Bracing for the shock of the old

John Eisenhammer on rocky times for future pensioners

We had better brace ourselves: "The population is in for a shock. People on average earnings are going to have to put aside a helluva lot of those earnings to make sure they have adequate provision in old age, probably a lot more than they are doing now," says Ann Robinson, director- general of the National Association of Pension Funds. "People are still not properly aware of this, but it needs to be understood."

She has been in the job only a couple of days but has no time to lose in publicising her message: today she will be thrust into the hurly-burly of the NAPF annual meeting in Birmingham.

This important gathering brings together some of the most influential financial players in the country, those who manage the hundreds of billions of pounds saved by people for their pensions.

But the two-day meeting is important above all because the issues it grapples with are assuming considerable urgency - something that Mrs Robinson insists must be appreciated by everyone. The traditional notion of a stable job leading to a decent pension and old-age care secured by one's employer and the state is disintegrating fast.

"We are on the verge of a revolution in attitudes," Mrs Robinson says. "People need radically to rethink what it means to provide for old age. The time we could equate this with a pension is going. We will have to think much more broadly about saving for the future."

The Government, in pushing personal pensions, has been saying for some time that we should do more to provide for our old age. But Mrs Robinson believes the implications of the changes have not sunk in.

The past few years have seen people in Britain thinking, and worrying, about pensions as rarely before. Robert Maxwell and the scandal over the selling of inappropriate personal pensions to people in occupational schemes were largely responsible. But there are far greater causes for concern.

While no government is so suicidally inclined as to say the old-age provisions of many of its citizens are not safe, there is an urgent case for admitting just that. Most people under the age of 45 can no longer afford to take their retirement finances for granted. The demographic time-bomb is largely the reason.

All Western industrial countries are ageing rapidly. In Britain, the proportion of over-65s, as a percentage of the population aged 15-64, will soar from over 20 to nearly 40 per cent in the next 50 years. They will be very expensive to care for.

The state, desperately overstretched, is trying to reduce its commitments. To carry on as now with old-age provision would send taxation through the roof. But it is not just the state that is cracking.

Companies with their own occupational pension schemes are facing the difficulties of fewer workers paying contributions to finance a growing army of pensioners. Employees are retiring early; working and remuneration patterns are changing dramatically; the investment climate has grown tougher, and there are constantly new regulations and provisions, all placing huge strains on the traditional ability of firms to give the generous guarantee of a pension based on final salary.

A number of household-name companies are considering whether they may have to move to schemes whereby people's pensions are defined by how much they contribute - meaning that if they want decent provision they will probably have to pay considerably more out of current earnings.

While such pressures are a headache for many pension managers, they also hold out the prospect of vast new wealth for the industry as a whole. As individuals start to save more for old age, there will be a massive increase in funds to be managed.

Although the change will be far greater on the Continent, where pension funds are largely undeveloped, the savings and investment landscape in Britain would also be radically transformed. Moreover, as Mrs Robinson says, people will have to get used to saving again for the long term.

"We British have become inflation junkies, addicted to property booms, rushing out to drink champagne today and never mind tomorrow. We are coming to a completely new set of expectations, where people want low inflation, and will feel better off having savings rather than speculating on house prices."

People must get used to thinking of a broad range of savings for old age, including their home. "Is it so extraordinary that people, when they go into a nursing home, should sell their house to pay the fees? Caring for the elderly is damned expensive, and the state simply cannot cope any more," she notes.

This fact has been dramatically brought home by the recent change in the law, which has seen the state largely withdraw from paying for nursing home care, shifting the funding burden to the individual who must use savings and home to cover costs that can be £1,500 a month.

"The idea of property cascading down the generations is no longer on. People must see property as part of their retirement savings, we shall have to rethink our inheritance expectations," Mrs Robinson says.

Though many of us are likely in future to be less well off as we save more of current earnings for old age, Mrs Robinson has little time for the inference that people will feel poorer.

"We have all become richer in the past 30-40 years - look at GDP, at the social data. How many people now live in a house without heating or a bathroom? We are rich enough to pay for our own old age."