7 July 2015

Along with going to the gym, or putting up shelves, saving tends to spend a long time on people’s ‘to do’ lists. Everyone starts out with good intentions, many even recognise the value of saving, but when it comes to cutting back on expenses in order to save more, or even setting up the necessary direct debit, procrastination wins out.

Saving may mean changing spending habits, which in turn requires self-control – setting aside a new iPhone today in favour of investing for tomorrow is not always the easiest decision to make.

Are save more tomorrow schemes the answer?

In the US, which is often ahead of the curve with financial innovation, the problem of savings inertia has been circumvented with ‘Save More Tomorrow’ schemes. These schemes aim to ensure that people never have to cut their spending in order to save more and has seen savings rates at some participating companies quadruple.*

These simple schemes allow people to pre-elect a percentage of any future pay increases for investment into their pension pot. This means, that as salaries increase, savings are increased automatically and savers don’t have to take the difficult decision of where and how to cut their spending.

Little by little

This could easily be replicated in the UK under the auto-enrollment scheme. Savers could start with a relatively low percentage of their salary going into these schemes and increase it progressively over time.

This would also address the problem of the auto-enrollment ‘cliff’ between September 2017 and October 2018. At this point, individual auto-enrollment contributions are due to rise five-fold from 0.8% to 4%. This is a substantial increase and one that new entrants to the workforce will need to save from day one. Replacing this "cliff" with an auto-escalation / save-more-tomorrow scheme would enable contributions to increase gradually and help avoid this shock for both current and new savers alike.

Less pain, more gain

We believe that it would be much better for everybody to start at a relatively low rate, gradually saving more each time they receive a pay rise. By the time employees reached 30 or over, they would be at contribution rates well in excess of 4% or 5%, the current top rate proposed, but it would have been considerably less painful on the way.

If we could align this change of approach with some of the pension simplifications that we have mentioned in our other blogs, I believe pensions’ rates in excess of 14-15% are not unrealistic. This relatively simple change in the way that corporates approach their schemes could facilitate a sea-change in the pension outcomes for millions.

Of course, the approach is not limited to corporate schemes, but would also be relatively easy to facilitate with personal pension portfolios. We urge the government, companies and all advisers constructing personal or corporate pensions to embed these automatic rises into their schemes.

*Source FT, 8th January 2012

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This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of 01/07/15 and may change as subsequent conditions vary.

In the US, which is often ahead of the curve with financial innovation, the problem of savings inertia has been circumvented with ‘Save More Tomorrow’ schemes.