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Pensions on the line

One of the ironies of the Equitable Life affair is the relative good health of its high-income fund. In a recent survey of pension fund performance, Equitable came out as the top performer.

According to CAPS, the fund lost only 5.2 per cent over the last year compared with a median of 21.5 per cent. The FTSE All-Share index lost 20.8 per cent over the same period.

When Equitable, hit by its defeat in the House of Lords and failure to find a buyer, closed for new business, one of the issues highlighted by commentators was over future performance.

As a closed fund, it would have less exposure to equities and poorer performance was considered likely. However, the asset mix foisted on Equitable&#39s fund managers has clearly benefited amid volatile stockmarkets.

It was not equities but falling gilt yields which made guaranteed annuity rate opt-ions such a liability.

In the recent Commons debate on Equitable, MPs from across the political spectrum questioned overall pension policy and the dependence of such an important social policy on the vagaries of the markets.

Conservative MP for Croy-don South Richard Ottaway said: “We have to question how much risk individuals can be expected to take in a pension system that depends on fluctuating capital markets and income rates. The issue highlights the failure of the private sector to protect individuals against such risk and clearly demonstrates the need for a reappraisal of pension policy.

“The Government&#39s stakeholder pensions are simply a way of encouraging lowerand middle-income groups to begin making contributions to privately funded pension sch-emes. However, they carry the same market risks as those of Equitable.

“If the retirement pros-pects of the knowledgeable professionals who took out Equitable Life policies could be damaged so unexpectedly, how reasonable is it to expect lower-income groups to acc-ept a similar degree of market risk? Investors will need unusually visionary minds when planning for their retirement. That is the exact opposite of what was intended and will simply put people off making decisions about their retirement.”

Liberal Democrat trade and industry spokesman Vincent Cable says: “We have seen 20 to 30 years of boom and we could see the same period of poor performance of equities. Nothing goes on forever and there could be a long-term decline. Financial services products will need to adapt.”

Cable accepts this could lead to a re-evaluation of the pay-as-you-go pension. He says Government policy has been based on people having increasing private provision.

But he says diminishing returns will make it increasingly difficult to encourage people to put money into a private pension.

Sue Regan, a senior policy fellow at the Institute of Public Policy Research, the thinkthank widely credited for inf-luencing the New Labour agenda, does not think the current situation will lead to a in pension policy but she says it reinforces the need for a decent state pension.

She adds: “Perhaps everyone has been very optimistic and leaning on past performance when they have been developing pension policy.”

For industry figures with long experience, this situation is not new. “We have been here before,” says Scottish Equitable pension development director Stewart Ritchie, citing the FTSE figures from the 1960s and 1970s. Even if those events predated private pensions, Ritchie points out there was still a considerable amount of funded pensions.

He says: “If we are indeed in a sustained bear market – and I do not yet accept that we are – this will have much a wider impact than pensions. It will have ramifications for the whole of our economy and will affect our ability to pay pensions full stop, whether they are pay as you go or funded.”

People most affected are those approaching retirement who, according to Ritchie, should be considering steps to minimise damage to their pension assets with lifestyle options.

But for those just going in, the message is quite different. “If your retirement date is beyond the current bear market, then you are getting good value and are getting assets at depressed valuations,” he says.

However, stakeholder is looking vulnerable. Ritchie says: “There is no disguising the fact that someone who took out a stakeholder pension at the first opportunity is sitting on a paper loss and this cannot be a strong selling point.”

Regan accepts that serious concerns are raised about stakeholder and the Equitable issue has added to those concerns.

“Individuals right across the spectrum can benefit from equity investments but they need advice to persuade them that it is the right course to take,” she says.

O&#39Halloran senior partner Terence O&#39Halloran says: “I am telling Equitable policyholders to stay where they are and to smile at those who jump ship.”


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