UK households have not stopped saving to go on a debt-fuelled consumer spending spree, according to research from Royal London, despite official figures revealing the savings ratio is at a record-low.
The insurer’s paper Has Britain really stopped saving? casts doubt on the meaning of the data supplied by the Office for National Statistics (ONS) earlier this year, and cautioned against policymakers jumping to the wrong conclusions.
On 30 June, the ONS published figures that indicated household savings reached a record low, with Brits saving on average just 1.7% of their earnings.
It said the household savings ratio fell from 3.3% in the fourth quarter of 2016 to 1.7% in Q1 2017, having already started to decline in previous years.
According to the paper, the Q1 2017 figure was distorted by people making larger than usual lump sum payments of income tax before the January 31 deadline; which Royal London said suggests that the fall in savings ratio is not a sign of reckless consumption, rather that people have been carefully setting aside money to pay their tax bills.
The ONS also said the savings ratio halved from Q1 2014 to Q4 2016, from 6.7% to 3.3%. However, Royal London said the fall is almost completely explained by changes in the figures for pension savings, which again provide little evidence of consumer spending sprees.
It said during that period, the fall in the ratio can be attributed to:
- A drop in the amount companies contributed to their defined benefit company pension schemes
- A fall in rates of return on the investments in pension funds
- A rise in withdrawals from defined contribution pensions, likely associated with the pension freedoms. Analysis from the Financial Conduct Authority suggested most of this money was used either to pay off debt or invested in other savings, rather than fuelling consumer spending.
Royal London also picked holes in the way the ratio is calculated, pointing out that it excludes “millions” of public sector workers who are members of ‘unfunded’ pension schemes.
The provider claimed that if they were included, the halving of the savings ratio between Q1 2014 and Q4 2016 would have been “largely or wholly” explained by changes in pension saving, rather than anything to do with short-term consumer behaviour.
Royal London director of policy Steve Webb said while the recent figures have been “eye-catching”, they actually give very little information on consumer spending.
“Leaving aside short-term factors like people paying lump sum tax bills before the January 2017 deadline, most of the recent change in the savings ratio has been about what is happening in the world of pensions and tells us little or nothing about consumer spending habits,” said Webb.
“Policymakers need to be incredibly careful about reading too much into a single headline statistic such as the savings ratio when it may be painting a very misleading picture of what is really going on in UK households.”