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The Actuary The magazine of the Institute & Faculty of Actuaries
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Pension fund investment

The letter from Pete Davis in the October issue presents a challenge to those of us who argued nearly 40 years ago that the natural home for pension fund assets was in equities. I cannot speak for all those involved but can assure Pete that, in my case, this was in no way a love affair, nor was it the result of very speculative calculations purporting to show that equities offered higher expected returns than gilts. It was in fact based on the sound actuarial basis of matching in the belief, supported by common sense and history, that incomes and dividends would be correlated as closely as is as likely between a monotonic and a cyclical series. It is well to record that this thinking was given some impetus by the problems caused to many funds by their heavy investment in fixed interest at a time when inflation started to rise, causing assets to fall and liabilities to rise.

A new factor has unfortunately entered into the matching argument. This is FRS17. This appears to value assets and liabilities on two different bases which is not normally recommended, but the bit that worries me is the valuation of assets at market value. This implies that a rise in prices is good for pension funds. As it results in a reduction in the returns on new investment it is in fact bad. I know this might appear to be a minority view but to me it is self-evident. The existence of the standard presents trustees and their investment advisers with a dilemma. Do they match against the liabilities or the standard? I hope Pete knows the answer.