When you do research in a field like household financial wellbeing you need to be prepared for surprises. The financial landscape of a family is complex and ever-changing, and the strategies that people develop to navigate it can be unexpected and often inspiring. Very often, you find yourself setting out to prove one thing, and end up discovering something far more important that’s been staring you in the face.
This was the case in our recent exploration of the effects of auto enrolment on people’s wider savings behaviours. This study was a collaboration with The University of Nottingham and Warwick Business School, supported by the Nuffield Foundation.
Retirement saving doesn’t happen in isolation
This research was part of an ongoing programme where we’re using innovative data techniques to measure the effects of this major policy intervention on people’s wider financial lives. This is an important topic, especially in the current environment where there are very reasonable calls to broaden and increase the levels of contributions into the workplace savings system. While we accept that many people should be saving more for their retirement, our research is asking the question: if more people are nudged towards paying more into a pension, what effect will this have on their broader financial experience?
We’d already measured the impact of being auto enrolled on people’s borrowing, and tracked their savings behaviour through the disruptions of the Covid era and the recent rises in the cost of living. This previous work threw up a number of intriguing questions – why didn’t more people change their pensions saving behaviour when facing the labour market shocks of the covid pandemic and the recent period of high inflation? Why did others become more likely to take out a mortgage when they were first auto enrolled? But one thing was clear: People’s financial lives are deeply interconnected, and a change to one element creates ripple effects across many others.
Now, we are building on our previous work to ask what happened to people’s savings behaviours when they auto enrolled. Did the automatic deduction of pension contributions from their pay have an impact on any other savings they already had?
It turned out we were asking the wrong question.
Savings can’t go down when you have no savings
As it turned out, we didn’t see any large reductions in other savings among people who were auto enrolled into Nest. Yet this simple statement disguises a more important truth: we found that a large proportion of those who were auto enrolled had no other forms of savings at the point where auto enrolment was rolled out. So, in retrospect, we shouldn’t have been surprised that they didn’t reduce their levels of saving.
The effect of auto enrolment on this group has been to get them started with long-term savings, while throwing into sharp relief their lack of any accessible savings to fall back on in the case of financial shocks like an unexpected bill or an interrupted income.
These new findings are consistent with our existing evidence base on how automatic enrolment affects household finances. At Nest Insight, we believe that personal finance policies like auto enrolment need to evolve in a way that targets overall financial security. A narrow focus on increasing pension saving fails to take into account the inter-connectedness of savings, spending and borrowing behaviour. In particular, we think there is merit in considering incorporating some element of emergency savings into the evolution of pensions automatic enrolment, for low to middle income households.
Matthew Blakstad, Analysis Director at Nest Insight
