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The Actuary The magazine of the Institute & Faculty of Actuaries
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Long shadows in the bear market

Much of the news this past month, as in several recent months, continued to focus on the weak position of the world economy and of most financial markets. Concern continued to grow for the ability of financial institutions – pension funds and life assurance companies – to meet the expectations of employees and policyholders.

Pension fund pressures
The spotlight remained on the apparently very substantial deficits exposed by several leading companies under FRS17 and on the implications of required remedial action. The difference between valuation for accounting purposes and the determination of an appropriate funding level continued to be somewhat obscured in debate, but more comment recognised the complexity of the issues faced by advising actuaries.

This month saw the publication of the latest issue of the Barclays Capital study of comparative returns from equities and gilts, carried out annually since 1956 using data from 1899 onwards. The study underlined the extent to which excess equity returns have been squeezed, as shown in the table (see www.barcap.com/egs/).

Real investment returns by asset class (% pa)
Last n years 2002 10 yrs 20 yrs 50 yrs 103 yrs
Equities -24.5 3.9 8.2 7.0 5.0
Gilts 6.7 7.2 6.6 1.9 1.2
Corporate bonds 6.6 8.6
Index-linked 5.1 5.1 3.5
Cash 1.1 3.4 4.6 1.8 1.0

Tough times for life assurers
The results reporting season towards the end of February confirmed the stresses on household-name life offices as one after another cast doubt on dividend prospects or indicated an intention to seek from the Financial Services Authority (FSA) a waiver of application of regulatory solvency tests. The FSA moved quickly to indicate its willingness to waive ‘artificial’ rules where healthy ‘realistic’ solvency could be demonstrated.

Perhaps the only consolation for chastened UK actuaries was the evidence of the rather greater difficulties being faced by certain of their European counterparts.