Monday, November 10, 2008

The great pensions disaster

(FT Alphaville) George Magnus, senior economic adviser to UBS, is out with a new book - “The Age of Aging: How demographics are changing the global economy and our world.”

Its warning is pretty harsh. The next great financial crisis to hit the world will not be credit cards, revolving credit facilities or China. No, what the world should really be worrying about are pension deficits, as well as the demographics affecting pensions.

According to Magnus, $2tn has been wiped off the values of 401k US pension plans in less than a year. In the UK defined contribution plans have fallen by about a third. More worryingly, over half of retirees in advanced nations are thought to have inadequate savings in 2007. This means governments and individuals will be even more poorly prepared for the implications of changing demographics than ever before, making the adjustment even harder.

The crisis is heightened by the number of people who had depended on their homes as a pension plan.

Inevitably, Western governments’ ability to generate the large resources needed for age-related spending programmes will be seriously affected. How will they be able to makeup the shortfalls?

According to Magnus it could be bad news for women, and those aged over 65:

Women and older workers, who could participate more in the labour force, may be among the major victims of the economic downturn. Skilled immigrants may not come, or they may go home. Productivity growth will stall, and the resources we need to put into human capital via education and skill formation may not be seen as the priority which they are.

And as corporate pensions liabilities grow (BT’s up by £5bn , Royal Mail’s up by 25 per cent to £4bn, £1.5bn at British Airways to name but a few expansions in the last month), it’s no surprise public sector workers are becoming the new pensions aristocracy. The impact on everyone else? Ros Altmann, an independent pensions expert, questions the point of non public workers saving in a pension scheme at all.

She tells the FT:

Ms Altmann points out that government measures to bail out the banking system mean money in the bank is much better protected than in a pension. For younger people in particular, a bank deposit may look the better option, as it is accessible and protected.

Why give your money away for someone else to lose is essentially the point. Ms Altmann continues:

If they save in a pension, they have to watch the value of their savings sink when markets fall, pay charges for the privilege, and if the pension provider collapses, they will get back a maximum of 90 per cent. On top of that, the money is locked up for good, an issue to which policymakers have paid insufficient attention, according to Ms Altmann.

And so, the pension crisis deepens.

Related link:
UK pensions strategy needs complete rethink to be safe - FT.com

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