BGN Entrepreneur

On the face of it, news that the savings ratio has risen to its highest level ever since 1998 ought to be good. Britain’s households have been living beyond their means for most of the Noughties and, as recently as 18 months ago, the savings ratio was close to zero. It was even negative for the first three months of 2008.
So, in theory, anything that helps to restore order to household finances should be welcomed. Or should it? As John Maynard Keynes pointed out, excessive saving at a time of recession can do more harm than good, a phenomenon he called the paradox of thrift.
Accordingly, it can be argued that if this pick-up in the savings ratio genuinely reflects a greater desire by households to spend less of their incomes and save a greater proportion, it could torpedo any hopes of a return to meaningful economic growth next year.
But that does not appear to be the case here. Instead, all the evidence points to the savings ratio improving simply due to a number of the most heavily indebted households paying down their borrowings, along with a minority of households overpaying their mortgages. That, in itself, does not necessarily jeopardize growth prospects, such as they are, for 2010 and is probably worth celebrating, in that it confirms a long-overdue recognition from many consumers that they were too far in debt.
The bigger issue is whether, as in days gone by, Britons, now that they have been weaned off the unhealthy habit of using their home as a cash machine, can ever resort to the practice of putting a little by each month for a rainy day.
One of the main reasons that savings ratios have been so low during the past decade is that this virtuous habit has died away. In housing estates where once the man from the Pru knocked on people’s doors to collect a weekly premium, these days it is more likely to be the lady from Provident Financial calling to collect her weekly loan repayment.
The savings industry, it is fair to say, has not helped. The mis-selling of both pensions and endowment mortgages from the late 1980s onwards began a process that saw the public’s confidence in savings products and savings providers systematically undermined and which was exacerbated by the Equitable Life scandal. The Government played its part, never more so than with Gordon Brown’s raid on pensions in 1997, while regulators also contributes, as evidenced by the very public debate over the solvency of various life companies around the time of the 2003 stock market collapse, which eventually forced Standard Life to demutualise. And then came the flight to safety sparked by problems at Northern Rock in 2007.
A study published by AT Kearney, the management consultancy, revealed that 90% of UK households have less than £50000 in financial assets, including their defined contribution pensions, and average financial wealth of only £7000.
It would be nice to think that, eyeing what could be a prolonged recovery in savings ratios, the UK financial services industry might now be engaging its best brains to create a suite of easily understood, low-cost products that would appeal to such households. On the industry’s track record, though, it would be unwise to expect as much.

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