A radical adaptation of the auto-enrolment system in conjunction with prize-based incentives would help address the problem of low savings rates in the UK, according to a discussion paper from StepChange Debt Charity, echoing previous calls by pensions minister Ros Altmann.
Following calls at the start of the year for auto-enrolment to be adapted to incorporate ‘rainy day’ savings into the existing framework, StepChange’s chief executive Mike O’Connor commented: “Adapting the existing approach to pension saving would ensure each adult is better able to cope with an unexpected bill and a loss of income without sinking into debt.”
A spokesman for the charity explained to FTAdviser that this is not necessarily a definitive proposal, but a number of suggestions on how to incentivise a stronger savings culture among those on low incomes.
“Prize based incentives could help incentivise people not to opt-out, so if people reached certain thresholds within that £1000 they’d be entered in a draw for larger prizes. £50,000 or £100,000 are what we’ve suggested as a starting point. It would also disincentivize people from taking the funds for anything but the emergency that the fund is intended for.”
Four years ago, Baroness Altmann suggested, prior to becoming pensions minister, that everyone contributing to a pension could be entered for a draw to win £1m each month.
The cost relative to current spending on pensions marketing would be small, but offering savers the potential of something in it for them today, not just in the future, could boost pension savings, Ms Altmann said.
The debt charity’s proposals follow findings from a YouGov poll commissioned by the charity - among 1,707 adults in July - which revealed 21.8m British adults are not confident they are saving enough to cope with a rainy day.
At the moment these people cannot see how they are going to be able to start saving either, with three quarters not confident they will be able to start saving even £1,000 within the next year.
This was the amount previous research by the charity showed would protect 500,000 households from falling into ‘problem’ debt. Yet their analysis of the Office for National Statistics’ wealth and assets survey revealed a £5.3bn savings gap, with more than 7m households short of this minimum needed to cover unexpected costs.
The other incentive proposed by StepChange would be matching, in the same way auto-enrolment sees employee contributions matched by the employer up to a certain amount.
“To be clear we’re not talking about replacing any aspect of the welfare system as this might, but would work with existing safety nets,” the spokesman added.
“We hope that people including financial advisers would be supportive of measures that better incentivise low income households to save and protect them from the prospect of debt when financial shocks happen.”
peter.walker@ft.com
Additional reporting by Donia O’Loughlin
