Research questions image of spendthrift UK consumers

Sharp falls in the proportion of households’ income that is saved rather than spent has been interpreted as a worrying sign that British families have in recent years been living beyond their means.

However new analysis by Royal London suggests that changes in how companies fund their pension obligations have distorted the so-called household savings ratio. It argues that this ratio has been skewed by a reduction in the contributions that companies make to fill pension fund deficits — to paint an unfair picture of spendthrift British consumers.

The household savings ratio has become a key indicator of how the UK economy is performing since last summer’s EU referendum. Buoyant consumer spending in the aftermath of the vote has helped to keep the economy growing despite prices rising faster than wages.

Many economists have questioned how sustainable this consumer-driven expansion is, pointing to the declining savings ratio and rapidly increasing levels of credit card and car debt. The research from Royal London suggest that while some households are not saving enough, in aggregate they are.

The majority of money saved in the UK is either in people paying off their mortgages or putting money towards their retirement through a pension. Counted in this measure of savings are accrued pension entitlements from employers.

Recent falls in the household savings ratio is almost entirely explained by a decline in the amount of funds in company pension schemes, the research says. This decline is not a result of people making smaller contributions but in how companies are dealing with deficits.

The amount of saving in pensions funds has shrunk due to a slowdown in how quickly companies are trying to plug deficits, a fall in how much the funds are earning on their investments, and more money being paid out of these schemes as people retire.

“The whole of the decline for the last three years is explained by something that is not about consumers and consumer profligacy,” said Steve Webb, Royal London director of policy and author of the paper. “There is a risk of being led down the garden path . . . Unless you stop and take a deep breath and look under the bonnet a whole narrative develops which can be misleading.”

He says the Office for National Statistics make a “very odd” accounting adjustment for the change in the size of pension deficits. This adjustment can vary by billions of pounds every quarter, and as only about £11bn is saved in total the adjustment can massively distort quarterly figures.

Additionally, government pensions which are ‘unfunded’ are not included in the figures. This includes the main public sector pension schemes for teachers, the NHS, civil servants and the military.

These pension schemes have seen increases in contributions since 2014. “It seems quite possible that total saving . . . would actually have gone up had account been taken of saving into unfunded pension schemes,” the report said.

The ONS said the June that the household saving ratio had fallen to its lowest level since the 1960s with households saving, on aggregate, 1.7 per cent of their income in the first three months of 2017. An increase in dividend taxation from April 2016, meant that some business owners paid dividends out early, with the self-assessment tax due on these payments being paid in January 2017.

This was just the latest step in a longer term decline in savings. The figure for the first quarter of 2017 was down from 6.4 per cent in the first quarter of 2014 and was the sixth consecutive quarter of falls in the proportion of income saved. The ratio was 3.3 per cent in the final quarter of 2016.

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