IFS accuses ONS of £2.2tn error in estimating pension wealth
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The Institute for Fiscal Studies has heavy criticism for a revision made by the Office for National Statistics in estimating household pension wealth which reduces total wealth by £2.2tn or 14% for 2018-20, saying the change leaves policymakers without reliable data on wealth or inequality between young and old.
“Statistics aren’t a sexy topic, but they play a crucial role in painting policymakers a picture of the world they’re seeking to influence,” said Isaac Delestre, a senior research economist at the institute.
“Unfortunately, the economics underpinning this £2tn change is fundamentally unsound. If we want our policymakers to be able to make good decisions, we need to provide them with an accurate view of the basic economic facts on the ground. When it comes to household wealth, the ONS isn’t currently doing that,” he said.
The dispute arose because the ONS now uses forecast GDP growth instead of market interest rates to convert defined benefit income streams into a wealth estimate. The IFS published a report on Friday looking at the effect of the change.
The report authors find that while the change mostly affects DB pensions, “its absurdity is well illustrated by the fact that, under the new methodology, someone with a defined contribution pension pot who chooses to buy an annuity would be deemed suddenly to have become much poorer as a result”.
An ONS spokesperson said the ONS commissioned an external review into the approach to valuing the future value of defined benefit pension schemes within its ‘Wealth in Great Britain’ statistics, which were implemented when these figures were recently published.
“Statistics aren’t a sexy topic, but they play a crucial role in painting policymakers a picture of the world they’re seeking to influence,” said Isaac Delestre, a senior research economist at the institute.
“Unfortunately, the economics underpinning this £2tn change is fundamentally unsound. If we want our policymakers to be able to make good decisions, we need to provide them with an accurate view of the basic economic facts on the ground. When it comes to household wealth, the ONS isn’t currently doing that,” he said.
The dispute arose because the ONS now uses forecast GDP growth instead of market interest rates to convert defined benefit income streams into a wealth estimate. The IFS published a report on Friday looking at the effect of the change.
The report authors find that while the change mostly affects DB pensions, “its absurdity is well illustrated by the fact that, under the new methodology, someone with a defined contribution pension pot who chooses to buy an annuity would be deemed suddenly to have become much poorer as a result”.
An ONS spokesperson said the ONS commissioned an external review into the approach to valuing the future value of defined benefit pension schemes within its ‘Wealth in Great Britain’ statistics, which were implemented when these figures were recently published.
The spokesperson added: “Any method must make broad assumptions about future economic growth. We sought advice from a range of experts and users before finalising the method used. We outlined these decisions at the time of publication.”
New estimates hide intergenerational wealth inequality
In total the ONS made three changes for estimating private pension wealth, two of which the IFS welcomed. However, the biggest change relates to how the value of future pension income is converted into today’s terms. It subtracts a staggering £2.3tn from estimates of total household wealth in 2018 to 2020.
The IFS is adamant the change should not have happened as it did and does not mince its words.
“This change is a mistake, making an already flawed methodology substantially worse,” the thinktank argues.
Forecasts for GDP growth were higher than market interest rates for the period in question, meaning the value assigned to pension wealth was lower. As a result, the ONS’s estimate of the total wealth in 2018 to 2020 of those aged 65–74 has been revised downwards by 38%.
“The problematic elements of the new methodology may not have such a large impact on measures of household wealth for the present day because market interest rates and GDP growth are more similar now than they were in 2018 to 2020. However, this does not remove the problems inherent in the new approach,” the IFS said. “In their current state, official statistics do not provide a reliable picture of total household wealth or of the inequality in wealth between young and old.”
Of the other two changes the ONS made, one corrects “a serious error in how inflation is accounted for when valuing pensions – an error that has been impacting official wealth estimates for a decade, though the ONS still does not acknowledge explicitly that it was an error”, the report notes.
This change increases estimates of total household wealth by around £500bn.
The second improves estimates of the age at which individuals can start to draw their full pension, which reduces household wealth by about £300bn from previous estimates.
Long-term GDP growth is used by the Government Actuary's Department to calculate the liabilities of unfunded public sector pension schemes, via the Superannuation Contributions Adjusted for Past Experience rate, set by the Treasury. The government argues that GDP growth is related to the growth in the tax base that underpins these taxpayer-funded pension schemes.
The IFS is adamant the change should not have happened as it did and does not mince its words.
“This change is a mistake, making an already flawed methodology substantially worse,” the thinktank argues.
Forecasts for GDP growth were higher than market interest rates for the period in question, meaning the value assigned to pension wealth was lower. As a result, the ONS’s estimate of the total wealth in 2018 to 2020 of those aged 65–74 has been revised downwards by 38%.
“The problematic elements of the new methodology may not have such a large impact on measures of household wealth for the present day because market interest rates and GDP growth are more similar now than they were in 2018 to 2020. However, this does not remove the problems inherent in the new approach,” the IFS said. “In their current state, official statistics do not provide a reliable picture of total household wealth or of the inequality in wealth between young and old.”
Of the other two changes the ONS made, one corrects “a serious error in how inflation is accounted for when valuing pensions – an error that has been impacting official wealth estimates for a decade, though the ONS still does not acknowledge explicitly that it was an error”, the report notes.
This change increases estimates of total household wealth by around £500bn.
The second improves estimates of the age at which individuals can start to draw their full pension, which reduces household wealth by about £300bn from previous estimates.
Long-term GDP growth is used by the Government Actuary's Department to calculate the liabilities of unfunded public sector pension schemes, via the Superannuation Contributions Adjusted for Past Experience rate, set by the Treasury. The government argues that GDP growth is related to the growth in the tax base that underpins these taxpayer-funded pension schemes.
