Hard reality of no-saving habit

By Anthony Hilton for MailOnline
Updated: 19:00 EDT, 24 November 2003

THE SAVINGS industry on Monday repeated that it could not afford to market mass investment products if it was restricted to a 1% charge, just as the FSA's new chairman Callum McCarthy said his organisation was still struggling to devise low-cost regulation to go with them.

Both seem to be ignoring a fundamental point. Even if they could supply the products, where is the demand? Who is going to buy them?

Almost 10 years ago, the Weinberg Committee found three-quarters of households in Britain had no savings to speak of. Roughly a quarter simply could not manage on their incomes and ran out of money before the next pay day, if they had one.

Even more telling, however, was that the bulk of the rest had two savings cycles per year - the first accumulating for a summer holiday and the second saving up for Christmas - but almost nothing set aside to act as a buffer for a rainy day.

This is the reality of life in Britain that Government and the savings industry ignore. There is endless talk about the savings gap. But no one seems willing, candidly, to face up to the issue that most of those in the target market are not going to be able to do any saving, because they have no surplus income.

Intuitively one feels things are, if anything, worse today than a decade ago for one very powerful reason - for the past five years we as a nation have been consuming 105% of what we have earned. This has been made possible by our willingness to run up debt due to low interest rates and lenders' readiness to provide the money because of the rise in the value of housing which, tacitly or explicitly, provides security for much of the debt.

If this economy is ever going to get back on the even keel that Bank of England Governor Mervyn King thinks is desirable - and he should know - it is going to require the equivalent of us spending 95% of our income for five years and using the balance to pay off some of the debt.

Obviously the adjustment will not be that symmetrical - indeed, it would probably provoke a recession if it were - but the point is that when households do finally feel the need to change their spending habits, their first priority will be to pay off debt. Britain may have an issue with savings, but it has a much bigger issue with debt.

Life too is harder now for the portion of the population that traditionally did save. The post-war generation of graduates may have had to cope with mortgages and school fees, but today's generation starts with £10,000 or more of student loan to pay off before it tackles the rest of life's costs, including housing at unprecedented levels. Does anyone really think anyone under 40 will save significant amounts?

The increase in National Insurance contributions, coupled with a low basic pay rise, means many people are taking home less this year than last. Next year promises more of the same. Tax rises seem inevitable, given the state of Government finances, and predictions for wage rises from the likes of consultants Mercer suggest no one will get much more than inflation. The result is a further squeeze.

One final point. Never in more than 30 years has the public's trust in City savings institutions been so low, and never has a Government been so ham-fisted and destructive in its attempts to improve things.

Even if people have the money, they don't want to give it to the City. The public's idea of saving and investment is to get a bigger mortgage, buy a bigger house and invest in a home improvement. Because their investment is geared by a mortgage, escapes capital gains tax and means they do not have to pay rent, it is easily the best deal. They believe their homes will provide their pensions and, on their experience of the past 10 years, who can blame them?

The danger is that past experience has shown house prices can fall. But until that happens, people are not going to be interested in other savings products. And when they are, they won't have any money.

Clear winner

IN the end, the London Stock Exchange has done the deal most people wanted it to. It announced today it will accept a 25% price cut and continue to clear through the London Clearing House following LCH's merger with the French Clearnet.

It will take a seat on the merged board but may not take up the offer of a shareholding in the new business. This, coupled with its 12 months notice period, suggests it will continue to keep up the pressure for cost reductions.

We still don't know if the threat to move clearing to Frankfurt was serious or merely a negotiating ploy - but that just shows how well the LSE has played this hand.