Quarterly sector accounts, UK: October to December

• In Quarter 4 (Oct to Dec) 2016, the households and non-profit institutions serving households (NPISH) saving ratio was 3.3%; the lowest quarterly saving ratio since comparable records began in Quarter 1 (Jan to Mar) 1963.

• For the year 2016, the households and NPISH saving ratio was 5.2%, compared with 6.5% in 2015; the lowest annual saving ratio since comparable records began in 1963.

• The level of real households and NPISH disposable income (RHDI) fell by 0.4% in Quarter 4 2016, following a fall of 0.3% in the previous quarter.

• Households and NPISH net borrowing increased in Quarter 4 2016 to £11.1 billion; this was the highest level of quarterly households and NPISH net borrowing since comparable records began in Quarter 1 1987.

• Central government net borrowing decreased in Quarter 4 2016 to £10.2 billion; this was the lowest level of quarterly net borrowing since Quarter 2 (Apr to June) 2007.

• There was a high value of merger and acquisition activity in 2016, which is reflected in the financial accounts.

This is the first Quarterly Sector Accounts bulletin to include Tables:

• J1 Households and Non Profit Institutions Serving Households Sector (S.14 + S.15) Allocation of Primary Income Account;

• J2 Households and Non Profit Institutions Serving Households Sector (S.14 + S.15) Secondary Distribution Income Account;

• J3 Households and Non Profit Institutions Serving Households Sector (S.14 + S.15) Use of Disposable Income Account;

• K1 Private Non-Financial Corporations Sector (S.11002+S.11003) Allocation of Primary Income Account;

• K2 Private Non-Financial Corporations Sector (S.11002+S.11003) Secondary Distribution of Income Account and Capital Account;

• PH Per Head;

• AH UK sector accounts revisions from previous estimate.

In previous quarters, apart from the new PH table, these tables were previously published in the Quarterly National Accounts publication.

Understanding the sector and financial accounts

This bulletin presents UK aggregate data for the main economic indicators and summary estimates from the institutional sectors of the UK economy: private non-financial corporations, public corporations, financial corporations, central and local government and households and non-profit institutions serving households (NPISH) as well as the rest of the world sector, that are presented in the UK Economic Accounts (UKEA) dataset.

This bulletin uses data from the UKEA. The UKEA provides detailed estimates of national product, income and expenditure, UK Sector Non-financial and Financial Accounts and UK Balance of Payments. These accounts are the underlying data that produce a single estimate of gross domestic product (GDP) using income, production and expenditure data.

The sector accounts are fully integrated, but with a statistical discrepancy, shown for each sector’s account. This reflects the difference between a sector’s net lending or net borrowing from the non-financial account and the net lending or net borrowing from the financial accounts, which should theoretically be equal but differ due to different data sources and measurement practices.

Comparability

Data in this bulletin are internationally comparable. The UK National Accounts are compiled in accordance with the European System of Accounts (ESA 2010), under EU law. ESA 2010 is itself consistent with the standards set out in the United Nations System of National Accounts 2008 (SNA 2008).

An explanation of the sectors and transactions described in this bulletin can be found in chapter 2 of the European System of Accounts 2010 (ESA10) manual.

Estimates within this release

Revisions in this bulletin are made in line with the National Accounts Revisions Policy. The earliest period open for revision in this release is Quarter 1 (Jan to Mar) 2016.

All data within this bulletin are estimated in current prices (also called nominal prices), with the exception of real households and NPISH disposable income, which is estimated in chained volume measures.

Current price series are expressed in terms of the prices during the time period being estimated. In other words, they describe the prices recorded at the time of production or consumption and include the effect of price inflation over time. Chained volume measure price series (also known as real terms) remove the effect of price inflation.

All figures given in this bulletin are adjusted for seasonality, unless otherwise stated. Seasonal adjustment removes seasonal or calendar effects from data to enable more meaningful comparisons over time.

