Falling markets deepen pension crisis but they didn't cause it

Quite understandably, nobody feels sorry for investment bankers or stockbrokers.

So when we hear that more than 10 per cent of them (around 30,000 people) lost their jobs last year and a similar number, if not greater, will go in 2003, few people feel much sympathy. Highly rewarded jobs carry high levels of risk.

But one of the growing obsessions of many people in the UK is directly related to the problems besetting the cosseted world of the City of London. The factors that drive headlines like "How they sank your pension", (The Spectator, February 8th) are exactly the same as those that are forcing bankers and brokers to head for their villas a little earlier than usual.

It has been commonplace for years to talk about the pension crisis facing Japan and many European countries. As populations age and live longer, the demands on pension providers grow significantly. In countries where the state is the main or sole provider of retirement income this becomes a problem of ever larger budget deficits and, ultimately, a simple matter of cheating. There are lots of pension commitments out there that simply will not be met.

Of course, it depends on what we mean by "commitment". Most governments undertake to provide a minimal standard of living for its pensioners. In the UK, where an uncharacteristically foresighted Treasury saw this one coming 20 years ago, various means have been found to lower the real value of state pensions. The current "pension crisis" has manifested itself in different ways but, in the UK, is entirely a private sector phenomenon.

The government, unlike many others in Europe, doesn't really have any pension commitments to speak of (relatively speaking, at least), so doesn't have to renege on them.

The word crisis is used to describe a number of events. Firstly, a very high profile and very large insurance company, Equitable Life, has been teetering on the edge for some time, mostly because of guarantees it gave to savers that it now finds hard to meet. Few companies gave such guarantees, at least so generously, so the problems here are to a large extent company specific.

Secondly, other firms involved in the saving business, again mostly insurance companies, have run into problems as a result of falling stock markets but few, if any, are likely to go bust. Most of the problems arise because of inflated expectations. Suspect sales practices (mostly of endowment policies) are partly to blame but the basic problem is a failure to understand the nature of risks taken when investments are made in equities.

Nobody really believed those commercials that say at the end, very quickly, "stocks can go down as well as up".

The returns on saving products for 2002 are now being declared by insurance companies are now being declared and, shock horror, they are poor.

Finally, many companies have closed so-called final salary schemes, the costs of which are belatedly being recognised, again mostly thanks to falling stock markets.

But even if stock prices had not crashed, companies would have had to look long and hard at their pension commitments. The fact that so many people are living for so much longer means that the cost of paying their pensions is going through the roof. The stock market boom of the 1990s merely concealed this uncomfortable truth, while the slump of the last three years has accelerated the inevitable.

Meanwhile, in the euro zone, a different day of reckoning is appearing on the horizon, and its broad outlines are easy to discern. Where people are entirely reliant on the government to see them into a comfortable dotage there is going to be an awful lot of disappointment.

The money simply isn't there. It wasn't there during the stock market boom either. In "pay as you go" systems the current generation of taxpayers pay the pensions of the set of current retirees. There are no savings to be dented by stock market crashes. Here, the trick is to make sure that there are plenty of taxpayers relative to the number of pensioners. Unfortunately, in countries such as France, where there are very few private or public pension saving schemes, it won't be too long until there is only one tax-payer per pensioner. Think about it.

Falling stock markets are clearly part of the picture but only insofar as they have concentrated minds on a looming problem. The more those markets continue to fall, the more bankers and brokers will be laid off. And more "Pension crisis" headlines will be seen.

Chris Johns is chief strategist ABN AMRO Securities, London. All opinions expressed are entirely personal. cjohns@eircom.net