Savings won't fill pensions gap, says study

The Government has been warned that it cannot rely on the markets to fill the pensions black hole, since too few asset classes will be able significantly to beat inflation.

The Government has been warned that it cannot rely on the markets to fill the pensions black hole, since too few asset classes will be able significantly to beat inflation.

The authors of the influential annual Equity Gilt study by Barclays argued yesterday that the Government will need to share the burden by saving now to support future pensioners through state pension rises, tax breaks and additional social security in the future.

Launching the 50th study, Tim Bond - the head of fixed income strategy at Barclays Capital, the bank's investment banking arm - said governments have assumed that encouraging people to save for their own retirement will be enough to relieve the burden on the tax system from an increasing number of pensioners.

"It won't," he said. "Governments should be saving more themselves, running large budget surpluses and paying down debt to ready the fiscal decks for the inevitable expansion in social security borrowing 15 to 20 years hence."

The latest annual study warns that the baby boom generation's impending retirement could cause a spike in inflation that will further undermine the attractiveness of bonds as a real-terms investment. The prices of goods and services could rise because there is a smaller workforce providing them to the swelled ranks of the retired.

At the same time, changes to pension regulations in the UK and, soon, across Europe are forcing funds to shift out of equities into bonds, where they can guarantee they have the assets to match future liabilities.

With yields on long-term bonds at their lowest for a generation, they are unlikely to provide a positive enough return that beats inflation, the study says.

Mr Bond said: "We have just been through an equity bear market so, of course, regulators are concentrating on the risks. But bonds are just as risky because inflation can destroy the returns you are getting."

As an alternative to bonds, pension portfolios should include real assets, such as commodities or property, which are less likely to lose their real-terms value. Barclays argues that the baby-boomers will become net sellers of shares, driving down returns.