Population estimates published in this bulletin are consistent with those published on 23 June 2016 in the Population Estimates for UK, England and Wales, Scotland and Northern Ireland publication.

Notices for this bulletin

We have identified a processing error in flows of UK corporate bonds. We are investigating the options for addressing the error and will publish further details and revised data as soon as possible. The series known to be directly affected are KLC5 and KLC8 (Bonds issued by UK MFIs and other UK residents). There will be knock-on impacts on bond asset flows and higher-level aggregates.

In the publication of 23 December 2016, it was stated that the tables in the UK Economic Accounts do not contain the most recent data for inventory holding gains for financial corporations and private non-financial corporations for 2015 onwards due to late processing of these data. Data for 2016 has now been updated for this publication, the UK Economic Accounts published on 31 March 2017. Data for 2015 will be updated in the publication on 29 September 2017.

Real households and non-profit institutions serving households (NPISH) disposable income (RHDI) explained

Households and NPISH income is measured in 2 ways: in current prices (also called nominal prices) and in real terms, where the effect of price inflation is removed.

Gross households and NPISH disposable income (GDI) is the estimate of the total amount of money from income that households and NPISH have available; that is, from wages received, revenue of the self-employed, social benefits and net income (such as interest on savings and dividends from shares) less taxes on income and wealth. All the components that make up GDI are estimated in current prices. In other words, gross disposable income tells us how much income households and NPISH have to spend, save or invest in the time period being measured (quarter or year) once taxes on income and wealth have been paid.

By adjusting GDI to remove the effects of inflation, we are able to estimate another useful measure of disposable income called real households and NPISH disposable income (RHDI). This is a measure of the real purchasing power of households and NPISH incomes, in terms of the physical quantity of goods and services they would be able to purchase if prices remained constant over time. To remove the effect of price changes on the current price GDI data we use the most relevant National Accounts price deflator: the households and NPISH final consumption implied deflator. This divides total current price households and NPISH final consumption by total chained volume measure households and NPISH final consumption to derive a price index.

GDI is then divided by this price index to remove the effects of price inflation. In other words, RHDI enables a comparison over time of how much households and NPISH have to spend, save or invest once taxes on income have been paid, by supposing a given amount of money could buy the same amount of goods and services in each time period.

The households and non-profit institutions serving households (NPISH) saving ratio explained

The saving ratio estimates the amount of money households and NPISH have available to save (known as gross saving) as a percentage of their total disposable income (known as total available resources).

Gross saving estimates the difference between households and NPISH total available resources (mainly wages received, revenue of the self-employed, social benefits and net income such as interest on savings and dividends from shares, but excluding taxes on income and wealth) and their current consumption (expenditure on goods and services).

The saving ratio is published in the UK Economic Accounts (UKEA) as non-seasonally adjusted (NSA) and seasonally adjusted (SA) formats, with the latter removing seasonal effects to allow comparisons over time.

The saving ratio can be volatile and is sensitive to even relatively small movements to its components, particularly on a quarterly basis. This is because gross saving is a small difference between 2 numbers. It is therefore often revised at successive publications when new or updated data are included.

The saving ratio is considered to be an indicator of households and NPISH confidence. A higher saving ratio may be the result of an increase in income, a decrease in expenditure, or some combination of the two. A rise in the saving ratio may be an indication that households are acting more cautiously by spending less. Conversely, a fall in the saving ratio may be an indication that households are more confident and spending more. Other factors such as interest rates and inflation should also be considered when interpreting the households and NPISH saving ratio.

Reliability

Estimates for the most recent quarters are provisional and are subject to revision in the light of updated source information. Our revisions to economic statistics page brings together our work on revisions analysis, linking to articles and revisions policies.

Revisions to data provide one indication of the reliability of main indicators. Revisions triangles are published on our website for the households and non-profit institutions serving households saving ratio.

Who uses these data?

