The Centre on Household Assets and Savings Management held their annual conference yesterday in London, with a focus on building financial resilience and turn “debt into savings”. This year’s conference is the latest in a number of activities CHASM has been leading in order to kick-start a debate on creating a coherent savings framework designed to help lower-income households build their financial resilience.
The Financial Health Exchange took part in CHASM’s Savings Summit, which took place on 24th May. The event brought together a number of experts from a wide range of backgrounds with the aim of developing a Savings Manifesto for the UK. This project is being undertaken with the support of the Barrow Cadbury Trust.
Why the need of a manifesto?
This project comes at a time when a number of initiatives and policies to help households build savings are favourable amongst policy-makers; such initiatives include the Lifetime ISA, Help to Save scheme, and increased tax exception brackets. There have been numerous debates as to the benefits of these for low income households, with many claiming that the initiatives are only valuable for middle and high income groups, but do little to address the financial challenges that act as barriers to saving for low income households. Hence the argument that a Savings Manifesto is needed to specifically help lower-income households build a financial cushion and achieve greater financial health.
Before this can be achieved there needs to be a deeper understanding of the needs of low-income households, and the reasons why they may seem to lack a saving mentality. Only then can policymakers build a strong and effective framework to help the group save.
Why is there an increasing focus among policy-makers on saving?
Research has shown that small amounts of savings can have a positive impact on household well-being. Referred to as the “asset effect”, some researchers and policy makers believe that owning savings and assets does something more than just create a cushion, but changes your confidence and outlook on life. Hence one reason for saving is the mental/psychological/emotional benefits, as well as providing practical financial benefits.
Although there are signs that there are links between wellbeing and saving, the evidence around the strength of the asset-effect is inconclusive. Nor do we know what the mechanism for the effect is – for example, is it because of the assets themselves or something else?
With this being the foundation for the discussion at the Savings Summit, we first considered what savings opportunities currently exist for low income households. This led to the reflection that savings had been “the first casualty of austerity” in the UK, as households juggled the rise in low and unpredictable wages and cuts to benefits, while at the same time experiencing increasing living costs, making it difficult to budget effectively and regularly allocate money for saving. And given this current environment, we questioned whether we should be expecting people on the lowest incomes to save.
Secondly, we considered what should be an appropriate savings target for lower income households. The literature suggests a range anywhere from £200 to 3 months income at any given time – this is despite the fact that 50% of the general population have said that they wouldn’t be able to find £200 from income or savings if they needed it. How do we make savings messages both meaningful and encouraging?
Finally, we considered in greater depth the options currently available through the market, as well as the policy proposals (outlined in more detail in CHASM’s Summit Briefing) that are being targeted at lower income households.
Policymaking – who do we target, and how do we make it work?
Current policies on savings and assets have been criticised for creating incentives primarily for middle/higher income savers, through mechanisms such as ISAs, tax exemptions, and Help to Buy. The Savings Manifesto therefore aims to re-balance the policy agenda to benefit those on lower incomes and those with smaller amounts of savings. The Savings Summit took a deep dive into a number of options, such as the government’s proposed Lifetime Savings Account, the role of credit unions, social landlords, and employers in creating alternative markets, and whether there is potential for the UK to introduce an equivalent of the United States’ 1977 Community Reinvestment Act, requiring financial institutions to help low-income savers.
Four key themes emerged that set the context for creating a coherent savings framework:
There is no one size fits all solution for people on lower incomes. The ‘low income’ consumer group is actually quite diverse with different income, consumption and saving behaviours. There are different segments of the low income group – those in employment but struggling to make ends meet, those whose income comes from benefits but are getting by alright, and those who experience persistent hardship. Hence one set of interventions will not suit all of these groups similarly.
People’s motivations and aspirations matter. A better understanding of the psychology of money has highlighted that people save for tangible and specific things, and that saving behaviour is closely linked with people’s aspirations. It’s more difficult to realise the tangible benefits of ‘rainy day’ savings versus savings for Christmas or a holiday. This lack of understanding leads to products that reinforce the ‘rainy day’ mentality of vague and unspecific outcomes. Instead, savings products need to have more realistic milestones, and more flexible rewarding periods that encourage individual savings goals.
Access issues will persist, even in a more open and competitive market. There are still millions of consumers who cannot access basic financial products and services because they have thin credit files or cannot provide sufficient identity documentation. With no viable solutions to this problem yet available, many of the consumers being targeted by a new policy agenda may not be able to even access the schemes. Additionally, while technology can drive innovation in this area, it should not become the sole channel for delivering the savings agenda. Without a ‘high street’ presence, consumers who rely on a face to face approach may not become aware of available schemes.
Finally, there was thoughtful debate on who is best placed to deliver the savings agenda – the mainstream financial services providers with familiar and recognisable brands, or an alternative option which brings together the state, the market, and the community. At the moment the discussion around savings is largely focused on products, but the current market isn’t offering anything that low income households need or want. The player who spends the most time and effort to understand households’ savings needs and motivations will emerge as best placed to deliver.
The Centre for Household Savings and Assets Management will be discussing these themes with the sector over the next few months to compile their Savings Manifesto, which is expected to be published in September. If you would like to feed into the Manifesto, you can do so here.