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Some related articles :BoE Warns on Pension Uncertainty (July 22,  2002)

Bleak Outlook for Pensioners at Mercy of Volatile Markets

 

By: David Turner
 Financial Times, July 23, 2002

 

 

Britain's ageing population will place more people at the mercy of volatile financial markets - which could leave them with much lower-than-expected pensions, according to a paper published by a Bank of England economist.

The warning came as UK stocks fell sharply again, sliding 5 per cent on the day to a six-year low.

The paper, by economist Garry Young, says the growth in the number of people exposed to such volatility raises the risks to economic and financial stability, by making it more likely that large numbers will suffer when a financial shock hits the system.

Moreover, poor returns for pensioners could damage the broader economy further if they encouraged workers worried about their retirement income to spend less.

His paper points out that ageing populations have encouraged the shift from public to private provision for old age, increasing the proportion of retired people "exposed to risks to market prices and rates of return".

"Recent experience with endowment mortgages emphasizes that the returns on long-term investments can turn out to be substantially different to expectations," the paper says.

It also makes clear that the golden age of pensions, when saving for retirement seemed relatively painless, is over. It warns that "the current generation of pensioners has benefited from extraordinarily high asset returns, which are unlikely to be repeated".

The paper points out also that whereas the first generations to live to an advanced age benefited from the accumulated capital of previous generations, later generations would be left less money by their long-lived predecessors.

Neil Churchill of Age Concern said: "The basic state pension should act as a shield against investment volatility by providing basic living expenses. At the moment it does not."

The paper also highlighted the risk that investment could be hit by a fall in the rate of saving, as people retire and turn instead to consumption. A large change in capital accumulation would slow down output growth, warns the paper.

Lower output growth would mean less tax revenue, and the need for higher tax rates if future governments plan to increase spending on public services on the same ambitious scale outlined in last week's spending review.

However, the report concludes optimistically that average living standards in Britain as a whole are set to double over the next half- century, as capital and technology continue to drive the economy along. The implications of an ageing population for the UK economy, Garry Young, Working Paper No 159.

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