Rainy day savings scheme will boost financial resilience
Financial resilience came under the spotlight again recently as new research found that one in three working households in Britain - more than 11 million people - have less than £1,000 in savings. As many as half live in the poorest third of households. Around five per cent of working-age adults in Britain, approximately 1.8 million individuals, live in families with no savings at all.
A report by the Resolution Foundation and the abrdn Financial Fairness Trust has concluded that the poorest households are struggling to build up financial resilience in the face of the cost-of-living crisis. Many are facing a savings challenge on three fronts - insufficient savings for small shocks, an inability to cope financially with large and unexpected life events such as family breakdowns or unemployment and inadequate retirement incomes. It estimated that UK households had a £74bn shortfall of funds saved for emergencies and retirement, compared to a country where every working age family has at least three months’ income in precautionary savings. Fewer than half of working-age households in the UK had savings worth at least three months of income. Those with lower levels of savings were more than twice as likely to use credit cards, overdrafts or borrowed money than those with more than £1,000 saved.
The report urges the Government to build on the success of the pensions auto-enrolment scheme where employers are obliged to enrol eligible workers with contributions of eight per cent - at least three per cent from employers and the remaining five per cent from the employee. It calls for an expansion in contributions by employers and workers to boost levels of financial resilience, suggesting a rise to 12%. Other countries alleviate the tension between precautionary and pension saving by allowing early access to pension savings under a variety of conditions so that they can also be used as precautionary savings. It shows how the UK’s savings policy could evolve to help boost retirement saving while making families more financially resilient in the short term.
The thinktank’s call for an expansion in auto-enrolment contributions reflects research conducted by the Purpose Coalition last year. The Coalition’s Cost-of-Living Taskforce developed an Action Plan to bring fresh thinking to the issue of financial resilience amid the challenges of the cost-of-living crisis. It also called for a rainy-day savings scheme, adapted from the workplace pension scheme, which would allow workers to access cash at crisis points during their working lives, rather than their savings being locked up until they retire. It is clear that a year on, and despite a fall in the inflation rate, that the situation has got worse for many households, with energy bills remaining high and mortgage costs spiralling. The geopolitical situation, energy insecurity, economic instability and climate change all have the ability to impact people’s financial situation and propel them into sudden hardship, forcing them into spending on credit cards, using loan sharks or going into debt.
The rainy-day savings scheme was one of five recommendations in the report that were aimed at moving from a crisis support approach to building up long-term resilience. Two of the key recommendations have already been adopted by the Government when it pledged to introduce 30 hours free childcare as well as an end to additional payments for those using prepayment energy. The Action Plan also called for the transformation of access to cost-of-living support by overhauling the government’s inadequate information systems and tackling the mental health pressures that the cost-of-living crisis has inflicted on students.
The proposals support Purpose Goal 7 Widening access to savings and credit, one of 14 Goals developed by the Purpose Coalition which set out the core barriers to opportunity in the UK and which encompass a broad range of societal and economic issues. They can be used as a framework against which organisations can map their social impact.
The feedback from our work with Purpose Coalition partners is that financial resilience remains a critical issue, especially for the most vulnerable in society. It is key to breaking down the barriers to opportunity that exist for so many. Our partners are already taking practical steps themselves to support their colleagues and their customers, but it is time for the government to move away from precautionary saving involving fiscal incentives, often disproportionately benefitting the wealthiest, and towards behavioural changes which will revolutionise the way people save, in the same way as pension auto-enrolment has done.
See the full Cost-of-Living Report here.
