Policymakers cannot draw conclusions from the falling savings ratio alone, Sir Steve Webb has warned.
The savings ratio dropped to a record low of 1.7 per cent in Q1 2017, according to data from the Office for National Statistics.
This is an ongoing trend for the past two years, since between Q1 2014 to Q4 2016, the ratio halved from 6.7 per cent to 3.3 per cent.
In a research paper published this weekend (19 August), Sir Steve argued 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".
The former pensions minister said the main conclusion to be taken from this research is that policymakers need to look at a range of indicators, and “not just one number and not quarter by quarter”.
“The collapse in the headline savings ratio figure has served to spark an interesting debate about modern attitudes to saving and spending, but policymakers must be sure that they understand what is going on behind the headline figure if they are to effectively manage the modern economy,” he said.
Sir Steve said the decrease in the savings ratio in the past two years is due to three factors: a drop in the amount companies were putting in to their defined benefit (DB) company pension schemes; a fall in rates of return on the investments in pension funds; and a rise in withdrawals from defined contribution (DC) pensions.
But the first quarter figures had an added element of distortion, Sir Steve told FTAdviser.
“January is a time when those whom are self-employed or fill in a tax return have to pay their taxes. They are not buying sofas or going on holiday, they are setting money aside in order to pay their tax bills,” he said.
Excepting the effect of the income tax payments, which is likely to disappear from the Q2 data, the remaining factors have been permanent during the last two years.
According to the research, “there is some evidence that employers were putting less into workplace pensions than before; a more detailed look at the data suggests that this is overwhelmingly because of a slowing in the rate at which firms were trying to ‘repair’ the deficits in their DB pension schemes”.
Also, the quarter-by-quarter data for employer DB contributions is very volatile, which reinforces the case for not relying too heavily on one quarter’s headline savings ratio number, Sir Steve said.
Besides provoking a fall in the pension funds investment return, interest rates are also causing an increase of these schemes liabilities, he said.
This increases the bill that companies need to pay to fund their DB funds.
Sir Steve also noted that the increase of DC withdrawals is probably associated with the pension freedoms introduced in 2015.
“We asked advisers, and people just want to restructure their income for retirement, they are not spending it in the majority of cases,” he said.
Roy Mcloughlin, associate director at London-based Cavendish Ware, is surprised by the research conclusions.
He said: “Auto-enrolment is increasing savings, so I would expect the saving ratio to go up.”
“People have changed their mind-set and are acknowledging that they need to make pension provisions. Auto-enrolment is changing the savings culture in Britain,” he stated.
Gem Durham, independent financial adviser at Obsidian, agreed with the overall conclusion of the paper.
She said: “Headline stats can be so miss-leading, and if you dig a little deeper you often find (as in this case) that what is implied by the headline is quite possibly not true.”
According to research from LV, 65 per cent of respondents do not have a safety net in case of a financial disaster. Those aged between 25 and 34 who live in rented accommodation are particularly vulnerable.
maria.espadinha@ft.com
