We are at risk now in homebuying and pensions

SO WE can no longer count on the stock market to pay off the mortgage early through an endowment policy, nor can we bank on a comfortable retirement courtesy of our pension. It is a situation that we'd better get use to.

The last two decades were a period of stupendous returns on stock market investment. Barclays Capital estimates that in the 1980s total returns on share investment after inflation were 7.9% and in the 1990s (the best decade of the 20th century) gains reached 14.1%.

But over the last two years, Britain's stock markets have fallen by an astonishing 25.8%, wiping out tens of billions of pounds of savings held in insurance policies, pensions, unit trusts and individual savings accounts.

And now, with worsening investment conditions on the horizon, we learn that insurance companies are being forced to issue 'red alerts' to people with endowments, warning them the policy they took out ten or even 20 years ago has very little chance of paying off the mortgage.

At the same time, the pensions industry is warning that people will have to stay at work longer or substantially raise the amounts they are saving if they are to have any chance of a comfortable retirement.

Confidence in shares as an investment has also been undermined by a series of scandals affecting savings, culminating in the Equitable Life fiasco, when the nation's oldest and most respected insurer admitted that it had insufficient funds to meet the promises it had made to policyholders. Now there are concerns that the continuing deterioration in the stock market, poor investments by the displaced Equitable management and the exit of billions of cash to alternative suppliers may render the whole fund insolvent.

So what has gone wrong with the financial services industry and what are the prospects for recovery? The problem for most people is that they were mis-sold policies by the modern equivalent of snake oil salesman.

Sometimes this was deliberate, as in the case of the pensions scandal of the last decade. Insurance companies set out to convince ordinary people like nurses and teachers in good, soundly run pension schemes that they could do better if they took the private route. So far the industry has been forced to pay back between £15bn and £20bn in compensation.

In the case of endowment polices, much of the blame must be put at the door of the unregulated mortgage and insurance brokers (many of them estate agents) who distributed the products. Rather than sell uncomplicated repayment mortgages - on which the suppliers earn little income - they chose to distribute endowments because there would be generous and recurring commission.

This was fine when stock markets were in good fettle and the endowment mortgage promised not just to pay off the mortgage but also to leave you with a 'bonus', for that holiday of a lifetime or the sports car to fulfil middleaged fantasies. Now people are faced with the prospect of either upping their payments into endowments (which many have already done at least once) or a shortfall on their mortgages of many thousands of pounds.

The only saving grace is that the housing market remains remarkably strong, rising 16% over the last year (according to the Nationwide), so that when people sell up they can look forward to large capital profits - tax free - which will more than compensate for the endowment shortfall. But who knows how long the housing bubble will last?

The authorities have been forced into a total rethink of the long-term savings market. Chancellor Gordon Brown has called in Ron Sandler, the canny South African financier who rescued Lloyd's of London from the brink of collapse, to advise him. Sandler is expected to recommend big changes in the way insurance policies, including endowments, are sold - there will be a much greater emphasis on transparency.

Those buying policies will be able to see more clearly the likely returns, which will be updated on a regular basis so adjustments can be made in the amount being saved as needed. That should prevent the unscrupulous salesmen and brokers from pulling the wool over our eyes ever again.

But in truth, nothing will cure the present crisis in the long-term savings market until there is a sustained recovery in stock markets in London and across the world.

Millions facing home loan trap