Executive Summary

In 1995, real disposable incomes grew by less than consumer expenditure and the shortfall was funded out of personal savings, causing the savings ratio -- which measures personal savings as a percentage of personal disposable income -- to drop to 9.2%, its lowest level for 5 years. Looking ahead, Key Note is forecasting a slight improvement in the savings ratio to 9.9% in 1996 and 1997, and growth over the 2 years in personal disposable incomes at an average of 3% and consumer expenditure at an average of 2.5%.

Some £604bn worth of personal finance was transacted by UK consumers in 1995. It was borrowed, held in savings accounts, insurances, pensions or equities. The largest amount was held in savings and mortgages within building societies, banks and National Savings. Transactions in stocks and shares and credit cards were also significant, but in spite of all the attention focused on the need to make provision for old age, the amount spent on personal pensions came bottom of the list and was just one-sixth of the total of finance house credit.

In 1995, nearly 80% of adults in Great Britain had an interest-bearing current account at a bank or building society; 13% had a National Savings account and 15% owned shares. 21% said they had a personal pension and 26% a company pension. 7% owned a PEP and 5% some unit trusts. Credit card use was on the increase with 7% more adults having one in 1995 than did so a year earlier, and one in every four now has a debit card.

A mortgage is the most common form of debt with 34% of adults having one. 10% have a bank overdraft and a further 10% use credit purchase, which is more popular than hire purchase (7%). A surprisingly high 51% of adults claim to have no debts whatsoever and for those over 65 this increases to 91%. 37% of adults dislike carrying around a lot of cash, but only 12% use the cashback facility at a supermarket or other retailer. 30% have difficulty in saving and 28% believe their personal finances will improve over the next 12 months.

Share ownership, which peaked in 1991 at 11 million adults, declined in 1995 to an estimated 9.6 million. The London Stock Exchange is facing new competition from direct share dealing, alternative European exchanges and new Internet services. The value of securities traded is forecast to grow at around 4% per annum over the next 4 years, reaching £3.66bn in 1999, with performance in equities stronger than in gilts.

Consumer credit business in 1995 reached £18.3bn. Motor finance accounted for 41%, divided equally between new and used motors; retail was responsible for nearly 30% and there was strong growth in retail store card business. In 1995, unsecured direct personal finance boomed, increasing by nearly 44% over the previous year.

The insurance business is having a difficult time, as the sales of life insurance and pensions products decline, and as an industry, it strives to overcome a serious loss of trust suffered through mis-selling practices, and come to terms with new regulations imposed to prevent a recurrence. Total new long-term insurance income for 1995 is predicted to be the lowest since 1991 and many new direct insurers are entering the market creating intense price competition.

Pensions are fast becoming a political football as Government and Opposition try to solve the problem of a reducing workforce which needs to pay for an increasing number of longer-living pensioners. Against this background, the number of new personal pensions being sold and membership of occupational pensions schemes is falling. Already, some 35% of the workforce have no pension set aside for old age, and millions more are destined to live in poverty because they are not contributing enough to the pension they have for it to provide an income on which they will be able to live.

The plastic card market is very volatile with many new products and highly competitive interest rates. It is dominated by the major banks who, in spite of accounting for 87% of all the cards on issue, are having to hold their position in a frenetic market by waiving annual charges. The explosive growth of debit cards is rubbing off to the benefit of credit cards as consumers become more comfortable with all forms of plastic. In 1994, over 1.5 billion purchases were made on plastic, a figure which is expected to grow to 4 billion by the year 2000. In 1995, the value of turnover for all cards passed £80bn, of which credit cards accounted for 56% and debit cards 34%. By the year 2000, this is expected to rise to over £114bn, of which 38% will be for debit card transactions and 62% for all types of credit, charge and store cards.

The major UK banks have recovered from the poor profits of 2 years ago and in 1994 and 1995 they produced better results. In spite of collective profits totalling over £10bn, trading performance remains open to question and the improvement in profits seems more the result of reduced bad debt provisions than increased efficiency. Numbers of staff and of branches have reduced by 17% and 15% respectively and to compensate and protect customer services, the banks have increased investment in telephone banking and cash dispensers.

Building societies face declining growth of mortgage business and a savings market which is moving away from secure investments in favour of bonds and equities. A spate of mergers and planned conversions to PLCs has spawned a battle for customers to be fought on the relative merits of mutual versus corporate status; financial services being the ultimate target market for both camps. Mortgage business fell in 1995 against the previous year, but the share of personal sector liquid assets grew.

National Savings reported a good year in 1995 with savings balances outstanding at year-end increasing by an estimated 6%. Since 1991, National Savings has steadily increased its share of balances outstanding by 44%, which compares with 23% in building societies and 8% in banks. Pensioners' Bonds continue to be popular with more than 244,000 now held with a value of £2.2bn.

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