The National Employment Saving’s Trust (NEST) says hybrid products could help defined contribution (DC) savers on low incomes weather financial shocks better.
A paper published today by the master trust cited evidence that 26% of working age adults have no rainy day savings and that only 42% have £500 or more on hand.
It argued a “sidecar model” – which would see consumers retain a single pensions pot but with separate saving streams – could help savers meet both emergency spending needs and long term financial goals.
Under such a model, contributions would first be paid into an accessible ‘liquid’ account.
When the balance in the liquid account reached a predetermined threshold level, known as the ‘savings cap’, all contributions would start rolling into an illiquid retirement account.
The paper said if a saver withdrew funds from the liquid account – reducing the balance to a level below the savings cap – future contributions would again be divided between the liquid and illiquid accounts.
This method would allow the pension pot to remain locked up and invested for the long term, while giving savers access to an amount of liquid savings.
NEST executive director of insight Will Sandbrook commented: “The idea being that if an individual has access to enough liquid savings they’re more likely to avoid damaging financial shocks, and the benefits of this could be felt right through into later life.
“However, simplistic early access models have a number of design issues and create the risk that an excessive amount of money could be withdrawn from pension pots pre-retirement.
“The paper is about starting the conversation more broadly and to get people interested in the topic.”
NEST said there are a number of challenges to the rollout of the concept – noting that AE enrolment into a liquid savings product is not currently legal and contributions would need to be higher for this to work as things currently stand.
The pension provider said it is now working with Harvard University John F. Kennedy School of Government professor Brigitte Madrian and the Money Advice Service to construct an academic research trial.
It aims to start the trial in the first half of 2018 and share its research with the wider industry.
Sandbrook added: “From the perspective of running the trial, the biggest challenge is working out how the trial can test the concept we are talking about. We want to do this because we think many people in the industry will find the data useful.”
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