Byline: ALEX BRUMMER
SAVING for a pension, we have all been brought up to believe, is one of the safest and most sensible things we can do with any spare money. Like an investment in property, it will, over time, always come up trumps.
But all that has been challenged by the implosion at Equitable Life, Britain's oldest mutual insurance group, which has closed its doors to new business.
The assumption about the security and good sense of piling surplus cash into pension funds has suddenly been undermined.
When, nine years ago, the late Robert Maxwell raided the pension funds at Mirror Group Newspapers to meet cash shortfalls elsewhere in his business empire, the public could at least understand that this was a straightforward case of fraud.
Protections were put in place to make sure such raids could not take place again. But what is going on at Equitable Life, and what it says about the way in which the pensions industry is managed and governed, is far more insidious.
It is not a one-off like the Maxwell experience. But it points to the hubris, management shortcomings and over-regulation which leads some critics in the financial world to describe the private pensions industry as 'organised theft'.
In particular, the critics are angry about the requirement by government that most cash must be placed in low-yielding gilts.
It is difficult to overstate the seriousness of the Equitable Life debacle.
At a stroke, its management, without any consultation with the 650,000 policyholders who own the company (as it is a mutual), has told up to one million professionals who hold one of its pensions that these will never be worth what they were promised.
THESE policyholders have two choices.
Either they have to accept years, or even decades, of far worse performance than they could earn on other pensions and savings products, and a far poorer retirement than they planned.
Or they can walk away from the company and in doing so forfeit 10 pc of the value which many will have scrimped to accumulate over their working lives.
When Gordon Brown set up the Financial Services Authority (FSA) three years ago as a reaction to the collapse of Barings Bank, it was promised that this new super City regulator would have draconian powers to intervene in the market and ensure the safety of our savings and investments.
But with regard to Equitable Life, the FSA stood in the shadows while the insurance group's arrogant management, led by managing director Alan Nash, battled with its policyholders.
First, the insurer tried to wriggle out of promises of guaranteed high returns to 90,000 pensioners. It was challenged in the courts by rebel policyholders and lost the battle.
Even when matters worsened in recent months, the FSA showed complacency by allowing the Equitable to continue to advertise and sell its products as though the company had a secure future.
The legal fight with policyholders left a [pounds sterling]1.5 billion black hole in the company's accounts. The Equitable's reserves were so thin that the only possible way to meet its obligations was by reducing the benefits to its other pensioners and policyholders.
At the heart of the Equitable fiasco are the peculiarly complex regulations which govern pensions and make them almost impossible for even the most financially literate member of the public to understand.
Essentially, successive governments have made a Faustian pact with the British people.
They have offered generous tax concessions to those who save through private pensions (whether personal or corporate), in exchange for dictating to people what they must do with the pot of cash when they retire.
Under the present law, only a proportion of the pensions that people have saved for can be taken as a cash sum. The rest has to be used to buy an insurance policy known as an annuity. …