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.