The data used in this bulletin have a broad range of users. They are widely used by government departments to inform and monitor the effect of policy decisions. The data also aid assessments of the economy: such as informing the Bank of England’s Monetary Policy Committee (MPC) when setting monetary policy and the Office for Budget Responsibility’s (OBR) forecasts and evaluations of economic growth and public sector finances. Theoretical and policy debate is also supported by UKEA data at knowledge and research institutions such as think-tanks, lobby groups and universities by researchers, analysts, academics and students. In addition, trade organisations use the sector accounts to further their understanding of their respective industry.

In Quarter 4 (Oct to Dec) 2016, the households and NPISH saving ratio fell to 3.3% from 5.3% in Quarter 3 (July to Sept) 2016. This was the lowest quarterly saving ratio since comparable records began in Quarter 1 (Jan to Mar) 1963.

The saving ratio fell in Quarter 4 2016 for 2 main reasons.

Firstly, there was an increase in final consumption expenditure of £4.2 billion, which means that households spent more than in the previous quarter.

Secondly, there were falls in property income for investment income attributable to insurance policy holders and investment income payable on pension entitlements. To clarify, “property income” is not income generated from holdings of physical assets such as buildings, as the name might suggest. Rather, it is primarily investment income on financial assets and natural resources such as shares, loans, bonds and land.

In this case, it is the income on the investments that insurance companies and pension funds make on behalf of those holding insurance policies and pensions. A significant proportion of those holding insurance policies and the vast majority of those with pensions are in the household sector, so the income from these investments is treated as households’ income in the National Accounts. For a further explanation, please refer to the How insurance and pensions data affect the household saving ratio and GDP section of this bulletin.

In Quarter 4 2016, investment income attributable to insurance policy holders and investment income payable on pension entitlements fell by £4.1 billion; this had a downward impact on the saving ratio. This could partly be due to the fact that insurance companies and pension funds have shown significant disinvestment in shares in 2016 as we published in MQ5: Investment by Insurance Companies, Pension Funds and Trusts: Quarter 4 (Oct to Dec) 2016 on 16 March 2017. Some of the income from the sale of shares was reinvested in government bonds (gilts), which generally generate lower returns. The rest may have been held as deposits. This shift in investment portfolios may have been at least part of the cause of the lower investment income for these companies in late 2016.

The rise in final consumption expenditure and fall in net property income were partially offset by a rise in wages and salaries of £1.1 billion, a rise in gross operating surplus and mixed income of £0.5 billion and a fall in taxes on income and wealth of £0.2 billion.

Gross operating surplus is the income earned from the capital factor in production. It represents output less the costs of goods and services consumed in the creation of the output, and less compensation of employees. Mixed income is a combination of income from labour and income on capital (which is difficult to separate) paid to households as the owners of unincorporated businesses and as self-employed workers.

Figure 2 shows the quarterly changes in the values of the transactions that comprise the saving ratio.

In 2016, the households and NPISH saving ratio was 5.2%, compared with 6.5% in 2015. This was the lowest annual saving ratio since comparable records began in 1963.

The fall in the saving ratio in 2016 reflects a rise in final consumption expenditure of £47.5 billion and a rise in taxes on income and wealth of £7.9 billion. This was partially offset by a rise in wages and salaries of £24.9 billion and a rise in gross operating surplus and mixed income of £14.6 billion.

For a further explanation of how the saving ratio is calculated, please refer to the Things you need to know about this release section of this bulletin.

The level of real households and NPISH disposable income (RHDI) fell by 0.4% in Quarter 4 (Oct to Dec) 2016, following a decrease of 0.3% in the previous quarter. This represents 2 successive quarters of falling RHDI for the first time since Quarter 1 (Jan to Mar) 2014.

The fall in RHDI of 0.4% in Quarter 4 2016 was due to an increase in nominal gross disposable income of 0.2% together with a rise in the households and NPISH final consumption deflator of 0.6%.

The increase in nominal gross disposable income was due to a rise in wages and salaries of £1.1 billion, gross operating surplus and mixed income of £0.5 billion and net social benefits other than transfers in kind of £0.5 billion. This was partially offset by a fall in net property income of £3.0 billion, a fall in net current transfers of £0.6 billion and a rise in taxes on income and wealth of £0.2 billion.

