Pension. Such an innocuous little word. Look it up in the Oxford English Dictionary, however, and the positive pleth-ora of meanings will give an indication of how unwise it would be to underestimate seven letters which are adding up to a whole raft of problems for a wide variety of constituents and not the least of these is the Government.
You could be forgiven for not recognising the concern that our political leaders must have over the pension issue. What appeared to be the opening salvo in a general election campaign that could last for as long as two years was centred on the National Health Service but pensions are bound to return to the fore. As has already been suggested, pensions could turn out to be New Labour's poll tax.
Just look at where they have crept into the news recently. A bid for high-street retailer WH Smith from a private equity house was put on hold as a consequence of a black hole in the company pension scheme. Employees of the Dennis bus-building subsidiary of the failed Mayflower group discovered that their likely pensions would be just 40 per cent of what they expected, even though existing pensioners were getting their entitlement in full. Protestors of all ages recently took to the streets of central London at a trades union-supported demonstration to express their concern over pension provision.
It is easy to lay the blame for the current spate of bad news on the coincidence of a savage bear market in equities, increased regulation, Government interference (such as the ending of tax concessions on dividend income) and the growing culture of spend rather than save but pensions have been at the core of financial development for several generations. When, nearly 60 years ago, the welfare state embodied the entitlement to a Government-funded pension, the mandarins of Whitehall could have had little idea of the troubles they were laying up for themselves.
Then, the life expectancy of a pensioner was of sufficiently short duration that pre-funding seemed unnecessary. Today, the state retirement benefit comes from taxes paid by those in work because the cost of moving to a funded scheme is too great to bear.
In the private sector, the pension fund has played a pivotal role in the investment scene. From the prescient move from government securities and property into ordinary shares in the 1950s and 1960s to the ultimately disastrous over-weighting of equities by the end of the 1990s, pensions have influenced markets and investment trends. The fact that the pension scene is in such disarray at a variety of levels should not blind us to the fact that they will continue to exert a strong influence upon many aspects of financial markets.
Aside from the seemingly inexorable switch from finalsalary schemes to defined-contribution pensions, there is the not insignificant matter of how the giant pension funds in this country will invest their assets. The pension industry, after all, remains the biggest owner of British shares. What they do will affect how markets behave and, indeed, a wide range of associated issues such as shareholder activism and corporate governance.
There have been some high-profile moves away from equities into bonds by some of the bigger corporate schemes, Boots being probably the best-known example. Moreover, the natural rebasing of portfolios that the bull market in bonds and the fall in equity values delivered has changed the map of pension investing. However, scope remains for pension funds to dump ordinary shares. This, at least, is the view of at least one senior pension consultant. He can see a significant further reshaping of scheme portfolios taking place over the next decade or so as trustees endeavour to match their liabilities with their assets.
There is the rub. Just as the Government is forced into withdrawing as the country's principal pension provider, so private schemes have to readjust to take account of greater longevity. No wonder rumours abound that the retirement age is about to be raised to 70. The other side of the great demographic shift that is under way is that individuals will have no option but to provide more comprehensively for their retirement or face a working life that will extend way beyond 65. The baby boomers may be the last of the grey leisure-seekers if we are not more prudent. Thank heavens that these changes, as they come about, will still need input from professionals in the financial services industry.