Jill Kerby

Volatile markets spell bad news for the retiring types

How can an ordinary private sector worker, whose managed pension fund is down nearly 6% in August alone, and has lost over -8.4% so far in 2011, have any confidence in the idea of an affordable retirement?

Only with great difficulty, especially when you consider that the last decade has been a complete write-off too, with an annualised managed fund return of just 0.9% since 2001. 

Adjusted for inflation, the pension contributor might as well have saved themselves the bother of investing in a ‘formal’ pension scheme and instead thrown their bundles of euro onto the nearest bonfire.

As one reader also discovered, leaving his pension money entirely in cash didn’t yield him any greater, or safer return: “I put €10,000 into a cash pension fund only to discover it was worth just €9,600 a year later. I had no idea the charges would be so high.”

The fall in stock and currency markets, continuing high charges, the impact of inflation and the clawing back of pension tax relief is guaranteed to make it tougher, not easier for private sector workers to save for their long term future.

The picture isn’t much better for public sector workers, the victims of pension promises the state can no longer afford. Nearly every generous defined benefit pension in the western world is being amended or abolished.  How can a state on economic life support, with a €20 billion annual budget deficit, possibly maintain Rolls Royce pension payouts to its public servants?

It can’t, is the simple answer.  With public sector and old age pensions being paid straight from general taxation and private pensions relying on the performance of increasingly rigged stock markets, the government will hopefully acknowledge the pensions crisis, let alone have a programme to repair it, when it presents its three year budget plan later this year.

Until then, time for a little ark building of your own.  Financial advisors, anticipating more market volatility and what might be the last chance to claim top rate tax relief, are all trying to come up with credible, short-term investment positions for their existing clients.

Join them.

No key solution

The frustration amongst indebted homeowners is palpable: it’s hard to avoid their grim stories in the media. Growing numbers, many with young families, feel that they are getting nowhere in trying to sort out their mortgage arrears or repayment problems.

Meanwhile, the forbearance measures in place “are not working and the ‘solutions’ are not long term solutions” says Michal Dowling of the Independent Mortgage Brokers Association which is bringing out its own report shortly on the arrears crisis.

For mortgage experts like Dowling the exponential growth in arrears and repossessions means that time is of the essence if the cost of this crisis doesn’t also spiral out of control.  What is needed, he says, is a consistent approach by the all the banks in the way they process applications for restructuring and forbearance measures, let alone providing a wider selection of options that can be offered.

This is not a problem, he says, that was ever going to be dealt with by one-size-fits all approach.

Meanwhile, the idea that there are a growing number of frustrated, hugely indebted homeowners who are resorting to the ‘jingle keys’, nuclear solution “is an urban myth”, says Dowling.

Only about 10% of all repossessions are ‘abandoned’ repossessions, he says and while some owners are undoubtedly non-nationals who’ve gone home, most cases of people ‘walking away’ are actually people with substantial arrears who have agreed to voluntarily leave their homes. In those cases, the banks have been known to write off the shortfall, but only “on a case by case basis.”

 “It is not advisable to ever just hand back the keys and walk away property if you plan to stay in the country,” says Dowling. The banks will, and they have, sought court judgments against such people.  It can impact on your earnings for up to 12 years, “and in cases that I’ve come across that involve buy to let properties that people want to walk away, I know that the banks will look for the courts to attach the shortfall to your to your family home.”

No matter how inadequate the debt forbearance measure or how stressful dealing with the mortgage lenders can be, stick with it, says Dowling.

It buys you time.

Paper trails

There is a saying that all fiat currencies eventually turn into wallpaper.

Last week, the Swiss franc joined the global money-as-wallpaper club by abandoning the sound money principals it had clung to for so long.  It de-pegged itself from gold and onto the unstable euro instead.

The Swiss said they had not choice. So much money was pouring into the franc from weak currencies like the dollar, pound and euro that Swiss exporters were in danger of losing their businesses.

The currency wars that started last year have been ratcheted up by the Swiss move but it has left gold as one of the last stores of value. 

With shares falling, commodities and bonds looking very overpriced, and even strong currencies being intentionally debased by their central banks, gold is the only ‘money’ that can’t be printed out of thin air or have its market value set by political dictat.

Unfortunately, ordinary Irish people still don’t see it that way.

Governments in developing countries, and their wealthier citizens are piling into gold, but here, all people see is a price per ounce that has soared. Silver, at c€30 an ounce seems a more manageable price tag, but it travels on an even steeper rollercoaster than gold and is not for the faint of heart.

In the past six months an ounce of gold has gone up (and occasionally slightly down), by over €300 (over $435), a price point that is just too great for people who only see a bubble ready to burst when any asset rises that fast.

I don’t think gold is in a bubble, but I understand why others do, and it’s too bad. 

All paper currencies, backed by nothing but the empty promises of the indebted governments that issue them, turn into wallpaper eventually.  And it will happen to the euro and dollar – and the once-mighty Swiss franc as well – once the central bankers get their instructions to fire up their presses and print away the toxic banking and sovereign debts.

That’s when it’ll be time to invest in wheelbarrows.