In 2016, RHDI increased by 1.5% following an increase of 3.6% in 2015. This was due to a 2.6% rise in nominal gross disposable income partially offset by a rise of 1.1% in the households and NPISH final consumption deflator.

This weaker increase in nominal gross disposable income in 2016 was predominantly due to rises in wages and salaries of £24.9 billion (compared with £29.3 billion for 2015), gross operating surplus and mixed income of £14.6 billion, net social benefits other than transfers in kind of £9.5 billion along with a fall in net property income of £1.6 billion (compared with a rise of £1.6 billion for 2015). This was partially offset by a rise in taxes on income and wealth of £7.9 billion.

Real households and NPISH disposable income (RHDI) per head

We also measure RHDI on a per head basis to remove the effect of changes in the size of the population from RHDI growth.

In Quarter 4 2016, RHDI per head decreased by 0.6%, following a decrease of 0.5% in the previous quarter. There was no growth in gross disposable income per head in Quarter 4 2016, following a decrease of 0.1% in Quarter 3 2016.

In 2016, RHDI per head increased by 0.8%, following an increase of 2.8% in 2015. Gross disposable income per head increased by 1.9% in 2016, following an increase of 3.1% in 2015.

For an explanation of real households and NPISH disposable income, please refer to the Things you need to know about this release section of this bulletin.

During 2016 there have been numerous large acquisitions of UK companies by foreign investors, most notably in Quarter 4 (Oct to Dec) 2016.

Takeovers such as these feed through the accounts in 4 main stages. First, when the foreign company acquires the UK company, there is an outflow of listed share assets from the original shareholders representing the sale of the company. There is also an inflow of listed share assets to the rest of the world representing the purchase of the company; this is outweighed by the outflow when the company is delisted in the third stage.

Second, the acquiring company pays the existing shareholders for their shares either by cash or shares in their own company, or a mix of the two. If it were left in bank accounts, cash might appear as an inflow in currency and deposits, while shares would, in this case, be issued by the rest of the world. This part of the transaction is particularly hard to track in the National Accounts. For example, investors receiving shares may have an option to cash them in. They may spend the proceeds from the sale of their shares during the same quarter in which they receive them on final consumption, or on another financial asset.

Third, the acquired company is delisted. This creates an outflow of listed share liabilities from the relevant sector (in this case, private non-financial corporations) and a matching outflow of rest of the world assets.

Fourth, the acquired company becomes an unlisted share asset of the new owner (in this case, the rest of the world sector). The company being taken over (which in this case belongs to the private non-financial corporations sector) holds the unlisted shares liability. This represents the obligation that the acquired company has to pass profits to the new parent company.

In practice, we capture the different parts of the acquisition through a mix of surveys and administrative data. The acquisition also takes place against the usual backdrop of other financial transactions. This makes it difficult to isolate the exact details of the deal in the National Accounts. For Quarter 4 2016, there are large statistical discrepancies that reflect unallocated flows, which have yet to feed through some of our other survey and administrative data. As more data and information becomes available on the nature of the deal, we expect these unallocated flows to be captured correctly, which will naturally lead to a reduction for the statistical discrepancies for Quarter 4 2016.

For further information about recent UK mergers and acquisitions, please refer to Mergers and acquisitions involving UK companies: Oct to Dec 2016 published on 7 March 2017 and accompanying short article.

In Quarter 4 (Oct to Dec) 2016, the central government, local government, financial corporations and households and non-profit institutions serving households (NPISH) sectors were net borrowers. The public corporations, private non-financial corporations and rest of the world sectors were net lenders.

In Quarter 4 2016, the public corporations sector switched from being small net borrowers to small net lenders, compared with the previous quarter. There were no other switches between net lending and borrowing by sector in Quarter 4 2016 compared with the previous quarter.

