The ONS is important for young people.
This blog refers to an article by Mary McDougall published today and readable from this link. A free read is on this link – if you a non-subscriber. If the free shares have run out, please contact henry@agewage.com .
The IFS criticism of ONS methodology (in particular of pensions wealth) is detailed here
A challenge has been set readers of my blog. It has been set by the Institute of Fiscal Studies which is challenging the adoption by the Office of National Statistics of giving the wrong impression of British pension wealth by adopting the SCAPE rate of valuations (based on economic growth) rather than remaining with the market rates it had used before.
In a language that I think I understand, ONS took a very long view of the affordability of paying pensions (of all kinds) based on what we have done not by actuarial and accounting measures such as interest rates, gilt rates, growth rates of indices etc…
SCAPE is used to measure the pain to the Government and hence us tax-payers of paying unfunded pensions and to suppose that in the long term the payment of private pensions is based on the same assumptions assumes that private pensions carry the same obligation to the tax-payer. They may be a little more expensive (if you consider the cost of managing a funded arrangement but I wouldn’t have thought in the long-term that we have much better to work out the cost of pensions than our national productivity (measured by SCAPE).
So now we get to the challenge. It is a challenge that will interest many readers of this blog. Let us start with a comment on the article introducing this squabble by an anonymous commentator.
Ah, why don’t ONS just produce estimates using both methodology?
It is a long range estimate and who knows what the outturn will be.
Anyway: Wealth asset survey Round 8: (2020 to 2022).
Median household wealth in Great Britain was £293,700 vs 302700 in round 7, using the old methodology which IFS referred to.
The wealthiest 10% of households had household wealth of £1,200,500 or more, while the least wealthy 10% had £16,500 or less.
Median household wealth varied by region, with the largest difference seen between the South East (£489,800) and the North East (£179,900).
It seems a reasonable point, I find the ONS using the SCAPE method makes sense for the distant future and frankly I am not too interested in long-term assessments based on Fiscal Studies (IFS).
But I want to hear this argument properly discussed because I suspect it is very much in the Pensions Minister’s thinking. If – as he spoke in Edinburgh – he considers the long-term affordability of a pension system is dependent on the growth of the nation, then we need to target economic growth to work out if we can afford our promises, this particularly concerns those that the Government is entirely responsible for paying (State and public unfunded pensions) but is also an indicator of the capacity of private pensions (DB, DC and CDC) to pay people a retirement income.
Put another way, the amount of income we pay in time is based on economic growth or accountant and actuary estimates of market rates. ONS has of course taken advice on moving to SCAPE and taken it from the Government Actuaries (as reported by the FT)
The change of ONS’ valuation of benefits going forward was advised..
It followed a recommendation from the Government Actuary’s Department to “minimise undue volatility” in the value ascribed to defined benefit pensions, which promise guaranteed pensions based on salary and length of service.
However, the IFS said the “misguided” valuation approach was “a mistake, making an already flawed methodology substantially worse”.
There is a separate question as to how we value pension benefits which is based not on saving but on achieved pensions, I would be interested if the “superannuation contributions adjusted for past experience (Scape) rate” is giving a true picture of the amount being put away through auto-enrolled savings, on annuities paid in place of pensions as well as the diminishing importance of private sector DB schemes.
I want to follow the comments in the FT ( the first one published above is a good one) and I want to hear from the ONS and GAD and the Pensions Minister who will have been appraised of this change.
I want to understand whether we are going to link success in the future to the growth of the country of persist with valuing pensions with reference to the returns and yields of stocks and bonds.
Most importantly, we need to start thinking for those for whom retirement starts in ten , twenty and thirty years. For those retiring in 2035, 2045 and 2055, what they expect to be getting should not be down to the short-term fluctuations of the assumptions we give to funded pensions (including the pensions from DC – which don’t exist yet). These are irrelevant to those retiring then, people should be thinking about retirement on a more fundamental view, the ONS moving to SCAPE seems to be a good thing, but I am ready to hear from those more expert than me.
I suspect that the IFS are being a little short- sighted here, we have a lot of valuations based on markets, but not much thinking about the long-term. Pensions are long-term.
So let’s hear from you experts and those like me who aren’t expert but care about our children.
I wait to hear from Allan Martin, a retired Scottish actuary and long term commentator on matters SCAPE from time to time in these blogs.
My own views are these:
Its full name is the Superannuation Contributions Adjusted for Past Experience (SCAPE) rate, the discount rate used by unfunded public service pension schemes to place a current value estimate on expected future pension payments.
It has been subject to a series of adjustments over the past eight years, reducing the SCAPE discount rate from CPI plus 3 per cent in 2011 to CPI plus 2.4 per cent in 2018.
In the most recent update, the Government announced a further decrease to CPI plus 1.7 per cent, which impacted public sector employer contribution rates from April 2024, prompted by the latest downward revisions to our long-term growth forecasts.
The margin over CPI is said by some to be an estimate of GDP growth.
GDP growth is adjusted for inflation by calculating “real GDP,” which uses a price deflator to express GDP in constant prices, allowing for meaningful comparisons of economic output over time.
Latest GDP growth rate for 2024 was annualised as 1.4%.
Historic GDP (1956-2024) was higher at 2.3% (but is that time-weighted, not GDP-weighted?)
Or use GNP (now called GNI by some) growth instead, most recently reported as minus 1.4% for 2023.
GNP was reported at 920.655 USD bn most recently in Sep 2024, an increase from the previous number of 872.904 USD bn for Jun 2024.
UK Gross National Product (GNP) data is updated quarterly, averaging 282.639 USD bn from Mar 1957 to Sep 2024, with 271 observations.
GDP is said to be a measure of the country’s output, but was never intended to be a measure of wellbeing or progress – it was developed in the US in
the 1930s to fill gaps in information available about the state of an economy.
There are many things that GDP does not measure at all which contribute significantly to
our collective wellbeing, such as caring, domestic activities, and the natural environment.
GDP does not take into account current inequalities nor the long term impact of actions, such as environmental impact.
GDP is the sum of everything spent by consumers, businesses and the government within a
country within a year (plus exports, minus imports) with two important caveats:
It only counts finished goods and services: these are goods and services that will not be sold again as part of another product.
And it only counts goods produced: it counts new things that have been produced, not all
goods that are sold.
Gross National Product (GNP), on the other hand, is the total value of all final goods and services produced by a country’s residents, regardless of where they are located, including income earned abroad, but excluding income earned by foreign residents.
From an investment point of view I’d want to include income earned from overseas.
From a taxes being used to part fund benefits approach I’d also want to include income earned by foreign residents.
You pays your money and you takes your choice(s).
I read elsewhere today that accountants EY have released their UK regional growth estimates for the period to 2028.
London and the East of England are both forecast to achieve annual GVA growth of 1.7% between 2025 and 2028.
Close behind are the South East, the South West and Northern Ireland, which are all forecast to match the UK’s pace, with annual GVA growth of 1.6% between 2025 and 2028.
Aberdeen, sadly, is forecast to grow at less than 1%, while across in Norway they’re awarding new drilling and exploration licences in its sector.
(For every pound of revenue the UK Exchequer has received, per barrel, extracted from the UK oil and gas sector of the North Sea, the Norwegian state has secured three from their “half” of the shared resource.)
GVA at basic prices plus taxes on products minus subsidies on products equals GDP at market prices (or headline GDP).
Even more to choose from, but seems to support the lowering of the SCAPE discount rate to CPI plus 1.7%.