Absolutely not - the actual level of future returns are (generally) irrelevant in pension scheme valuations. Because liabilities are typically linked to either future SALARIES or the RPI, what actually matters is the DIFFERENCE between future returns & future salary increases, and/or the DIFFERENCE between future returns & future inflation increases.
When returns fell after 2000, so did salary increases & inflation. Hence the *differences* are actually still not much different from previously, and the drop in investment returns / salary increases / inflation after 2000 is a "red herring"!!
I think a 50% drop in the stock market between 2000 and 2003 is not "irrelevant". Salaries have increased year on year albeit slowly as you say. Even if salaries only increased a few percent in that time, it is a lot to catch up.
Of course, it also depends what you mean by "future returns", 10, 20 or 30 years?
Not necessarily either. The biggest culprit was the government in the form of the Inland Revenue.
No matter how public or employee spirited a company was, the IR did not allow peniosn funds to exceed a certain percentage of their actuarial pension liability. I think the maximum funding allowed was
107%, but I could be mistaken by a percentage or two. In the good years during the 90s, when markets were booming, employers found they needed to either take pensions holidays or give additional benefits to their employees and pensioners.
Looking back now, it's clear that this was an extremely short sighted rule. At the very time when pension fund valuations were relatively large because of the stock market levels, companies were forced to take pension holidays and avoid over-funding, when they should have been pouring in more money, ready for the rainy days.
Rgds
__ Richard Buttrey Grappenhall, Cheshire, UK __________________________
What makes you think the pension fund had top buy shares? It could just rest in cash or gilts or any of the myriad of other things that pension funds own such as painting, property, forests etc.,
The point is that the Employing Company could not make contributions, not that they invest in equities.
According to the managers of my small group fund "because otherwise they would be accused by their auditors of not 'investing sensibly'", it was a bit more than that but I think you get the picture.
During 2001-2 (I think) when it was obvious to most people that the market still had a way to fall, they refused to move the bulk of the funds into cash because they had a duty to maximise the returns of the fund and by being in cash they could not prove that they were doing this. In cash the up side was limited and they were potentially missing out on double digit growth in shares, the fact that the downside was zero and that during the period there was likely to be a decline in share prices did not enter the equation.
I know that this sounds like an attempt to blind me with science to make me go away happy, but the discussions that we had together with the actions that were taken to resolve the situation to my satisfaction, suggest that he believed that it *was* his obligation to remain fully in equities.
Well 'he' is definitely out of step with his fellow pension fund managers and I suggest you sack him and get somebody else. The famous 'nestle' case told trustees that leaving a big fund is cash for a long period was negligent, but to interpret that ruling in the way you quote shows them either to be fools or that they think you are.
Two examples of what the others are/were doing are : Boots' staff pension fund, for example, switched *entirely* into Fixed Interest at around the same time. The Mineworkers Pension Fund is invested in many other asset classes than equities including items of art.
In summary, investing in a pension fund does *not* mean that you are investing in the Stock Market.
We had a long discussion. I made it clear that I didn't accept his view of his obligations. He knew that I wasn't a fool.
They kept on asking if I had been motivated by the Boots pension fund decision. I was actually unaware of this and had decided for myself that being in equities with a largish fund was silly.
I dont think it was luck, they got want they intended. They had performed an actuarial review and found the fixed total return from the Fixed Interest portfolio was sufficient to meet their future liabilities.
I would imagine in exactly the same way as any other statutory actuarial review of a pension review and in the same way as used in the scenarios described in this thread.
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