Hatch a plan for your nest egg now

AT the weekend Michael Portillo warned that state pensions might be phased out in the next century. While the state would continue to provide universal education and health care, he gave no such guarantee about pensions for 'my generation and below'. Mr Portillo is 40.

Many people will see this as another attack on the welfare state, but it is really more useful to take it as a statement of mathematical reality. What members of the present government say on this issue does not actually matter in itself:. I it will not be Mr Portillo, as chief secretary to the Treasury, who will be taking the decision about state pensions in 2030, but someone who is probably now at primary school.

Yet there are at least three reasons why the only safe assumption anyone in their twenties or thirties can make is that Mr Portillo is right.

The most universal is demographics. In the European Union at the moment there is one person aged over 64 for every five people of working age. This rises steadily until 2040, when there will two people above retirement age for every five workers. The case is much the same in Japan and the US. And the ratio in Britain will be rather better than in many European countries, for our birth rate fell earlier and is closer to replacement rate than in France, Italy or Germany.

The Future of Welfare: a guide to the debate (Joseph Rowntree Foundation, published this week) used this point to argue that we could afford to carry on financing the welfare state. But even on the most favourable estimates, the cost of pensions will grow, and grow particularly sharply after 2020. The funds to finance this expansion will be finite. More pensioners will have to share the available pot.

Second, there are reasons to suspect that the state pot - the amount the various Western industrial nations raise in taxation - will be smaller. As highly paid people are far more mobile than they were a generation ago, and money is completely mobile, so governments are having to compete against each other in taxation levels. This has cut away at the taxation base of individual countries, for, if higher tax rates simply drive high earners or international companies abroad, they will reap lower revenues, not higher. Mobility will continue to increase and, as a result, the amount that governments can raise in taxation may fall quite sharply over the next generation.

Third, we are all prisoners of great changes in work patterns. Several are already evident. An obvious one is that more people face redundancy in their forties and fifties. Another change is the pattern of earnings. Up to now most white-collar workers assumed that their earnings would rise with age, yet many are finding that their peak earnings are coming much earlier in their careers. People have to try to plan for career breaks, retraining, self-employment, maybe a period working abroad. Even those in what were thought to be 'safe' occupations, such as banking or the Civil Service, cannot assume to have jobs for life. These changes make it a nonsense to rely on any pension based on a final salary, be it from the private or public sector. Yet many still are.

In fact, Mr Portillo is not going nearly far enough. He should not be saying that people cannot rely on the state for pensions. He should be saying that neither can they rely on their current employer. No one can be wholly confident that his or her present employer can guarantee a pension in 40 years' time. No one can make a confident prediction about the political complexion of future governments. The only rational conclusion individuals can reach is to make provision of their pension their own personal business.

So what should we do? The answer is to save, and save far more than most people during the entire post- war period would have considered necessary. We are all, whether we like it or not, captive to the economic forces of our time. What one generation regards as normal, another sees as odd. To save 20 per cent or more of our income would seem odd to most Britons, but it is normal in Japan and other parts of East Asia. Many middle- class Victorians saved that proportion of their income: Trollope saved more.

But while the Victorians saved for their retirement, they also lived in rented homes. By contrast the main savings mechanism for the post-war generation has been house purchase. This was perfectly rational given cheap interest rates, tax concessions on mortgage interest and freedom of capital- gains tax on first homes. In a period of high interest rates relative to inflation and much smaller tax concessions, it is less attractive.

People who bought homes with borrowed money and then saw their value fall understandably feel cheated. Yet they had been wrongly conditioned by the financial circumstances in which they grew up, and made a mistake. They are in the same position as people in the Forties and Fifties who put their savings into gilt-edged securities because they thought these were safe, and saw their savings destroyed by rising inflation.

Changing attitudes to saving will take time. A whole generation has been brought up with the idea that if they want something, they can have it. The flood of junk mail urging us to take out personal loans and offering 'free' credit on new cars reinforces this view of the world. But a policy that was rational in an era of relatively cheap money, rising salaries, secure employment and a decent safety net from the state is no longer appropriate. Gradually, people will realise this and modify their behaviour.

Many already have. Personal savings have nearly doubled from a trough of 6 per cent of income in 1988 to about 11 per cent today, though savings are still lower than they were in the early Eighties. The burst of new pension products, which the financial services industry has been offering since the mid-Eighties, must also be stimulating demand. But we are still at the very early stages of change. Most people do not yet assume that they will have to organise their own pension, or even take much notice of what is being done on their behalf - though the escapades of the late Robert Maxwell have helped to raise awareness.

This leads to a further issue. How, asked a colleague, can she know whether the life company with which she has a pension policy will even be around in 2040?

Of course, she can't know. The only sensible thing to do is to split the risk - save in several different ways and hope that some of them will do well during the next 30 years. If that sounds lame, it is at least more sensible than making a bet on a future generation of politicians.