European households are keeping too much of their financial wealth in bank accounts, which is being steadily eaten away by inflation, a recent industry paper has said. The European Fund and Asset Management Association called for a shift in tax policies to encourage savers to place more money in investment products, which they asserted would produce higher yields.
Between the end of 2016 and the end of 2021, “the amount of savings held in bank deposits in Europe increased” from €10.3trn to €13.4trn, “as did the share of deposits in household financial wealth, from 37.0% to 38.1%,” the Efama report stated. Although the share in the grand duchy declined over that same period, Luxembourg households are parking more than half their financial wealth in the bank.
Efama said that “savings sitting in a bank in an environment of ultra-low interest rates are losing money because inflation erodes the value of people’s money year on year.” The purchasing power of the money in retail bank deposits dropped from €10.3trn at the end of 2016 to €9.5trn at the end of 2021. Using the European Commission’s spring 2022 forecast inflation rate for the EU, 6.8% this year, the lobby group said the loss in purchasing power would climb to €1.4trn by 31 December 2022, “or on average, €2,779 per household.”
The lobby group calculated “what would have happened if households had reduced the share of deposits in their financial wealth to 25% at the end of 2016” and invested surplus savings into Ucits retail funds. (Households in the Netherlands, Sweden and Denmark have less than 20% of their financial wealth in bank deposits.) This would free up €3.3trn to invest. Using net performance figures from January 2017 to April 2022, the purchasing power of European households’ financial wealth would have been €711bn higher.
Efama also calculated a 10-year scenario starting at the end of 2011, which would have yielded a collective gain of €2.2trn at the end of April 2022. Under a 20-year scenario starting at the end of 2001, the opportunity cost was pegged at €1.5trn.
Inflation is rapidly rising this year, which “will further exacerbate the problem,” the trade group stated.
From the paper: “Even if inflation is brought down to lower levels, the fact remains that holding close to 40% of financial wealth into bank deposits will always result over time in a significant loss of income for citizens. A vast majority of EU citizens still consider investing as being too risky and are therefore staying away from capital markets. The upcoming Retail Investment Strategy of the European Commission is an opportunity to address this issue and consider ways to turn depositors into investors.”
Call for tax policy shift
In addition to a major dose of financial education, Efama urged “member states to provide a specific tax advantage to encourage people to transfer some of their savings from bank deposits into personal pension products, including the pan-European Personal Pension Product.”
This could be done “either through a one-off transfer or a gradual shift away from bank deposits. Tax incentives would be needed for people to accept to lock up part of their bank deposits into pension products with limited possibilities for early withdrawal before retirement age.”
To spur action, “the establishment of the tax advantage should be limited in time and could be part of a campaign to increase people awareness about the opportunity cost of keeping an excessive amount of savings in bank deposits.”
Efama is an umbrella organisation for national trade associations, such as the Association of the Luxembourg Fund Industry, and corporate members, including most major investment fund firms active in Europe.
The paper, “Call for action to protect retail investors against inflation”, was authored by Bernard Delbecque, the trade group’s senior director, economics & research, and released on 29 June.
This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.