Harness auto-enrolment for Help to Save, says StepChange Debt Charity
14 September 2016
We're calling on the Government to include auto-enrolment in the design of its Help to Save scheme to enable low income households to build precautionary savings.
The call comes as new research from the charity shows that 61% of people who would likely be eligible for the scheme say auto-enrolment would be more likely to get them to save, with 42% saying they’d be much more likely to save. Further details of the scheme emerged last week with the publication of the Savings (Government Contributions) Bill.
Auto-enrolment has proved to be successful with pensions and should be adapted to help all struggling savers, not just those who qualify for Help to Save, to build a rainy day pot. The charity is also proposing a number of additional measures – including prize-linked savings and digital ‘nudges’ - to help families on lower incomes to save, as well as series of changes to Help to Save to ensure it better serves the needs of the people it is designed to help.
Our previous research has shown that 22 million British adults are not confident that they are saving enough for a rainy day and that if every household had £1,000 in precautionary savings, 500,000 of them could be prevented from falling into problem debt.
Help to Save bonuses
The charity polled over 1,500 of its clients who would potentially qualify for Help to Save and the results highlight potential problems with the design of the scheme, foremost amongst which is the possible two year period for people to qualify for the 50% Government bonus.
Initial Help to Save proposals suggested that the Government would match savers’ contributions after two years, but the charity’s research shows that the majority of those polled face emergency expenditures e.g. a broken boiler or car repairs once every six months (42%) or once a year (25%). The charity believes that the bonus should be paid every six months to better reflect the needs of those whom the scheme is designed to help.
In order to cover unexpected costs, those eligible for Help to Save say they are most likely to borrow from friends and family (39%) or cut down on essential spending e.g. food or heating (37%). Others said they would use some form of credit.
We're calling on the Government to include auto-enrolment in the design of Help to Save. Separately, it believes the pensions auto-enrolment system should be adapted to include a rainy day savings element, which could be established by creating an accessible savings ‘jar’ within a pension pot or diverting auto-enrolment contributions into a linked savings account. Auto-enrolment has been successful for pensions saving and has a number of benefits:
- It is already in place and working effectively with a suitable system of earnings thresholds and eligibility criteria
- It contains a match – both employer and tax contributions boost individual savings
- It contains a nudge which helps to overcome behavioural barriers.
The charity believes that commercial providers should examine the possibility of prize-linked savings schemes in which account holders have a regular chance to win a sum of money. Such schemes have proved popular in the United States with ‘Save to Win’, which was established by credit unions in Michigan and since 2009 has had 50,000 unique account holders saving over $94m.
The financial services sector has used digital nudges e.g. personalised text messages for the collection of fines or to warn that a customer was approaching their overdraft limit and found that these have been successful. We believe that as part of a broader package of measures these nudges could be used to encourage saving. For example, if banks identified customers were under-spending compared to their usual expenditure pattern, customers could be encouraged to save the underspend.
Mike O’Connor, Chief Executive of StepChange Debt Charity, said:
“We have a savings crisis in this country and we need better mechanisms and incentives to support people, especially those on low incomes, to build precautionary savings and financial resilience which protects them from problem debt.
“Help to Save is a welcome start, but without changes I worry whether it will really deliver for lower income households. Auto-enrolment has already been successful in improving pension savings and by building it into Help to Save and adapting the pensions auto-enrolment to include a rainy day element, the Government can help improve financial resilience and prevent the harmful slide into problem debt that too many people in this country face.
“Helping families save will cost taxpayers, but it can prevent problem debt which costs the country more than £8bn each year through mental health care cost, lost productivity at work and relationship breakdowns. Help to Save is set to cost £70m in 2020-21, yet the tax relief on ISAs, which are less relevant to low income groups, is supported to the tune of £2.6bn per year.”