British consumers have reason
to be confused, being encouraged by the government to save for
their old-age and simultaneously being told by the Bank of England
to spend for prosperity. Anyone seeking the answer need look no
further than an already low savings ratio and inadequate pension
provision.
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Deputy Bank of England governor
Charlie Bean has sent out a message that will hardly delight the
country’s more than 200 life insurers and pension product providers
locked in an intense battle for the British consumer’s savings.
Spend and then
spend some more was the essence of Bean’s message in which he
emphasised that the central bank’s policy was to discourage
savings.
Bean, who must at least be given
credit for speaking frankly, told the BBC and Channel 4 news
viewers that interest rates were being kept at rock-bottom levels
to discourage consumers from saving and encourage them to spend
more to help boost the UK’s moribund economy.
According to the BBC, Bean stated
that the bank wants people to “eat into” their savings.
Bean explained: “What we are trying
to do by our policy is encourage more spending. I think it needs to
be said that savers shouldn’t necessarily expect to be able to live
just off their income in times when interest rates are low. It may
make sense for them to eat into their capital a bit.”
Bean is a member of the Bank of
England’s monetary policy committee that sets the base interest
rate which has been at 0.5% for some 18 months. Before commencing
its steep decline, the base interest rate stood at 5.75% in early
2008.
It is not surprising that he has
come under heavy criticism for his statement. Not least of those
critics is Ros Altmann, an independent pension adviser and, among
other positions, a governor of the Pensions Policy Institute.
“The economic crisis resulted from
too much debt and not enough saving, but short-sighted policy is
repeating the same errors by attempting to undermine savers and
damaging pensions,” said Altmann.
“This will not solve our problems
and, with an ageing population, damaging pensions just means that
more people will end up in poverty, fall back on benefits or be
forced to take more risks with their money that could wipe out
their capital.”
Altmann continued that Bean’s
comments undermine the coalition government’s claims to want to
rebuild the UK’s savings culture and reinvigorate pensions and
retirement.
“Households should be encouraged to
pay back debt and build up reserves to sustain them in older age,
not to keep spending like there is no tomorrow,” stressed
Altmann.
“If the Bank of England creates
inflation to help devalue debts, then a generation of savers and
those who did put aside money for future pensions will be damaged,
which will cause future generations to mistrust savings,” Altmann
concluded.
Spend more, save
less
However, Bean could be getting
exactly what he wants. According to the UK’s Office for National
Statistics (ONS) the household saving ratio fell to 3.2% in the
second quarter of 2010, down from 5.5% in the first quarter.
Annualised quarter-on-quarter GDP growth in the second quarter of
2010 was 1.2%, reported the ONS.
Compensation of employees at
current prices rose by 0.1% in the second quarter and was 2.4%
higher than the second quarter of 2009, well below the inflation
rate which stood at 3.1% in September.
Bean’s call to spend more and save
less comes at a time when the country’s life and pension industry
can at best be described as moving sideways for over a decade.
According to data just released by
the Association of British Insurers (ABI) the life industry’s total
premium income in 2009 was £119bn ($185bn), compared with about
£100bn in 2009. This represented a CAGR of just below 1.8%.
Compared with 2008, premium income
was down 9% in 2009 with life premium income down 41%, roughly half
the level in 2009, and pension premiums up 3%, almost two thirds
higher than in 1999.
Despite the improvement in pension
premium income over the past 10 years, a survey conducted by the
ABI in the second quarter of 2010 found that only 55% of consumers
can be regarded as adequate savers. A further 14% of respondents
were under-savers while 27% had no pension savings. The remaining
respondents were unclassified.
Life insurance presents a more dismal picture with only about a
third of British households having any form of life cover,
according to the ABI. Somewhat incongruously, almost 80% of
households have cover for their household contents.
