is now (since March this year) penalty-free access anyway (the 20% you repay upon a withdrawal being economically equivalent to the 25% you received when investing): liquidity to the fore.  Alternatively, invest in a pension pot…..and wait until you are at least 57 before being able to access anything.

Best wishes

Michael Johnson

Research Fellow

Centre for Policy Studies