So can you still bank on shares when trying to save for a pension?

The most important lesson for Abbey shareholders is that anyone holding shares should spread their bets

Not enough people nowadays have the Abbey habit to save it from being taken over. The Abbey National used to be the second biggest of the building societies, after Halifax, but a period of bad management has so weakened it that it will soon lose its independence.

Not enough people nowadays have the Abbey habit to save it from being taken over. The Abbey National used to be the second biggest of the building societies, after Halifax, but a period of bad management has so weakened it that it will soon lose its independence. Either the Spanish bank, Santander Central Hispano, which has made a £8.5 billion bid that is backed by Abbey management, will take control, or some other bank will bid more.

So is this just one more take over, part and parcel of the "winner take all" ethos of the market economy? Well, it is that certainly, but it is rather more. This is also a story about an idea - transforming the mutually owned building societies into shareholder-owned banks - that has in this instance come unstuck. And it is a story about the problems of capitalism itself. At the moment that people are being urged to save more for their pensions, the sort of solid businesses into which the prudent pension fund manager might put the money are being taken over.

The commercial lesson is a very simple one: businesses should stick to things they know something about. Lending on British housing has, since the hiccup of the early 1990s price falls, been one of the safest financial bets in the world. Companies go bust, countries have to have their debts renegotiated, individuals default on their personal loans, but the British housing market has climbed, at least until now, ever onwards. You might imagine lending on them is, well, as safe as houses. Yet Abbey National managed last year to lose £686m.

How? Well, largely because it got itself into other businesses, particularly commercial lending and also life assurance, which it was not very good at. The basic home lending was fine; the rest was pretty much rubbish. It was the classic story of a business that felt (wrongly as it turned out) that there were not enough opportunities in its basic business and that it had to diversity into other ones. The other ones have cost it its independence.

For anyone who bought Abbey National shares when it stopped being a mutual, this will be sad, but it does not represent a systemic failure of the whole idea. After all, the rival Halifax boomed, merged with Bank of Scotland, and is now valued as one of the top 20 banks in the world. What Abbey National's experience should do is to remind people, if they need to be reminded, that the rules of market capitalism are much harsher than those of mutually owned building societies.

Perhaps the most important practical lesson for Abbey shareholders is that anyone owning shares should spread their bets and hold stock in several companies, as well as the fact that the time to buy shares is when they are unfashionable. If there is a bidding war for Abbey National, people who bought recently will do very well.

It is not just shareholders who should hope that there will be a counterbid. There is nothing particularly wrong with Santander's proposal - it is after all Spain's largest bank - except that it proposes to pay most of the money in its own shares. Our pension funds might not feel too keen on having their pensioners' pounds invested in Spain. As for individuals, well, if you are going to have a Spanish fling it might be more fun to put the money towards a flat above Marbella instead of the shares of some foreign bank.

That leads to the question of whether there is or could be such a thing as a European banking system. The portents are poor. Egg, the internet bank started by Prudential, has been hugely successful in Britain but a flop in France. With the exception of Scandinavia there have been hardly any cross-border retail banking ventures.

At a commercial level no one cares, but as individuals we evidently do. The Americans and Australians have made some headway in the UK, but continentals have not. We may not mind buying each others' cars, but when it comes to money it seems we would rather stick with institutions of our own nationality. Given the UK punters' experience of Bank of Commerce and Credit International, which has Pakistani and Middle Eastern origins and was legally based in Luxembourg, such caution is understandable.

We will see. My guess is that another bidder, maybe a UK one, will come in, for the potential cost savings are much larger if a British bank buys Abbey National. Whatever the Competition Commission thinks, it would be pretty odd if Spain's largest bank were allowed to buy the business, and British competitors were excluded from doing so. If the shares are taken out of circulation in the UK, this is one more asset that British pensioners, needing British assets, will be unable to invest in.

That leads to what perhaps the most disturbing aspect of this bid. There is a huge generational problem that affects almost everybody who works in the private sector. How do you save for a pension? For the civil servants with their index-linked pensions, and many other public sector workers, this may not seem to grave a concern. But for the people in the private sector who have to pay the tax to fund these indexed pensions, as well as supplementing low state pensions, the question is very real.

For the final 25 years of the last century there was a very simple answer. An investment in shares in British and international companies produced a total return averaging more than 10 per cent a year after inflation. But now we have had the worst share market since the early 1970s, the worst for a generation. Just at the time when saving is most needed, the principal asset is performing terribly. People, understandably, have shied away from shares. Just this week it was revealed that take-up of ISAs, the government's effort to encourage saving when it abolished PEPs, has fallen to the lowest level since they were started in 1999.

This is alarming. Of course the excesses of the late 1990s share boom were bound to cause a hangover. But ultimately the future prosperity of everyone, even people in the public sector, depends on the economy experiencing sustained profitable growth. The drive behind economic growth comes from its commercial companies. The only way ordinary pensioners can get a stake in companies' success is by buying their shares. Every time a firm goes private, or is taken over by a foreign group, a block of shares is effectively pulled out of circulation.

So how should people save for their retirement? Buy a flat and rent it out? Great idea ten years ago but maybe not such a good one now if prices fall. Buy the government's index-linked debt? Fine for the individual, but not so good for society as a whole for that debt will eventually have to be repaid by other taxpayers.Set up your own business? Fine for the few but impracticable for the many. Go in for one of the complicated hedge funds? Bad idea - if you don't understand it, don't invest in it.

No, for most people there is no real alternative to investment in the broad mass of British firms. And when one runs into the sand, as Abbey National has done, it is bad news not just for shareholders but for society as a whole. Capitalism is a bit like democracy is it not? The worse system of economic organisation, save for the others.