Can banks be trusted? Are pensions safe? Will the state provide? n

MONEY
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The Independent Culture
THE ONE thing that we can predict about the 21st century is that, as it unfolds, the great Beveridge social welfare initiative will finally succumb to demographic pressures. Its demise will have a profound effect on the way people manage their money. Financial consumers will need to plan for cradle-to-grave self-sufficiency. Those who do not invest for their old age, or who fail to insure themselves against unemployment and illness during their working years, may find life extremely uncomfortable.

This bleak forecast is not based on the apocalyptic premise that a government of the hard right will retain power for the next 100 years. As Andrew Warwick-Thompson, head of partnership pensions at actuaries Bacon & Woodrow, points out: "Both major parties in this country recognise that the state can no longer support the state pension, unemployment benefit and long- term care. Someone - not in this Govern- ment but in the next one - will have to rethink the pension structure completely .

"The big sadness is that Beveridge had an opportunity and wasted it. He believed that the state could provide, and demographically that just wasn't feasible."

Declining birth rates and improved life expectancy have presented a demographic time bomb to all mature economies with developed social security systems. At the beginning of this century, one person in 700 was over 80. By the middle of the 21st century the figure could be one in seven, and some estimates suggest that by then the ratio of workers to pensioners may have shrunk to as low as 1:5.

These predictions may be exaggerated, but there is little doubt that money management in the 21st century will be dominated by the need to fill the gap left by the partial or wholesale privatisation of state pensions, unemployment benefit and, especially, long-term health care.

"There will be a boom in privately run old people's homes," says Warwick- Thompson. "We will have old people's villages, where you move out of the community into an elderly health care project. It will be a bit like a time-share, with medical attention bolted on."

Workers in the 21st century will probably experience frequent job changes, coupled with periods of unemployment, and savings port- folios will need to be flexible - to combat expected income volatility. Tomorrow's parents may have to accept complete financial responsibility for their children's further education.

It will, in other words, be absolutely essential to manage one's money as prudently as possible. Relying on a monthly pay cheque to keep you going, and the state to bail you out when the going gets tough, won't be enough for most people. But what exactly will good financial management involve in future? You will need to save, but where should you put your savings? In a bank? In a pension? In stocks and shares?

Consumers in the 21st century will have to entrust their futures to the private sector, and they will therefore want much stronger assurances than are currently available about the probity and staying power of the commercial organisations managing their pensions, insurances and assets. Many people will seek safety in size, on the grounds that large companies are less likely to go into liquidation or board a flight to Brazil with their customers' money. But with luck public anxiety should also force a future government to tighten regulation of the financial services industry and to set in place more generous investor compensation schemes.

In the meantime, however, you cannot afford to be over-cautious: your financial needs are likely to be so great that you'll need to make your money work for you. Provision for old age will be the crucial requirement - so much so that insurance companies, in partnership with Government, will produce a new generation of protection policies, to which contributions may be mandatory. The need for such policies will be accentuated by the fact that not everyone will receive the financial windfalls they may be expecting from inherited property - since many houses will have been sold to support their owners in their dependent old age.

On the plus side, there will be huge improvements in the physical management of money and in access to financial services. The fiscal environment should favour savers, and there will be sophisticated new investment vehicles.

Cheques are likely to become payment dinosaurs; their use is already falling by 1 per cent a month. Ian Lindsey, head of banking at Save & Prosper, forecasts that consumers will carry only two pieces of plastic in the 21st century: their electronic purse - a rechargeable plastic card with a computer chip - and an all-purpose card. This will access every account where there is liquid cash, will provide credit, and for good measure will store the cardholder's medical details.

Whichever party is governing, savers in the 21st century are unlikely to see a return to high marginal tax rates, and there may be a continued shift away from the taxation of capital. Andrew Dilnot, director of the Institute for Fiscal Studies, says that the trend is "towards direct taxes on earnings and an increased reliance on consumption taxes like VAT, while the tax on returns from savings falls to zero."

With volatile employment patterns, a reasonable proportion of the 21st century saver's money will need to be kept in liquid form, and there will be a new diversity of accounts competing for this cash. The safest way of choosing between them will be to combine caution with diversity. One hardly dares breathe the word "derivatives", but hedging techniques can be used for the insurance management of risk, as well as for speculation. Over the next few years financial institutions will develop hybrid products. John Ginarlis, of CSC Index, the international management consultancy, says: "I would expect a greater proliferation of the `insurance' type use of derivatives built into simple savings accounts. They will be simple products up front to the investor, but they will be complex engineered products behind the scenes."

Traditionally-minded 21st-century investors may prefer to stick to stocks and shares, but even they will need to look beyond today's established markets. Peter Jeffreys, managing director of Fund Research, says: "Whether we like it or not, the mature economies are not going to grow as fast as the developing economies (or emerging markets), which currently account for 85 per cent of the world's population and 11 per cent of the world's stock market capitalisation. I would advise my children to have at least one-third of their money in places where it will grow."

As for borrowing, modest house price inflation, relatively high real interest rates and the abolition of tax incentives mean that there will be little reason to hold long-term mortgage debt. Fifteen- and 20-year mortgages look set to replace the traditional 25-year loans. Rob Thomas, housing analyst at UBS Investment Bank, says: "Housing is still an investment, it is just not a very good one any more. Mortgages will not become a thing of the past, but people will want to have lower mortgage debt."

People will want to keep debts of all kinds to a minimum. The need for financial self-reliance will present some robust challenges to consumers in the 21st century, and no one can afford to give themselves unnecessary added burdens. One can only hope that there will be an adequate safety- net in place to protect the vulnerable - the sick and the long-term unemployed - in what may prove to be a rough new world.

TRENDS

n In 1993, 41 per cent of the £330bn of liquid personal assets in the UK was owned by 2.4 per cent of the population.

n In 1963, 54 per cent of share equity in the UK was owned by private individuals; in 1993, 18 per cent.

n In 1993, real disposable household income per head was 80 per cent higher in the UK than in 1971.

n Between 1971 and 1992, the percentage of people with incomes of less than half the national average grew from 11 to 21 per cent.

n In 1993, 13 per cent of household income came from social security benefits.

SURVIVAL STRATEGIES

n Expect state pensions, unemployment benefits and long-term health care to be privatised - and make provision for yourself.

n Take responsibility for your own finances. Become your own DIY financial planner.

n Plan for frequent job switches and periods of unemployment.

n Don't be afraid of cashless transactions. Plastic "chip" cards and telephone banking will soon become the norm.

n If in doubt, rely on traditional financial common sense. Minimise debt, be suspicious of get-rich-quick schemes and don't put all your eggs in one basket.

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