An Education in Pensions

Pension funds of British companies comprising the blue-chip Footsie 100 index face a shortfall of £36 billion and the gap between their available assets and their commitments to present and future pension ers is widening each year as the life expectancy of their staffs — as well as those already on pension — lengthens. Many of these companies still have old-style 'defined' pension funds which guarantee a specific income {and,sometimes, annual increments)for the lifetime of the pensioner and his spouse.

In Britain a male employee reaching the age of 65 in the next couple of years can expect to live for a further 25 years,or until he is about 90, according to current ac tuarial calculations. The pressure this greater longevity places on the funds is self-evident.

In Gibraltar — where both men and women have a life expectancy above the European average — that age would be extended by several months, if not a year or so more than in the UK. And this sets the scene for potentially disastrous twin fiscal time bombs for the Government, local insurance ad visers warn.

Not only does the Government face a growing future pensions bill for civil servants — whose numbers have increased by one in four over the past five years, whose wages and salaries have risen by 25 per centin the same period,and whose expected longevity continues to increase — but the thousands of Gibraltarian workers who have neither occupational pensions nor have provided savings towards their retirement will also live lon ger... adding a further burden on the Government (and ultimately the tax-payer)in social welfare and extended health requirements.

So far warnings from the indus try (and on at least one occasion from Chief Minister Peter Caruana) that a time may come when the Government will no longer be able to fund state old age pensions have fallen on deaf ears — in spite of sig nificant tax concessions designed to encourage savings and investment in private pensions or annuities.

(In an attempt to end the pen sions inertia of many companies in mid-October Isola & Isola joined forces with pension funds experts from European Financial Plan ning to present a well-attended seminar on pensions provision on the Rock.)

However,as well as this inertia,a further cloud on the pensions hori zon causes concern in the industry as the Government continues to fund its pensions programme for civil servants and old age provi sions for social welfare payments on a cash flow basis. No invest ments have been made or even cash tucked away to meet ongoing bills each of which currently total more than £10 million.

It's a situation which rings alarm bells for Tom Fraser, chief execu tive officer and MD of European Financial Planning which provides pension, mortgage and insurance advice to companies and individu als on the Rock and in Spain.

"Although Gibraltar has in place pension legislation that is sig nificantly more advanced than in many other jurisdictions, I am horrified that so many local firms have made no pension provision

Several of the Gibraltar firms which provide staff pensions op erate old-style defined funds and many of these require "a proper review which takes into account up to date actuarial data." And as longevity extends and medical knowledge grows a further factor enters the equation and will need to be considered by funds and administrators — "What happens when medical science comes up with the'magic cure'for cancer or other serious illnesses? How many people will live even longer?" Fra ser asks rhetorically.

"In terms of saving, Gibraltar is well set up with a range of tax concessions which are not avail able in many other economies," Fraser points out... adding that he understands fears and concerns about this, in what is clearly an oblique but un-named reference to the Savignon fiasco.

Savers, he explains, should spread their investments in a pat tern that changes as they grow older. "While over a longer period investment in equities gives a bet ter yield this is also the riskier end of the market and how much he invests in these will depend on the saver's attitude to risk.

"What is important — and we stress this when we give advice-is to get the mix of savings vehicles right... and then check regularly to see where your savings are go ing and that the balance remains right."

Which is all part of the European Financial Planning Group's policy of"trying to educate people about what they should be doing."