Jon Dean: Two press stories caught my attention in the last week or so. The first was a survey from Scottish Widows, reporting that one in 10 workers (around 3m people) have reduced or stopped their pension saving because of coronavirus.
The second was the news from the Bank of England showing that households’ unsecured debt shrank by a record £7.4bn in April, with new mortgage borrowing also shrinking to a nine-year low that month.
A tale of two populations?
The two datasets combined would suggest a divide in the UK’s population between those whose situation is still relatively secure, and those facing a reduction in earnings as a result of Covid-19. In aggregate, the population has more disposable income, as the closure of shops, pubs, coffee shops and entertainment venues has inhibited consumer spending; prudent consumers still being paid in full are using this to their advantage, as they are not spending on their cards but paying them down.
However, this masks the subset of consumers, possibly furloughed or claiming benefits, who are forced into taking repayment holidays. Banks’ forbearance measures mean the debts of this latter group are not growing as fast as those of the better-off are being repaid.
Many of those on payment holidays will also have stopped or reduced their pension contributions. The Scottish Widows survey showed that one in five people have seen their income fall, with a further 44% worried about paying their rent, mortgage or other essential bills.
This situation will inevitably worsen quite soon, as the government starts to unwind its furlough scheme and hard-pressed employers start to place their workers on notice of redundancy.
Temporary suspension of work will become permanent for potentially millions; the Bank of England’s own forecasts suggest a rise from a pre-Covid near-record low of 3.9% unemployment to around 9%.
Using inertia to improve resilience
I’ve talked previously in these pages and elsewhere about the challenges facing the Money and Pension Service in implementing its five-stage strategy to boost financial resilience. Household indebtedness and the lack of emergency savings and income protection are the central issues facing households right now.
I quizzed pensions minister Guy Opperman back in February on whether there were plans to incorporate emergency savings as part of the next phase of automatic enrolment, since master trust Nest is already trialling so-called ‘sidecar savings’. The minister confirmed that nothing will be done on this until the results of these trials are concluded at the end of this year.
As good an idea as it is, sidecar savings ‘jars’ are intended to operate as an opt-in service for employee contributions over and above the auto-enrolment minimum. Arguably many of the individuals most at risk of hardship are already struggling to pay their bills once pension contributions have been deducted from their earnings. These people have little to no emergency savings (and in the current environment, these cash buffers have most likely long-since been spent).
What if, instead of starting with pension savings, new joiners were set up in a cash savings scheme? The auto-enrolment rules engine could calculate a default emergency funds target of, say, three times the individual’s take-home pay, and direct minimum contributions into this pot.
Once the target is reached, contributions would then be directed into the pension plan. As with the existing setup, it would work on an opt-out basis, but would need a few simple tweaks. Workers who decide (on the back of the welcome communications) that the default offering was not right for them would be asked to choose from a simple set of options:
- I already have an emergency savings pot, please put me straight into a pension
- I’d like to save for both my pension and emergency savings, please put my contributions 50:50 into each until I reach my target
- I’d like to set my own goals for cash and pension savings
- I’d like to talk to someone about what’s best for me, please help me find an adviser
Maybe this is overly simplistic and I’m sure my list of choices could be improved upon, but I’m not alone in thinking this kind of solution would improve on the successes of auto-enrolment so far. Scottish Widows is also calling for reform to include emergency savings, albeit with higher contributions. Their press release is worth a read.
Whichever solution works best in practice, wouldn’t it be timely to assess take-up of the Nest trial and begin debating the next steps, while the urgency to build financial resilience is front and centre of people’s minds?
Epilogue on ESG
In my last article on ESG investing (Can ESG fashion a better world?), I noted that Primark was among clothing suppliers refusing to pay for orders in-production that it had cancelled as a result of lockdown. I’m encouraged that the company has since agreed to pay at least part of their suppliers’ bills.
Whether this was in response to shareholder or media pressure, consumer action, a fit of conscience, or was something that the company already had in train, is not clear. I would like to think that institutional investors will bring pressure to change corporate behaviour relating to similar cases in the future, as part of their stewardship and sustainability duties.
