Office for National Statistics data released earlier this year purported to show that British households were in the midst of the most significant squeeze on living standards since the 1970s.
The central argument presented for this worrying demise in expendable income was a data extrapolation that apparently showed a drop in the percentage of household savings being set aside as savings to 1.7%. This was set against a savings ratio of 3.3% over Q4 of 2016 and 6.4% over Q1 of 2014.
Since that healthy 2014 savings ratio, ONS data has shown six consecutive quarters of decline in the savings ratio of households. Headlines across the media suggested that the consumer-spending driven economic growth that has kept the UK economy unexpectedly buoyant since the shock Brexit referendum result had been fuelled by credit.
A drastic drop in savings and spending on credit was a ticking time bomb sitting beneath the country’s economy, ready to blow in the relatively near future, was the most common interpretation of the data.
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Savings Ratio Affected by Company Pension Schemes
However, insurer Royal London recently questioned the validity of the conclusions drawn.
The financial institution highlighted several factors it believes have distorted the headline 1.7% figure and raised doubts over the methodology the ONS employed to reach it.
The author of Royal London’s paper that challenges a real decline in savings, or at least such a major one, is Steve Webb, the insurer’s director of policy. Webb explained that recent falls in the UK’s household savings ratio can be almost fully accounted for by a drop in the value of funds in company pension schemes.
Accrued pension entitlements are calculated in the savings ratio figure and over the past few years companies have dropped the pace of how quickly they have been trying to plug pension scheme deficits.
Returns on the investments held by pension funds has also tailed off as the financial markets boom of the recovery from the ‘08/’09 financial crisis slowed down and more money has been paid out of schemes as people retire.
The result of this has been a drop in the value of funds held in pension schemes which, because of the methodology employed in the ONS calculation has fed through to a declining savings ratio figure.
Webb referred to the accounting adjustment based on the declining value of company pension schemes as ‘very odd’.
Depending upon company contributions, fluctuating fortunes of investments and payouts, total company pension schemes value can vary hugely month to month. Due to the way it is calculated, this makes a big impact on the household savings ratio reading.
Additionally, Webb questioned why the ONS data does not include ‘unfunded’ government pension schemes such as those of the NHS, teachers, civil servants and the military.
The government has increased contributions into these schemes since 2014 and Webb believes it’s quite possible if those had been included “it seems quite possible that total saving…would actually have gone up had account been taken..”
While direct accusation was carefully avoided, the inferred conclusion seems to be that perhaps the government has excluded unfunded state pension schemes from statistics in order to keep the huge shortfalls they have out of sight and mind.
Early Dividends to Sidestep Increased Tax
The other factor highlighted by the Royal London paper was that due to the increase in dividend taxation brought in from April 2016, many business owners paid out dividends early, the self-assessment income tax on which was due being paid in January of this year.
This meant large lump-sum income tax payments being made in Q1 and a drop in savings over the same period.
However, this suggests, Royal London posits, careful budgeting and not irresponsible spending.
The conclusion drawn by Royal London’s Webb is that a closer look ‘under the bonnet’ of UK household savings would avoid the ‘misleading narrative’ developed from the earlier ONS figures.
So hopefully things are not as bad as it seemed.
Royal London did, however, caution that while the aggregate savings ratio of UK households seems to be in relatively good health despite the ONS data, there are still many households who need to raise their game if they wish to ensure a more secure financial future.