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There's a perfect storm brewing on Europe's horizon — a combination of tentative markets, sluggish growth prospects, and a demographic time bomb that will see the ratio of workers to retirees plummet dramatically over the next 40 years. The result; as state budgets shrink, Europe's consumers will have to rely more on themselves for things they once took for granted — like retirement benefits and comprehensive health care. For some, that will mean entering the investment culture for the first time — just when the outlook is bleak. For others, it will mean holding their noses and forging ahead despite lousy market conditions. Not even large corporations are safe — in the U.K., the government is drawing up plans for compulsory insurance for some corporate pension schemes, many of which currently face huge deficits. A few simple rules can help you navigate Europe's new reality.
Develop steady habits Even as he watched the FTSE index plummet from its all-time high at the end of 1999, Barry Lake, 48, kept investing. The surveyor from Rayleigh, England, first dipped into the stock market in 1994 by joining an investment club. Over the last two years Lake has shoveled about €2,830 — or around j118 monthly — into equities. Yes, the holdings — including those of his clubs — are worth far less than their peak of €364,000 during the tech boom. "Maybe we were a little bit unwise not to sell up and put it into bonds," he sighs. But he's staying put.
Diversify your investments Financial advisers say Lake's approach is just right. His regular payments — which allow him to buy fewer shares when prices are high but more when they fall — mean he is effectively "euro-cost averaging," considered the most productive approach. Equities make up about 60% of his portfolio — suitable for his age. The rule of thumb: people in their 20s and 30s should have about 80% equities in their portfolio, 15% fixed-interest products (such as bonds) and 5% exposure to commodities or real-estate vehicles. By the time they hit their mid-50s, they should have rebalanced their portfolios to around 50% equities, 30% fixed-interest products and 20% exposure to property and commodities — and have a cash cushion of three to six months' salary. "Then," says Justin Modray, an adviser at Bestinvest, "in tough times you won't have to cash in at disadvantageous terms."
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Get work to pay Corporate benefits vary across the E.U. — in the U.K., company pension plans cover almost half the work force, whereas in France they are still in their infancy. Historically, it has not been easy for Europe's workers to take pensions with them from job to job, although recent E.U. directives are addressing the problem. But always ask. "If you change jobs," says Roddy Kohn, of pension advisers Kohn Cougar, "it's possible your next employer will operate a transfer club for pension benefits, and will be willing to take your pension."
And don't forget health benefits. According to O.E.C.D. projections, by 2030 pension and health benefits could account for more than 25% of GDP in France and Germany, up from just over 17% five years ago. No wonder corporate health benefits are on the rise. In 1993 in the U.K., almost 3.8 million people were covered by company health insurance; by 2001, the number was 4.7 million. Simon Pomeroy, of recruitment consultants Robert Walters Associates, notes that health cover tends to matter more to older workers and those with families, and advises them to check the fine print. "Health care isn't standard. Sometimes the level of coverage is minimal."
Don't put it off Kohn suggests that employees check what kind of pension scheme they are in, or going into, and supplement their payments whenever it is appropriate. "Don't think to yourself, 'Pensions are horrible, boring things and I don't have to think about them because I'm only 33,'" he warns. "Making the wrong decision could cost you thousands of euros."
Consider all opportunities Products with tax breaks are another option. In the U.K., tax-free products like Individual Savings Accounts (ISAs) have been around for four years: Martin Lipton, 36, has bought two in the past three years. "It helps me think about the future," he says, "and it's also a way to get my tax back." In 2000, Germany introduced private pension plans with tax breaks of up to 4% of gross salary. But because of dismal market conditions, enthusiasm for the products has been low. It's a good idea to take advantage of tax breaks, but customers must also be comfortable with the underlying investment. Says Modray: "The tax wrapper should not be the primary reason for investing. If it's going to give you sleepless nights, it's probably not worth it." In other words, find what works for you, but find it soon.
- JENNIE JAMES | London
- Don't let the downturn paralyze you. Europeans need to think ahead — and act