Put all pension assets into bonds – UK actuaries

UK – A paper prepared for the Institute of Actuaries says the optimal policy for defined benefit pension schemes is to fully fund liabilities and invest all assets in low-risk bonds.

“For a credit-worthy employer, where there are no informational asymmetries, and where there is a appropriate governance, the optimal pension policy is to fully (or over) fund the pension liabilities and to invest all assets in low risk bonds,” the paper, to be presented to the institute on October 25, states.

The 35-page report – entitled ‘Funding Defined Benefit Pension Schemes’ – was prepared by actuaries at Mercer and Hewitt Bacon & Woodrow. It is also highly critical of the actuarial profession itself.

The actuaries write: “We are particularly concerned with how actuaries present the financial status of DB schemes.”

“We believe that these practices have the potential to mislead, and are not in the public interest,” say the report’s writers C. A. Cowling of Mercer Human Resource Consulting and T. J. Gordon and C. A. Speed of Hewitt.

They argue that formal pension scheme actuarial valuations are typically not “valuations” as understood by most finance professionals and lay people – adding valuations “evolved from a time when solvency was not an issue”.

“This has led to a flexible approach to the notion of value as an intermediate item in the contribution setting process.

“In our view, this has been unhealthy for the actuarial profession in creating the notion that value is something that can be arbitrarily determined and manipulated.”

The report concludes by saying that the profession “has wandered from its traditional path”.

“Long-standing notions of prudence, risk management and solvency, that had previously stood the profession in good stead, have been downgraded over the past decade and a half. Now would be a good time to correct this.”

Elsewhere in the UK, Russell/Mellon has said that pooled balanced pension funds have now regained almost half of what they lost during the low equity markets.

“Due to poor equity performance, pooled balanced funds lost around 30% of their asset value, on average, over the three years to 31 December 2002,” said publications and statistics manager Daniel Hall. “Although they still have a long way to go to get back to their 1999 levels, continued positive performance means that these funds will have now regained over half of their lost asset value.”

The third quarter saw pooled balanced funds achieve a positive return for the sixth consecutive quarter, with a median return of 1.8%.

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