Gregg McClymont: BoE policy is hitting appetite to save


I have argued previously that the UK is a nation of savers, not investors. A colleague responded by pointing out that if this was true at all it was true only relatively speaking. He was right.

So many financial services industry conferences I attend culminate in the cry that the UK does not save enough. That we are heading for a retirement crisis.

Quantitative easing is increasingly discussed in the context of rising defined benefit pension scheme deficits. By driving down interest rates, QE drives down the present value of pension schemes’ future cashflows (measured by the discount rate).

But QE’s impact on household savings rates gets less attention. The UK’s savings ratio – the share of households’ and related institutions’ disposable income left over after spending – for both the final quarter and the full year 2015 were the lowest since records began more than 50 years ago, according to the Office for Budget Responsibility.

Households saved just 3.8 per cent of their disposable income in the final quarter of last year – well under half the share they were leaving aside as recently as 2012.

The most recent figures are even worse. The respected GfK survey tracked a sharp fall of 16 points in people’s desire to save money between July and August this year: the sharpest month-on-month fall in the survey’s 20-year history of conducting a savings index.

The Bank of England is increasingly open about the trade-off involved. Its chief economist Andy Haldane declares that: “I sympathise with savers but jobs come first”. That means from a policy point of view encouraging institutional investors to hold fewer risk-free assets and more growth assets. Thus the Bank’s gilt-buying exercises, which seek to drive up the cost of buying risk-free assets so that holding them in ever greater proportions becomes irrational for pension schemes, insurers and the like.

At an aggregate level this monetary massaging makes sense given the UK economic outlook. By fixing its banking sector more rapidly and effectively, and by engaging in fiscal as well as monetary easing, only the US among financial crisis hit economies looks close to reaching “escape velocity” – economese for self-sustaining recovery.

The UK looks more vulnerable, especially in the wake of Brexit. Thus the latest interest rate cut. Fears about sustained – secular – economic stagnation driven by new fundamentals of ageing societies and low productivity growth are real. Japan stands as the cautionary tale.

But for individual savers the transmission effect of near zero interest rates is not to encourage the holding of growth assets – or at least not in aggregate. Rather it is – in aggregate – to reduce the wealth of retirees dependent on savings income and to reduce saving among those in employment.

After all, when your money is sitting in the bank losing value against (the real rate of) inflation, why not go ahead and buy that gleaming new car you have always wanted but which caution has until now thwarted?

Savers do not move up or down the efficient frontier in an attempt to maintain a stable level of risk-adjusted return. If they did, they would be investors. Back to where I started.

Gregg McClymont is head of retirement savings at Aberdeen Asset Management