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The cult of the equity for pension funds: should it get the boot?

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  • SUTCLIFFE, CHARLES

Abstract

Over the last half century UK defined benefit pension schemes have followed the cult of the equity by investing a large proportion of their assets in equities. However, since the turn of the millennium this cult has faced two serious challenges – the halving of equity prices, and the complete rejection of equity investment by the Boots pension scheme in 2001. This paper summarises the history of the cult in the UK and the arguments advanced at the time to support its adoption. It then presents the case for the cult (excluding taxation, risk sharing and default insurance). This is followed by a detailed consideration of the validity of this case, including an examination of the relevant empirical evidence. It is concluded that, in the absence of taxation, risk sharing and default insurance, the asset allocation is indeterminate; and depends on the risk-return preferences adopted by the trustees.

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  • Sutcliffe, Charles, 2005. "The cult of the equity for pension funds: should it get the boot?," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(1), pages 57-85, March.
    • Handle: RePEc:cup:jpenef:v:4:y:2005:i:01:p:57-85_00
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    Cited by:

    1. John Board & Charles Sutcliffe, 2007. "Joined-Up Pensions Policy in the UK: An Asset-Liability Model for Simultaneously Determining the Asset Allocation and Contribution Rate," Economic Analysis, Institute of Economic Sciences, vol. 40(3-4), pages 87-118.
    2. Bowden, Roger J., 2009. "Lifecycle derivatives and retirement income assurance using long-term debt," Journal of Pension Economics and Finance, Cambridge University Press, vol. 8(3), pages 361-390, July.

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