How the City has ruined our presents and futures

Investors are told that if they are willing to take more risk and invest in the stock market they will be rewarded over the longer term because of the ‘equity risk premium’. Thanks to a belief in that so-called axiom, millions of people's pension savings have largely been devastated by the credit crunch.

Pension funds have plunged in value as stock markets collapsed, while the pension income available to new retirees has plummeted as the Bank of England prints money to buy gilts and drive interest rates down. Employers are cutting contributions to their workers' pension schemes too as the economic downturn hits their revenues. My report, Planning for Retirement: You’re on your own, which is available for download at www.metlife.co.uk/rp, examines important issues facing people preparing for retirement.

The credit crunch delivered the knockout punch but problems have been building up for years. Analysis from the report shows someone who paid £24,000 contributions over the last 10 years into a defined contribution pension scheme, invested in the stock market, would now have a fund worth £21,000. Defined contribution pension schemes have fallen more than 25% since the start of the credit crunch. Pension planning has traditionally relied on stock market growth to provide good pensions but it has not worked out.

The entire UK pension system has been based on a bet that equities would always do well enough over the long term to deliver good pensions. Generous final salary schemes – as well as forecasts for good personal pensions – all relied on the equity gamble paying off. The expected strong equity returns also enabled successive governments to cut UK state pensions over time.

The idea that equity markets might not deliver over the long term was never seriously entertained by policymakers. Nobody explained to workers that they were effectively gambling their future security on the stock market without any form of insurance to protect themselves against the risks of poor equity returns and rising life expectancy.

A survey by MetLife of people aged 55-64, illustrated the human cost of the credit crunch. More than half (54 per cent) said their pensions would fall short of expectations and a third thought they had wasted their money and wished they had not bothered with pensions. A majority (56 per cent) said they would now continue working into retirement.

The added problem for those just retiring is that low interest rates mean the income streams they can buy with their decimated pension pots is also low. They could invest in drawdown annuities and stay exposed to equities in the hope that a stock market recovery will boost their pension pots in the long term. But this implies more risk.

Another alternative, for those in pre- and post-retirement phases, is to invest in equities but to take out some insurance against the potential downside. Everyone knows their house could be damaged by fire or flood and they may need some insurance against these risks. But pension savers were never told their pension could be decimated by poor stock market returns – even over the long-term. So they didn't know they needed to consider insuring themselves.

But insurance is available. One of the ways to do this is to look at products known as unit-linked guarantees. They may not be cheap, but they do offer some security. Blind faith in the old idea that long-term investors would always do well in the stock market has let millions of people down. The effects of this pensions crisis could be even more long-lasting than the current economic crisis and people need good financial advice. But challenging the traditional City thinking about pension investment is long overdue.



Dr Ros Altman is author of 'Planning for Retirement: You’re on your own – more risks, new solutions?'

Start your day with The Independent, sign up for daily news emails
Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm tomorrow
Arts and Entertainment
James May, Jeremy Clarkson and Richard Hammond in the Top Gear Patagonia Special
tv
News
Claudia Winkleman and co-host Tess Daly at the Strictly Come Dancing final
people
Arts and Entertainment
Caroline Flack became the tenth winner of Strictly Come Dancing
tvReview: 'Absolutely phenomenal' Xtra Factor presenter wins Strictly Come Dancing final
PROMOTED VIDEO
Arts and Entertainment
The Apprentice finalists Mark Wright and Bianca Miller
tvBut who should win The Apprentice?
News
news
Extras
indybest
News
Elton John and David Furnish will marry on 21 December 2014
peopleSinger posts pictures of nuptials throughout the day
Sport
Brendan Rodgers looks on from the touchline
SPORT
Life and Style
A still from the 1939 film version of Margaret Mitchell's 'Gone with the Wind'
life
Arts and Entertainment
J Jefferson Farjeon at home in 1953
booksBooksellers say readers are turning away from modern thrillers and back to golden age of crime writing
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'
Marian Keyes: The author on her pre-approved Christmas, true love's parking implications and living in the moment

Marian Keyes

The author on her pre-approved Christmas, true love's parking implications and living in the moment
Bill Granger recipes: Our chef creates an Italian-inspired fish feast for Christmas Eve

Bill Granger's Christmas Eve fish feast

Bill's Italian friends introduced him to the Roman Catholic custom of a lavish fish supper on Christmas Eve. Here, he gives the tradition his own spin…
Liverpool vs Arsenal: Brendan Rodgers is fighting for his reputation

Rodgers fights for his reputation

Liverpool manager tries to stay on his feet despite waves of criticism
Amir Khan: 'The Taliban can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'

Amir Khan attacks the Taliban

'They can threaten me but I must speak out... innocent kids, killed over nothing. It’s sick in the mind'
Michael Calvin: Sepp Blatter is my man of the year in sport. Bring on 2015, quick

Michael Calvin's Last Word

Sepp Blatter is my man of the year in sport. Bring on 2015, quick