On a quarterly basis, households and NPISH net borrowing of £11.1 billion in Quarter 4 2016 is the highest net borrowing recorded by the sector since comparable records began in 1987. In Quarter 4 2016, central government net borrowing of £10.2 billion was the lowest net borrowing recorded by this sector since Quarter 2 (Apr to June) 2007, when it was £9.7 billion.

In 2016, the central government, local government, financial corporations and households and NPISH sectors were net borrowers. The public corporations, private non-financial corporations and rest of the world sectors were net lenders.

The composition of net lending and borrowing across the economy by sector remained the same in 2016 as it was in 2015.

On an annual basis, there are a few main points of interest. In 2016, households and NPISH net borrowing was £22.8 billion, the highest net borrowing recorded by the sector since comparable records began in 1987. In 2016, financial corporations’ net borrowing of £30.6 billion was the highest net borrowing recorded by the sector since 2002, when it was £41.7 billion. In 2016, central government net borrowing of £56.2 billion was the lowest net borrowing recorded by the sector since 2007, when it was £41.1 billion.

Central government

In Quarter 4 2016, central government net borrowing was £10.2 billion, following net borrowing of £17.7 billion in the previous quarter. This decrease in net borrowing was because of rises in taxes on production of £3.3 billion, net property income of £3.3 billion and net other current transfers of £1.6 billion. This was partially offset by a fall in net capital transfers of £1.3 billion and rises in final consumption expenditure of £0.6 billion and an increase in subsidies paid of £0.5 billion.

In 2016, central government net borrowing was £56.2 billion, following net borrowing of £76.7 billion in 2015. This decrease in net borrowing was mainly due to rises in taxes on production of £11.2 billion, taxes on income and wealth of £8.9 billion, net social contributions of £8.9 billion and net other current transfers of £7.4 billion. This was partially offset by rises in final consumption expenditure of £6.5 billion, net social benefits other than transfers in kind of £3.0 billion and a fall in net property income of £2.8 billion.

Of the increase in taxes on production of £11.2 billion, £5.0 billion is attributable to a rise in Value Added Tax (VAT) receipts. A further £5.7 billion of the increase is attributable to an increase in taxes on products excluding VAT and import taxes, which includes tax revenue collected from Stamp Duty and the Insurance Premium Tax.

In April 2016, the rate of Stamp Duty Land Tax on purchases of additional residential properties increased by 3 percentage points. Likewise, in November 2015, the standard rate of Insurance Premium Tax increased from 6% to 9.5% and increased to 10% from October 2016. The increases in these tax rates may have contributed to the strong rise in the value of taxes on products excluding VAT and import taxes during 2016.

Local government

In Quarter 4 2016, local government net borrowing was £2.2 billion, following net borrowing of £1.7 billion in the previous quarter. This increase in net borrowing was mainly due to a fall in net other current transfers of £0.6 billion and rise of gross capital formation of £0.5 billion, partially offset by other small changes throughout the accounts.

In 2016, local government net borrowing was £7.8 billion, following net borrowing of £3.5 billion in 2015. This increase in net borrowing was mainly due to a fall in other current transfers of £7.5 billion, offset by a rise in other current taxes of £1.4 billion and a rise in net capital transfers of £1.2 billion.

Public corporations

In Quarter 4 2016, public corporations’ net lending was £48 million, following net borrowing of £44 million in the previous quarter. This switch to net lending was due mainly to a fall in acquisitions less disposals of non-produced non-financial assets of £0.2 billion, partially offset by a rise in gross capital formation of £0.1 billion.

Historically, the public corporations sector has tended to be a net lender of funds to the economy on a quarterly basis, however, they were small net borrowers in Quarter 2 (Apr to June) 2016 and Quarter 3 (July to Sept) 2016.

In 2016, public corporations’ net lending was £0.5 billion, following net lending of £0.8 billion in 2015. This decrease in net lending was due mainly to a rise in acquisitions less disposals of non-produced non-financial assets of £0.7 billion and a fall in net capital transfers of £0.4 billion. This was partially offset by a rise in gross operating surplus of £0.6 billion and a fall in gross capital formation of £0.1 billion.

