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Cited by 2 publications
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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. 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 of the trustees and employer.Key words: pension funds, asset allocation, cult of the equity, time diversification, mean reversion, liability matching, equity risk premium. Throughout this paper, except where specified otherwise, equities is taken to mean a well diversified portfolio of shares, e.g. the market portfolio. 2Taxation is irrelevant for public sector pension schemes, while default insurance has not applied in the UK. Risk sharing may mean that the employees and the employer have different 1The allocation of a pension fund between equities and other asset classes is a key decision for trustees (Blake, Lehmann and Timmermann, 1999;Brinson, Hood and Beebower, 1986;Brinson, Singer and Beebower, 1991;and Ibbotson and Kaplan, 2000). The Boots Pension Scheme announced in July 2001 that they had liquidated the 75% of their assets invested in equities, and moved to a 100% bond portfolio, Ralfe (2001Ralfe ( , 2002, Ralfe, Speed and Palin (2003). This constitutes a clear rejection by Boots of the cult of the equity 1 ; which may be defined as investing a large proportion of the assets of a long term investor (e.g. a pension fund or a life assurance company) in equities. This paper shows how the cult has become established in the UK, and examines the arguments for its continuation.The total deficit of private sector UK defined benefit pension schemes was estimated in July 2003 by the Confederation of British Industry (2003) at £160 billion (although they note it might have been as high as £300 billion). The CBI also estimated that company profits would be depressed by about £16 billion per year over the next decade because of the need to increase employer pension contributions to fill this pensions deficit. A major cause of this deficit is the cult of the equity. Over the period January 2000 to March 2003, the FTSE All Share index fell to less than half its initial value. The UK cult of the equity meant that pension scheme losses from this stock market fall were much larger than would otherwise have been the case. These equity losses were an important factor in pension schemes reporting large deficits, closing to new members and increasing their co...
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. 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 of the trustees and employer.Key words: pension funds, asset allocation, cult of the equity, time diversification, mean reversion, liability matching, equity risk premium. Throughout this paper, except where specified otherwise, equities is taken to mean a well diversified portfolio of shares, e.g. the market portfolio. 2Taxation is irrelevant for public sector pension schemes, while default insurance has not applied in the UK. Risk sharing may mean that the employees and the employer have different 1The allocation of a pension fund between equities and other asset classes is a key decision for trustees (Blake, Lehmann and Timmermann, 1999;Brinson, Hood and Beebower, 1986;Brinson, Singer and Beebower, 1991;and Ibbotson and Kaplan, 2000). The Boots Pension Scheme announced in July 2001 that they had liquidated the 75% of their assets invested in equities, and moved to a 100% bond portfolio, Ralfe (2001Ralfe ( , 2002, Ralfe, Speed and Palin (2003). This constitutes a clear rejection by Boots of the cult of the equity 1 ; which may be defined as investing a large proportion of the assets of a long term investor (e.g. a pension fund or a life assurance company) in equities. This paper shows how the cult has become established in the UK, and examines the arguments for its continuation.The total deficit of private sector UK defined benefit pension schemes was estimated in July 2003 by the Confederation of British Industry (2003) at £160 billion (although they note it might have been as high as £300 billion). The CBI also estimated that company profits would be depressed by about £16 billion per year over the next decade because of the need to increase employer pension contributions to fill this pensions deficit. A major cause of this deficit is the cult of the equity. Over the period January 2000 to March 2003, the FTSE All Share index fell to less than half its initial value. The UK cult of the equity meant that pension scheme losses from this stock market fall were much larger than would otherwise have been the case. These equity losses were an important factor in pension schemes reporting large deficits, closing to new members and increasing their co...
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. 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 of the trustees and employer.Key words: pension funds, asset allocation, cult of the equity, time diversification, mean reversion, liability matching, equity risk premium. Throughout this paper, except where specified otherwise, equities is taken to mean a well diversified portfolio of shares, e.g. the market portfolio. 2Taxation is irrelevant for public sector pension schemes, while default insurance has not applied in the UK. Risk sharing may mean that the employees and the employer have different 1The allocation of a pension fund between equities and other asset classes is a key decision for trustees (Blake, Lehmann and Timmermann, 1999;Brinson, Hood and Beebower, 1986;Brinson, Singer and Beebower, 1991;and Ibbotson and Kaplan, 2000). The Boots Pension Scheme announced in July 2001 that they had liquidated the 75% of their assets invested in equities, and moved to a 100% bond portfolio, Ralfe (2001Ralfe ( , 2002, Ralfe, Speed and Palin (2003). This constitutes a clear rejection by Boots of the cult of the equity 1 ; which may be defined as investing a large proportion of the assets of a long term investor (e.g. a pension fund or a life assurance company) in equities. This paper shows how the cult has become established in the UK, and examines the arguments for its continuation.The total deficit of private sector UK defined benefit pension schemes was estimated in July 2003 by the Confederation of British Industry (2003) at £160 billion (although they note it might have been as high as £300 billion). The CBI also estimated that company profits would be depressed by about £16 billion per year over the next decade because of the need to increase employer pension contributions to fill this pensions deficit. A major cause of this deficit is the cult of the equity. Over the period January 2000 to March 2003, the FTSE All Share index fell to less than half its initial value. The UK cult of the equity meant that pension scheme losses from this stock market fall were much larger than would otherwise have been the case. These equity losses were an important factor in pension schemes reporting large deficits, closing to new members and increasing their co...
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