This is the first of a series of articles by Nest Insight’s Managing Director, Will Sandbrook and Director of Research and Innovation, Jo Phillips, sharing our view on what a roadmap for lifelong financial security could look like, and how household financial wellbeing could underpin the government’s strategy for productivity and economic growth.
Improving household financial resilience and increasing saving are critical for giving people financial security and have huge potential to support economic growth. People who have financial resilience today are more likely to save more for the future – and this in turn creates more investment in the broader economy, as well as reducing money-related mental health issues and sickness absence, and increasing productivity. Through the autumn, Nest Insight will be setting out the evidence base that we have developed around how to support financial resilience, and what that evidence might mean for interventions to support household financial security and, in the process, underpin government’s strategy for productivity and economic growth.
Too many households lack financial resilience. This undermines their ability to build true financial security, for today and for the longer term, through saving and ultimately through building wealth.
These challenges are connected at the household level. Helping people be more resilient helps them to carve out the time, money and headspace to save. Saving, in turn, makes them more resilient. But it also creates the platform from which longer-term security is built, whether though retirement saving, other forms of investment or accessing more secure long-term housing. There’s a growing body of evidence showing that people who have financial resilience today are more likely to save more for the future.
But they are also connected to the macro level. A higher savings ratio creates greater investment capacity in the broader economy. Better resilience reduces money-related mental health issues, reducing sickness absence and avoidable accidents and increasing productivity when in work. In the longer-term, increased resilience for households reduces the kinds of hardship which can undermine educational attainment and feed through into lower earning capacity and hampered social mobility for future generations.
So, a strategy to improve household financial resilience and increase saving has huge potential to support a strategy for economic growth
Yet where these issues overlap in the public policy sphere, thinking has often sought to tackle individual parts of the wider picture, not least because lobbying efforts are often siloed across single industries or interest groups. This makes it harder to either imagine or define a joined up lifelong financial security strategy.
This has in turn, unsurprisingly, led to policies that can add up to less than the sum of their parts when taken in the round and considered through the lens of overall household financial security.
This is one of the reasons why the recent announcement that the pensions minister role will now sit jointly in DWP and HM Treasury, under the radar for many, is potentially so radical and transformational – it provides a platform for a truly cross-cutting approach.
Such an approach would identify the outcomes we most want to support households to achieve, the behaviours that would help them to get there, and the barriers the current system puts in their way.
It would be about financial inclusion in the broadest sense – a system that achieves inclusive outcomes, not just one where the right products are technically there for those who can find their way to them.
And it would do that in a system-wide way, so that people aren’t being forced to make choices between more immediate and longer-term priorities using incomplete or imperfect information, with enormous uncertainty about the future, and with different and confusing economic incentives and trade-offs.
Since we launched in 2016, Nest Insight has focused on building a deep understanding of the financial lives of low, moderate and volatile income people and households. The evidence base that we have developed is helping us and others to better understand how different financial interventions and decisions interact across people’s financial lives.
For example, it shows the true extent of income volatility experienced pay-period to pay-period in UK households, and how that volatility diminishes mental bandwidth, forcing a focus on near-term financial management over longer-term planning.
It shows how the default settings in our retirement system are extremely strong, across all incomes and levels of financial security and in the face of powerful external forces like escalating minimum contribution rates, the pandemic and extraordinary rises in living costs.
It shows how these things combine so that households that lack resilience or manage on low incomes appear to absorb default pension contributions through a mixture of lower spending, as intended by the policy, but also through increased borrowing and reductions in other forms of saving, for those for whom that is an option.
These are challenges as we think about what form a lifelong financial security strategy might take, and notes of caution as to why a narrow focus on one part of the picture – for example looking at pensions adequacy in isolation – risks missing the bigger picture and doing harm to some of the people we are trying to help.
But our research also points to the solutions to these challenges. Most notably, it points to the incredible effectiveness of pairing opt-out workplace accessible savings tools with workplace pensions. These approaches work. They are inclusive and popular, bringing new people to saving and helping them to build financial resilience, while complementing existing pension savings participation and contributions. Seen from the broader financial security perspective, payroll ‘autosave’ solutions represent an opportunity to turn future changes to auto enrolment from a risky proposition for some to a win-win proposition for all – addressing the issue of those who lack cash savings and resilience now while giving them a platform to become ‘better’ long-term savers later, and de-risking the broader expansion of pension saving at the same time.
This is why we believe that what is needed now is not just a set of unconnected policies around pensions and auto enrolment, savings, financial inclusion and housing security, but an integrated lifelong financial security strategy, as part of a wider strategy for economic security and growth at the national level. Over the coming months, we will set out the arguments underpinning this position in more detail, summarising and signposting the evidence-base (both ours and others’) and highlighting the immediate opportunities for action.
In doing so we will identify what we see as the immediate opportunities to start to move towards this integrated strategy, and we will set out a roadmap by which these opportunities could be implemented, built with input from a range of stakeholders representing different parts of the system. We hope the evidence base that we present, and the opportunities we highlight, can form the basis of coordinated action to address people’s lack of household financial security, actively supporting the Government’s critical strategy for increased productivity and economic growth.
