Oxford research leads to new legislation in the United States to improve financial planning among ordinary Americans.
How do we plan for periods in our lives when we can’t work? Some of us will have been prudent and saved sufficient funds to cover emergencies. We may also have planned for our retirement or other long-term requirements, such as our children’s education. All too often, though, money is spent rather than saved, meaning that financial fragility underpins our lives.
In the United States in particular, saving is neglected by a significant proportion of the population. However, recent legislation paves a radical new path towards financial stability. On 18 December 2014, President Obama signed the American Savings Promotion Act (ASPA) into law. ASPA removes US federal prohibitions on banks offering Prize Linked Savings (PLS) products, which are savings vehicles where the collective interest of savers is redistributed via a raffle-like draw – similar to National Premium Bonds in the UK which, when they were introduced in 1957, were dubbed “savings with a thrill”.
ASPA grew out of pilot testing and research conducted over the past eight years by Professor Tufano, Dean of Saïd Business School at the University of Oxford. Working in collaboration with the social enterprise Doorways to Dreams, which he co-founded in 2000 to support the finances of low income Americans, Professor Tufano analysed ways of developing innovative financial products, services and public policies.
“My research showed a real need among ordinary Americans for better savings provision,” says Professor Tufano, who was appointed Peter Moores Dean and Professor of Finance at Saïd Business School on 1 July 2011. “Too many people have not saved for a rainy day, although a great many people say they would like to be able to save more.”
Professor Tufano’s research into household finance spanned the US, UK and South Africa and revealed an appetite for PLS products as a means of saving. “Individuals are willing to give up the certainty of a small payoff from interest on traditional savings accounts for a small chance at a large, potentially life-changing cash prize,” says Professor Tufano. PLS products offer the payment of prizes from aggregate interest, with each saver’s principal remaining untouched. They can be set up so as to allow the payment of interest too, or run without interest payments but with bigger cash prizes.
On the ground testing of PLS products began in Michigan, which uniquely among American states did not criminalise them. In 2009, D2D and its collaborators launched Save to Win in Michigan, the first state-wide PLS product in the United States. Save to Win grew exponentially, with over 50,000 accounts opened and $100 million in savings to date. The development of Save to Win indicates that it is especially appealing to households who previously were non-savers.
Thanks to ASPA, then, the way is clear for financial institutions in each state to implement PLS products, though individual states will still need to pass legislation permitting institutions under their jurisdiction to offer PLS products. Saving with a thrill will help consumers develop long-term savings habits that will result in increased financial security. As Professor Tufano says: “Thanks to ASPA, an important barrier to support American savers has been lowered. Research and evidence can be brought to bear upon policy and business, with a clear economic benefit to society.”