'Lost decade' for pensions as fund valuations slump

Over the past 10 years the purchasing power of the average pension pot has slumped. At the start of the decade, a £100,000 fund could buy an annuity worth around £9,000 but today it would pay out less than £7,000 a year, according to accountants at KPMG.

Linda Bell, pensions director at the firm, said the past decade told "an unfortunate story for equity markets, spanning from the height of the dotcom boom to the current credit crisis."

A typical worker's pension scheme grew at only 2.25% between January 2000 and December 2009, and then saw its value slashed further by running costs. In contrast, assets deposited in the bank during the same period would have grown at more than double that rate, earning an average of 4.7%.

KPMG said a dramatic rise in life expectancy since 2000 had exacerbated the pensions crisis. At the beginning of the decade, businesses assumed a 65-year-old would live for the next 16 years but now the expected pension duration is 22 years, adding six years to the average pay out.

Bell warned the "hangover" of the past decade's poor returns on pensions might force firms and individuals to turn their backs on the schemes.

She said: "We expect to see more companies closing schemes and selling them to third parties. Individuals may well also turn away from saving for pensions, burned by the experience of the last decade and also by Government policy to repeatedly reduce incentives to save."

Bell predicted increasing numbers of older people will rely on their capital, property or other assets to fund retirement over the next 10 years. But she warned it could be a risky strategy.

"These people are likely to have a very difficult job running down their capital at the right pace to potentially see them through to age 100 and beyond," she said.

The past decade has also accelerated the demise of the final-salary pension scheme, after the bill for private firms offering the benefit soared above £1 trillion for the first time.

New figures from Aon Consulting show the UK's 200 biggest final-salary pensions have a £103 billion deficit.

Marcus Hurd, of Aon, said it was "an unwelcome Christmas present".

Hundreds of firms axed their final salary schemes this year, including Barclays, Morrisons and BP.