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The Actuary The magazine of the Institute & Faculty of Actuaries

Pension funds bonds only?

In response to our article in the May issue, Tim Gordon states that it doesn’t matter that a bond-orientated investment policy will require higher employer contributions in the long run, arguing that this makes no difference to the value of the business and pointing out that the employer may not survive anyway. The point made in our article, however, is that the business will be less likely to survive if it has to pay higher contributions, a consequence of far greater concern to the members than whether the investment strategy affects the ex ante value of the company. Mr Gordon also draws a false equivalence between pension fund deficits and corporate debt, a matter that was dealt with in our letter in the July issue. The important distinction we drew between them applies irrespective of how they are presented in company balance sheets or the legal requirements that apply on the wind-up of a pension scheme. His analogy between a pension fund and a hedge fund is also incorrect for the same reasons.

On a more positive note, we are happy to absolve Mr Gordon of the sin of changing the focus of his arguments from the shareholders to the members – we accept that he has been consistent in attempting to justify the bond-only investment policy from the perspective of scheme members. The SIAS paper he submitted in 1999, however, is not the first actuarial paper that advocated such a policy.