Context
The UK Strategy for Financial Wellbeing, led by the Money and Pensions Service (MaPS) and published in 2020, identifies five National Goals. One of these aims to increase the number of working-age adults (who are financially ‘struggling’ or ‘squeezed’) saving regularly by two million, by 2030. MaPS aims to achieve this by enabling people to build a savings habit, increase their cash reserves to help with short-term emergencies and have a clearer future focus in their financial lives.
Reward-based and prize-linked savings schemes are potential mechanisms for promoting regular saving and supporting people to build a savings buffer. The UK government’s Help to Save scheme has been implemented to do this among people on low incomes. And there have been calls from UK charities and policy think-tanks for prize-linked alternatives to Premium Bonds that are better suited to the needs and circumstances of people on low incomes.
The study
This report considers the relevant UK and international evidence, published since 2010, on the effectiveness of reward-based and prize-linked schemes on saving on a low income.
Its initial focus is on saving behaviour. It then goes on to examine the ancillary benefits of saving behaviour, including the sums saved – the savings buffer – and improved financial wellbeing. Next it explores the possible the pathways to change, including the potential role of habit formation, and then considers the impacts of schemes on different groups of people and the influence of contexts. Finally, it identifies key learning for product design, delivery and communication.
The central research question this review aimed to address is:
- How effective are reward-based and prize-linked savings schemes in encouraging saving behaviour amongst low-income households?
Additional questions it sought to address are:
- Does the effectiveness of either product type differ depending on demography?
- What is the behavioural theory that sits behind reward and prize-linked savings products?
- What comparisons can be made between the two types of savings intervention, in terms of: effectiveness of reward-based savings products (guaranteed reward, such as a bonus), and effectiveness of prize-linked savings products (chance of winning a prize), and are there any comparisons between the two, e.g. effectiveness on different beneficiary groups and in different contexts and settings?
- What is known about how these products should be designed, communicated and delivered to enhance effectiveness?
Key findings
1) There is promising evidence of the popularity and effectiveness of both reward-based and prize-linked savings schemes for encouraging saving behaviour.
- The amounts saved in reward-based schemes are generally modest, in the order of a few £100s.
- The amounts saved through prize-linked schemes are slightly greater than in reward-based schemes, but this is from a comparatively small body of research.
2) Reward-based savings accounts – and a large share of the total saving – are often maintained some months and years beyond the award of a match.
- Automatic contributions may be a factor in this.
- In the context of reward based schemes, total savings and net assets are not necessarily improved as the savings in these schemes simply substitute for savings that would otherwise be held elsewhere.
- However, in prize-linked schemes, there is strong evidence that the additional savings come from reductions in expenditure and reduced spending.
3) The impacts of reward-based and prize-linked savings schemes on long-term saving behaviour are unclear.
- Generous incentives (particularly match rates) do appear to be helpful for promoting long-term saving
4) Facilitating regular saving and asset accumulation is key irrespective of how it arises.
- Current and recent policy emphases the role of routine and regular saving in financial wellbeing outcomes.
- Making saving attractive and easy is likely to be especially important for promoting regular saving.
5) Capitalising on behavioural and cognitive biases in reward-based and prize-linked schemes offers promise in helping low-income households overcome psychological barriers to saving.
- Prize-linked schemes benefit inherently from people’s tendencies to overweight small probabilities of large wins and in both scheme types the salience of the incentive (and actual wins) is important.
- A short time preference is one of the most important cognitive barriers to saving for low-income households and is influenced by how long people must wait for their reward or can access their savings.
- For low-income households that are averse to the loss of spending power that saving requires, the incentive and overall scheme design have to be attractive enough to overcome this.
- There is substantially more evidence which explains why prize-linked schemes promote saving behaviour, and this offers greater insight into effective product design and delivery than for reward-based schemes
6) Low-income households are nonetheless diverse and the benefits of schemes are not necessarily felt evenly.
- There is clear evidence that the attraction of prize-linked schemes is greater among the financially excluded, lottery players, and low and non-savers.
- Low-income households also differ in their responses to behavioural designs, regardless of how they may be defined by their demographic, socio-economic or financial characteristics.
7) In the successful design and delivery of products, the most researched and clearest evidence for both scheme types relates to the offer of a substantial financial incentive.
- A high incentive draws attention because it is salient. However, frequent and short-term incentives and flexibility in saving frequency, amounts and withdrawals are also important for low-income households.
- The framing of a scheme and messaging to communicate it must be clear, positive and appropriate to the needs of the target beneficiaries.
- Choosing a trusted provider and pairing strong incentives with other design features, such as goal setting, automatic transfers, financial capability and gamification, are expected to support scheme success.
Points to consider
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Methodological strengths/weaknesses: The review methodology used a rigorous, methodological but flexible approach based on the rapid evidence assessment approach. Details of appropriate search terms for a search and source are also provided, including why papers were included or not.
- There are over 40 papers cited, from a wide variety of reputable sources such as numerous academic peer reviewed journals, so the study appears thoroughly researched.
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Relevance: This report is relevant to all stakeholders, academics and policymakers with an interest in savings and saving schemes, particularly in relation to financial wellbeing.
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Generalisability/ transferability: The research is mostly generalisable to the UK though readers should note that a small amount of the evidence is based on studies from other countries such as the United States, Australia and New Zealand.
