Early retirees can’t bank on the incredibly shrinking pension

For many people, a Monday bank holiday is a bonus.

To one man I met this weekend, it's an extra day's breathing space before another working week he never planned to have.

The man is in his early 60s and 2002 was to be the year of his early retirement on a comfortable pension.

The lump sum allowed him to buy the car he had always wanted, give his daughter a chunk of money for the deposit on an apartment, take his wife on a great holiday and still have a few euro left over to stick into his current account.

Because of that small stash keeping his account in the black, because he was still being paid for the odd bit of project work, and because the couple had paid off their mortgage, it was several months before he noticed that his pension didn't seem to be improving his finances to any great extent.

Eventually, he organised a sit-down meeting with his pensions advisor to find out why regular and sizeable sums weren't arriving on his personal bottom line.

The advisor pointed out that the client had chosen not to buy an annuity, which would have guaranteed a regular salary.

The client had rejected an annuity once he learned that when you pop your clogs, an annuity pops its clogs, too. While it gives you a salary as long as you live, it provides nothing for your family to inherit.

The man who had decided to retire early knew all that and grunted impatiently. The pensions advisor reminded him that the fund (after the lump sum was removed) had been invested in a mixture of equities and bonds. Mostly equities. But this last year or so hasn't been a great time for equities.

The early retiree began to get a clenched feeling in his insides as the financial advisor explained that the early retiree's pension fund had shrunk by nearly a quarter. Shrinking funds don't pay much of a dividend.

The early retirement man realised that what he had relied on and worked towards for many years had shockingly diminished in a short few months and was never going to pay him the comfortable monthly pension he'd always assumed it would.

Should he change the fund away from equities into something safer, he would incur some penalties, and, although safely solid investments could deliver a guaranteed return, the solidity of the guarantee would be matched by the smallness of the payments.

His wife wanted him to take the money out of equities and put it into the post office. The advisor said: "Equities always turn up.

The last few years have just been untypical. And, if this war is short, equities might take a turn for the better as soon as peace breaks out."

The client sat, chilled by the thought that it would take a war to rescue what he had always viewed with pride as properly planned finances for his declining years.

He was clearly going to have to undertake a lot more freelance management consultancy than he had planned to do. "How the Early Retiree became a Late Retiree", is how the man ruefully captions his own story.

Hoping to quit work in his early 60s, he now faces the prospect of working well into his 70s. He's not alone, by a long shot.

And he's lucky he can continue to work. In America, right now, the new social category is a "dumpy": a Destitute Unprepared Mature Person, clutching a sign saying "will work for medicine".

It may not have happened yet, but it will. Pension failure is an international time-bomb whose human destructiveness has so far gone unrecognised.

Much of the developed world is aging fast. Put that demographic together with recession and the end result is not a happy one. Stir in a little pension-fund raiding and you have a recipe for tragedy.

Such pension-fund raiding has become widespread and not just by corporate villains like the late, unregretted Robert Maxwell.

Some older companies in Britain, coming under pressure in a rapidly competitive market, have "postponed" making payments into their pension funds and then gone belly-up, leaving former employees stranded with nothing more than a state pension.

One such firm, a textile mill called Lister&Co, went bankrupt a few years ago with an underfunded pension plan and employees coming up to pension age who were due pensions of around stg£35,000 a year found themselves with next to nothing.

Even when the pension fund is scrupulously maintained, recession and over-reliance on equities can and do knock hell out of it.

Some $2.8 trillion got knocked off pension fund assets in the last three years in a dozen different markets.

And while some financial advisors argue that stocks that go down usually come back up, thousands of potential retirees who have seen the value of their pension portfolio nose-dive aren't holding their breath.

The incredible shrinking pension is happening during a demographic shift of enormous magnitude. For the first time, Europe has a mass population of elderly men and women.

The "old age pension" was designed, paradoxically, for people much younger than the millions now depending on it.

Whether it was Bismarck's Germany in the 1880s or in Franklin Roosevelt's America in the 1930s, 65 was chosen as the "normal" eligibility age because so few people were likely to get to it.

The average life-span fell well short of that age, and the actuaries of the time believed that those workers who reached the age were unlikely to live much longer.

Paying generously for a lengthy period of retirement was never the objective, anyway. In the '30s, one American senator said the purpose of pensions was "to make new places for the young and eager".

Pay the old folks to stay home, in other words.

Create a "three box" model of life: education followed by work with a small subsidised box called retirement at the end.

If the middle classes wanted to contribute to private pension schemes over and above the state pension, even better: they could feel provident and their small retirement box would be fur-lined.

The actuaries, back then, had the statistics to prove the observation made by Yeats's old priest Peter Gilligan that "people die and die".

The perverse comfort of certain and early mortality was all-pervasive. In Britain, any OAP making it as far as 100 got a personal letter from the Queen to mark the exceptional nature of their longevity.

Then, over a short period of time, although people didn't actually stop dying, life expectancy soared, challenging national economies in an unprecedented way.

Faced with a gross over-supply of centenarians, Britain abandoned the personal letter system.

By the end of the 20th century, the finances of ensuring years of subsidised dependence amounting to roughly a third of the adult life-span were ropy everywhere.

Ropier than a quick war can solve.

It's a national and an international problem, the pensions time-bomb. It could do more damage to the unity of the EU than immigration. And it's being painfully discovered, one pensioner at a time.