UK savings ratio set to double under new EU accounting rules

LONDON, April 7 Mon Apr 7, 2014 9:05am EDT

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LONDON, April 7 (Reuters) - The finances of Britain's households are likely to look a lot healthier later this year, but not because wages are about to jump. Instead, it will be due to changes in the way national statistics are compiled.

Britain's savings ratio - the amount put away as a percentage of after-tax income - is lower than in many other rich countries, raising concerns about the sustainability of the country's economic recovery from the financial crisis.

But under European Union accounting changes being introduced in September, that ratio is set to roughly double, according to officials from Britain's Office for National Statistics.

The new methodology will add five percentage points to the ratio - taking it to around 10 percent from the current 5.0 percent.

The big rise comes from the recognition of shortfalls in defined benefit pension funds - many of them run by local government authorities - as income for holders of pension plans.

Currently, shortfalls in the funds' long-term liabilities are only included as income - and hence affect the ratio - when they are eventually made up to pension plan holders.

Under the new rules, the assumption is made that the shortfalls will be made up and therefore they will be counted.

Joe Grice, chief economic adviser at the ONS, said the change did not represent a fundamental improvement in the health of household finances.

"Clearly, reality hasn't changed. It's the way of recording the reality that will," Grice told an ONS seminar.

But some economists said the new-look savings ratio would make Britain's recovery appear more sustainable.

"The changes suggest that a significant degree of personal savings has been omitted from calculations hitherto and this should give a healthier and more accurate representation of household finances," said Philip Shaw at Investec.

The savings ratio in Britain rose during the financial crisis as people built up their nest eggs to cope with the downturn. But the ratio has fallen in recent months.

Critics of the government, including the opposition Labour party, say the fall shows how households are struggling to make ends meet. But some economists say it could be a reflection of confidence among households that the economy is picking up. (Editing by Jeremy Gaunt)

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