Forex Market Commentaries - Savings and Pension Funds

The French Are Saving In Euros, Whilst Britons Still Believe In Their Pension System, Both Beliefs Are Wrong

Jan 9 • Market Commentaries • 9826 Views • 10 Comments on The French Are Saving In Euros, Whilst Britons Still Believe In Their Pension System, Both Beliefs Are Wrong

Despite the Eurozone debacle the French are showing remarkable trust in the system, their banks and our beleaguered, battered and bruised single Currency. With one of the lowest personal debt ratios in the Eurozone, partly as a consequence of the French not over indulging in the sub prime mortgage debt binge that Brits gorged on in the last decade, the French are content with avoiding the mattresses as saving refuges and see their banks as safe havens. The juxtaposition between the French and their UK counterparts could not be starker. At the last measurement UK savers put aside only 5.4% of disposable income for savings or to repay loans, 17% is the French equivalent.

French savers are hoarding their spare cash at the fastest rate in nearly 30 years. France is amongst the most thrifty nations in the developed world and the threat of Europe’s debt crisis spreading to France has had savers running for the perceived safety of bank accounts. France’s economy is far more dependent on consumer demand to underpin its growth than Germany which relies on exports for its growth. With unemployment claims at a 12-year high, French households are preparing for the worst. The household savings rate shot up during the 2008-09 financial crisis and is currently running at about 17 percent, the highest level since early 1983, according to Thomson Reuters Datastream.

Consumer spending has fallen in November at the fastest 12-month rate since February 2009, which marked the trough of the 2008-2009 financial crisis. With household indebtedness among the lowest in Europe there is scope for French savers to ease their savings from current highs. The high savings rate is proving to be a boon for France’s banks as surging deposits help ease the pressure of funding themselves through the interbank markets while helping to meet the revised and oncoming Basel III capital adequacy ratios.

With inflows of deposits helping to reduce French banks’ reliance on markets and the ECB, they are aggressively marketing tax-free and taxable savings accounts, The rate of growth in deposits in Livret A savings accounts, which are tax free and have a state-regulated interest rate of 2.25 percent, accelerated in September to 11 percent over 12 months, according to Bank of France data. While that is nearly twice the 6 percent average rate of the last 10 years, it is a far cry from the 30 percent seen in March 2009, during the darkest days of the 2008-09 financial crisis.

Les Britanniques
The UK savers’ predicament is very different, from the late nineties through to 2008 the overall amount the UK was saving went into sharp decline. It reached its lowest point in the first three months of 2008, when for the first time since 1955 the Office of National Statistics (ONS) reported a negative savings ratio; as a nation the UK spent more than its disposable income for that quarter. However, if employer pension contributions are excluded the UK sustained a negative saving ratio since 2003.

The average savings ratio for the 30 years prior to this was about 9%. According to the World Bank the UK has the fifth lowest level of gross savings as a percentage of Gross Domestic Product (GDP) in Europe. With gross savings at 12% of GDP the UK is only ahead of Iceland at 11%, Portugal at 10%, Ireland at 9% and Greece at 3%. Even Spain at 20% and Italy at 16% are ahead of the UK. The list is topped by Norway and Switzerland which both have 32%.

The household savings ratio, the percentage of disposable income that people save or use to repay loans, for Q4 2010 was 5.4%. To put this into perspective the average savings ratio for the last decade is 4.3%, compare this to the 90’s, which averaged 9.2%, and the 80’s which averaged 8.7%. The UK has come to have one of the lowest levels of savings in Europe and its individuals over reliance on pensions appears deeply misguided as over half of UK adults are not saving enough for retirement. Only 51% of British workers are saving adequately for old age, according to the last annual Scottish Widows pension report..

People want, on average, an annual retirement income of £24,300 to live comfortably, down from the pre-recession figure of £27,900. However, in order to obtain a retirement income of circa £25,000 per annum pensioners will need a pension pot of circa £400,000 over four times greater than the current average pensions savings pot which is at circa £92,000 and falling fast..


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Tom McPhail, pension expert with independent financial adviser Hargreaves Lansdown said that according to Office for National Statistics figures, the average pension savings of people retiring between the ages of 50 to 64 last year was £91,900, enough to produce an annual income of about £3,500 to £4,000.

To produce an income of about £24,000, you would need a pension pot of about £400,000 once the state pension has been taken into account. People today face a very simple choice: to save more, retire later, or live on less in retirement.

But there a third choice that the UK pension advisors deliberately avoid and the French are halfway to understanding, investing in currencies..

Estimates put the loss of purchasing power of sterling at circa 20- 25% over the past five years, therefore that average pension pot of £92,000 could be worth considerably less vis a vis a direct comparison with a basket of correlated currencies such as; yen, euro, franc, dollar, yuan, the Aussie and Kiwi.

Rises in local consumer prices don’t reflect the loss of the purchasing power of money. Imagine holding savings in British Pounds in 2007. Three years later, those same pounds would have lost approximately 25% in value compared to other major currencies, such as the US Dollar, Euro and Swiss Franc, and even more to some others. The same 2007 monetary value would have bought 33% more “stuff”, if holding savings in Swiss Francs instead of British Pounds. Compared to people who held savings in other currencies 25% of purchasing power would be lost by holding British Pounds. If a saver lost 25% of their net worth in the stock market they’d feel a bit deflated, yet when the same thing happens to savings, people seem oblivious to it, as long as it is the same or higher nominal number that shows up on their bank statement.

There is no such thing as “absolute value”, there are only overvalued and undervalued assets.

Many of us have been fooled into thinking that our wealth and purchasing power is the same as our net worth in nominal currency terms, less the consumer price change per year. This clearly isn’t true: what if you wanted to buy a house for your family after house prices and rents have risen 50% in 3 years? What if you wanted to move to another country and all of a sudden found that your new home was much more expensive than what it was the last time you visited because your purchasing power had decreased due to exchange rate changes?

I’m not in the business of offering investment advice, money isn’t (as the French believe) particularly safe, neither is it an asset class that’s safer to hold continually in your domestic currency. The only long term safety you have in protecting your net worth is to learn how to identify if and when different types of assets, especially currencies, are overvalued or undervalued. To blindly hold cash in your savings account is a great way to put yourself at risk of allowing the tides of time and government’s under reported “inflation tax” to impoverish you without you even realising what hit you.

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