Pensions

Anthony Hilton: Are Britons saving or not? Don’t trust the official statistics

The one certainty about economic statistics is that they will be wrong, and the only debate should be around whether they are out by a little or a lot.

Thus the quarterly growth figures, by which the City sets such store when they are released, are subject to extensive revision in the following two years as more data comes in.

The end result frequently is to give a quite different picture of events from history’s first draft. And so it is with savings.

The mantra of the pensions industry as it seeks to sell its products, repeated by politicians who are paid to fret about the nation’s finances, is that the British do not save enough.

Concerns have been expressed for years but they came to a head in June when the Office for National Statistics published its estimate for what proportion of their income people had saved in the first quarter of the year — the savings ratio.

They found that it had slumped to an all-time low of just 1.7%.

To put this in perspective the savings ratio in China is over 30% and in Germany it hovers around just under 10%.  

Even in the UK for most of the past five years it has been between 6% and 8% before six successive quarters of decline brought it to its current pass.

Given that in the early Nineties the ratio briefly touched 15%, the conclusion was clear. The current generation was either utterly feckless or drowning in a mountain of debt — possibly both.

To be fair there were some sceptical voices.

Sir Steve Webb, the Liberal Democrat pensions minister in the coalition government and now policy director at the mutual insurance group Royal London, found it hard to believe that things could have got so bad so fast and started asking questions.

The result was a fascinating blog published a few weeks ago in which he got behind the methodology and found that, far from being a story about consumers going on a credit-fuelled spending spree, the fall in the savings ratio over the period was almost entirely explained by changes in the rate at which individuals were building up future pension entitlements.

The key factors driving this were things over which individuals had no control, being changes in the rate at which companies were making extra contributions to pension schemes to help eliminate historic deficits, and a lower discount rate — linked to interest rates — which is used to calculate the future value of pension entitlements and expected rates of return.

There was this massive fluctuation but the actual amount people put in their piggy bank, or indeed took from it, had barely changed at all — apart from those of a certain age — but hardly representative of the population at large who took advantage of the newly announced freedom to gain early access to their pension pots.

Webb found out too that statisticians don’t treat all pensions equally.

Most state employees — and those who work in the NHS, the armed forces, the police or in schools — pay a chunk of their salary towards a pension.

But instead of going into a dedicated pot, as in the private sector, the Government treats these payments as yet another source of tax revenue to pay the present lot of retired state workers.

Similarly, those working today will have their pensions paid by state employees who are working when they’ve retired.

But because this money is technically not saved in the sense of being formally set to one side, it does not make it into the official figures.

Thus the pension savings of a million or more people, many of whom are setting aside really quite large sums of money every month, are ignored in the calculation of the savings ratio.

Statisticians have a tough job, the more so when trying to get a fix on savings which is, after all, just the difference between two huge numbers — what the country earns and what it spends.

But what Webb’s probing reveals is that the savings ratio as published in fact tells us very little about consumer behaviour and whether current spending is too high.

It certainly should not be used to guide policy — at least not without much more analysis.

Now, as if all this were not confusing enough, it is all scheduled to be tossed in the air tomorrow when the ONS announces its latest series of revisions.

And just to rub home the point, what these figures will show is that household saving did not hit a record low last June after all.

Most of the revision relates to earlier years — from 2010 to 2015 — and covers all aspects of the economy, not just saving.

Thus we have an even bigger trade shortfall demonstrating that we find it even harder to export than we thought, with the estimated deficit figure for 2015 ballooning from £80 billion to £98 billion.

On the other hand the growth in incomes over the period was also greater than previously believed, in 2015 it was 5.3% not the 3.5 % recorded.

When it comes to savings, the rise for 2015 is from 6.1% to 9.2% — ie, 50% more than thought. It was higher in earlier years too so the overall picture from 2011 to 2015 is one of very little change.

And even if the recent plunge is eventually confirmed and persistent — which seems highly unlikely — it will be a plunge from a much higher starting point.

It will be low but nowhere near that “record” 1.7%.

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