Financial corporations

In Quarter 4 2016, financial corporations’ net borrowing was £3.9 billion, following net borrowing of £8.0 billion in the previous quarter. This decrease in net borrowing was due mostly to a rise in net property income of £3.5 billion and a fall of gross capital formation of £2.0 billion, partially offset by a fall in net social contributions of £2.9 billion and gross operating surplus of £1.1 billion.

In 2016, financial corporations’ net borrowing was £30.6 billion, following net borrowing of £27.1 billion in 2015. This increase in net borrowing was due largely to falls in gross operating surplus of £3.4 billion and net property income of £1.3 billion, partially offset by rises in net social contributions of £5.4 billion and net other current transfers of £1.6 billion.

Private non-financial corporations (PNFCs)

In Quarter 4 2016, PNFCs’ net lending was £19.1 billion, following net lending of £11.5 billion in the previous quarter. This increase was due mainly to falls in gross capital formation of £4.7 billion and a rise in gross operating surplus of £3.9 billion, partially offset by a rise in taxes on income of £0.9 billion and a fall in net property income of £0.3 billion.

In 2016, PNFCs’ net lending was £47.1 billion, following net lending of £32.7 billion in 2015. This increase was because of a rise in gross operating surplus of £9.8 billion and a rise in net property income of £8.7 billion, partially offset by a rise in taxes on income of £2.4 billion and a rise in gross capital formation of £1.6 billion.

Households and NPISH

In Quarter 4 2016, households and NPISH net borrowing was £11.1 billion, following net borrowing of £5.9 billion in the previous quarter. This increase was due mainly to a rise in final consumption expenditure of £4.2 billion and falls in net property income of £3.0 billion and net other current transfers of £0.6 billion. This was partially offset by rises in net social contributions of £2.3 billion and wages and salaries of £1.1 billion and a fall in gross capital formation of £1.7 billion.

In 2016, households and NPISH net borrowing was £22.8 billion. This was the largest net borrowing for households and NPISH recorded since comparable records began in 1987 and follows net borrowing of £2.8 billion in 2015. This increase was predominantly due to rises in final consumption expenditure of £47.5 billion, taxes on income and wealth of £7.9 billion and gross capital formation of £4.9 billion. and a fall in net social contributions of £14.8 billion. This was partially offset by rises in compensation of employees of £24.9 billion and gross operating surplus and mixed income of £14.6 billion.

Rest of the world

In Quarter 4 2016, rest of the world net lending was £13.4 billion, following net lending of £26.5 billion in the previous quarter. This decrease was due mainly to a fall in the external balances of goods and services of £10.0 billion and a fall in net property income of £3.3 billion, partially offset by a rise in net capital transfers of £1.4 billion.

In 2016, rest of the world net lending was £86.5 billion, following net lending of £81.3 billion in 2015. This increase was due mainly to an increase in the external balances of goods and services of £7.2 billion, partially offset by a fall in net property income of £2.8 billion.

Further details of the UK Balance of Payments position can be found in the Balance of Payments bulletin.

The balance of payments summarises the economic transactions of the UK with the rest of the world. Further detail relating to the rest of the world sector can be found in the Balance of Payments bulletin.

Further detail about households and non-profit institutions serving households (NPISH) final consumption expenditure, including a breakdown of households’ spending by product, can be found in the Consumer trends bulletin.

A detailed breakdown of the components of gross domestic product (GDP) including the third estimate of quarterly GDP growth can be found in the Quarterly National Accounts bulletin.

We also publish a “cash-based” measure of households and NPISH disposable income (RHDI) and the saving ratio. This is an Experimental Statistic that estimates RHDI and the saving ratio less the transactions that are imputed and unobserved by households. The data for these statistics are updated around 2 weeks after the publication of this Quarterly Sector Accounts bulletin; the latest available “cash based” RHDI and saving ratio are consistent with National Accounts data published on 23 December 2016.

