Household Sector Saving and Wealth Accumulation - Evidence from Balance Sheet and Flow of Funds Data

Abstract

In this paper I investigate the make-up of household sector wealth. In particular I look for evidence that there has been a move towards increased equity participation ('equitisation'). I also touch upon the issue of the 'wealth effect', and whether this has led to a significant rebalancing of portfolios. Analysis of the composition of household sector wealth shows that the share of equities has increased dramatically, suggesting that equitisation has been a powerful force in recent years. However, when I investigate where the household sector has actually channelled savings the evidence in favour of the equitisation story is less forceful. Flows to bank deposits (along with investment in life products) remain the most important form of saving. Nevertheless, equity mutual funds (investment and unit trusts, including PEPs and equity-based ISAs) have increased in popularity in recent years. These trends suggest that the equitisation process will be slow and steady, rather than a sudden switch leading, for instance, to rapid bank disintermediation. With regards to the wealth effect, it is probably fair to say that this has had a significant impact on aggregate savings flows. In particular, many employers have taken contribution holidays or reduced contributions in response to pension fund surpluses.

Keywords: Equity mutual funds, pension fundsavings, Bank deposits, wealth effect

JEL Classification: L5, D1,JO