Longer lives threat to pension firms

PENSION firms could face bankruptcy as people live longer, Britain's top financial watchdog has warned. The Financial Services Authority says it is becoming more expensive for insurers to fulfil their obligations to pay pension annuities, which fund an income in retirement.

The report, which is due out on Monday, underlines the problems faced by savers, the Government and financial services companies. It will be seen as yet another blow to savers who could see their retirement dreams shattered because they are living longer and unaware that they are not saving enough.

The report warns savers to expect smaller pension payouts as we live longer - unless they are willing to save more or take a risk with their retirement cash. It raises particular concerns that insurers may underestimate the risks associated with longer life expectancy and could pay out too much to savers. This 'poses a threat' to their solvency.

Carol Sergeant, of the FSA, said: 'The consequences of an ageing population have not yet been fully appreciated. It will not be enough for the industry simply to continue offering the products that worked 30 years ago. Consumers, too, must understand that they will face greater exposure to the effects of financial volatility.'

There are protections for savers, but when an insurer goes bust there is no guarantee investors will get everything they expected from their pension.

The FSA warns that people are not saving enough to compensate for living longer. Life expectancy for men and women - which was 45 and 49 years respectively in 1901 - is projected to be 80 and 84 by 2011.

Two fifths of people with an annuity have less than £10,000 in their pension. This buys an income of just £700 to £800 a year today.