This Quarterly Sector Accounts bulletin is currently the subject of a review by the UK Statistics Authority to determine its designation as a National Statistic. National Statistics are produced to high professional standards set out in the UK Statistics Authority's Code of Practice for Official Statistics. They undergo regular quality assurance reviews to ensure that they meet customer needs. They are produced free from any political interference.

From 30 September 2017, this bulletin and its associated dataset, the UK Economic Accounts, will present separate estimates for the households sector and the non-profit institutions serving households (NPISH) sector. Currently, these 2 sectors are presented as though they are 1 sector, households and NPISH. More detailed analysis of these sectors will therefore be possible. This work is part of the scope of methodological improvements being introduced as part of “UK National Accounts: The Blue Book: 2017 edition” due to be published on 31 October 2017.

We are currently developing the Quarterly Sector Accounts bulletin Quality and Methodology Information document. This will be published shortly and will contain important information on:

• the strengths and limitations of the data and how it compares with related data

• uses and users of the data

• how the output was created

• the quality of the output including the accuracy of the data

The Quarterly Sector Accounts and the UK Economic Accounts are published at quarterly, pre-announced intervals alongside the Quarterly National Accounts and Quarterly Balance of Payments statistical bulletins.

The activities of pension funds and insurance companies have an effect on household savings and expenditure. Yet these effects are not always directly observed by households. This section explains these interactions, as well as how insurance data affect the estimates of goods and services produced within the economy (gross domestic product, or GDP).

Pensions and saving

Individuals are the only beneficiaries of pensions. As such, pension assets can only be owned by households, and individuals living abroad. Since pension assets are an important part of an individual’s savings, changes to the amount of assets pension companies hold have a direct impact on the household savings ratio.

A pension fund can grow through contributions from individuals and employers or from income the fund earns on its investments. The contributions represent a transfer from households to pension funds, but the money, minus a fee for the services a pension fund provides, remains the asset of the household and is considered to be savings in the National Accounts. Any investment income the fund makes using these assets then grows the household’s level of savings.

Pension fund assets can also decrease when the fund pays pension benefits or if its investments lose money. These actions impact on the savings ratio by pulling down household savings.

Insurance and households

Insurance has 2 effects on the household savings ratio through savings and expenditure. As with pensions, any funds an insurance company holds to cover potential claims are the assets of households: they’re held by the insurance company until such time as a household needs the money.

Like pensions, these funds grow when the fund makes money on its investments or when households pay into them through premiums. And they can shrink when insurance companies pay out claims or, in the case of life insurance, when they increase the reserves for future payments to households.

Changes to these factors have an effect on household savings and, as a result, on the savings ratio.

The second effect, on household expenditure, comes from the output of insurance companies. For general insurance this is calculated as premiums minus claims plus investment income from the funds held on behalf of policyholders. Life assurance companies have the same equation, minus any funds they put aside for future benefit payments.

When an insurance company’s output grows, that output has to be consumed. Part of it is consumed by companies who need insurance to carry out their activities. The rest is consumed by other insurance customers: individuals, and customers abroad. Within the expenditure approach to measuring GDP, these are respectively household final consumption and exports of services, both positive entries. As such, when insurance companies’ output grows, then consumption, be it by companies, private individuals or customers outside the UK, also grows, although not necessarily all at the same rate. The income approach to GDP is also affected through changes in operating surplus, reflecting the profits made by companies producing insurance services.

The impact on insurance within the output approach to GDP is not wholly reflected in the same way as the expenditure and income measures, as direct volume measures on the numbers of insurance policies are used based on data from the Association of British Insurers.

Summary

In summary, insurance companies and pension funds affect the savings ratio by altering household savings and, for insurance companies, their consumption and are reflected across the 3 approaches to GDP. These effects in the National Accounts are relatively technical in nature and are not necessarily observed by households.