WIREDGOV

Our new report finds that a major recent revision by the ONS to official estimates of household wealth is fundamentally flawed. 

A new IFS report finds that a major recent revision by the Office for National Statistics (ONS) to official estimates of household wealth is fundamentally flawed. It leaves policymakers with no reliable guide to how wealth is distributed amongst British households. 

The ONS has made two clear improvements to previous estimates (one correcting a serious mistake in the previous methodology). But it has also introduced another change to its methodology which subtracts £2.3 trillion from estimates of household wealth in 2018 to 2020. That change is fundamentally flawed.

The report finds:

• The ONS revision concerns the method used for valuing private pensions when estimating household wealth. The scale of the change is enormous, implying that the total wealth of Britain’s households in 2018 to 2020 was approximately £2.2 trillion less than was previously believed – a 14% reduction.
• Two of the three changes made by the ONS are welcome – most notably correcting a serious error in accounting for inflation which had been distorting official wealth statistics for a decade. This one adds around £500 billion (£0.5 trillion) to total measured household wealth, while the other subtracts around £300 billion.
• However, by far the largest change made – by itself subtracting a breathtaking £2.3 trillion from recorded wealth – relates to how the value of future pension income is converted to today’s terms. This change is a mistake, making an already flawed methodology substantially worse. It is quite possible that the ONS’s revised estimates of household wealth are actually further from the truth than those it started with. The result is that policymakers lack a reliable set of household wealth statistics on which to base policy.
• The mistake is to move away from the use of market interest rates to convert future pension income into today’s terms and towards greater use of a rate based on forecast GDP growth. That is faulty economics. The rate used was, in 2018 to 2020, much higher than market interest rates, and hence the value assigned to pensions was much lower. While the change mostly affects defined benefit 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.

Isaac Delestre, a Senior Research Economist at IFS and an author of the report, said: 

‘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. Unfortunately, the economics underpinning this £2 trillion 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.’

Notes to editors

£2 trillion poorer than previously thought? Assessing changes to household wealth statistics is an IFS report by Stuart Adam, Isaac Delestre, Carl Emmerson and David Sturrock.