Lincoln Drill Hall

Wednesday, 3 December 2008

Pension Scheme funding

No, don't go to sleep; this one matters. You will recall the interplay between three or four numbers which drive the result of an actuarial valuation: inflation, wage increases, pension increase and equity premium. On these four hang all the law and the profits [sic]. A key question is the equity premium post credit crunch. The FTSE is where is was ten years ago, having been 50% higher both last year and twelve years ago. The equity premium is the amount by which returns from equities will exceed those from gilt edged stock (government bonds). The argument has to be that the premium will now be considerably higher; the starting point being considerably lower. This assumes that in the fullness of time the market will once again rise to 6000. I recall that when it did first time round, I thought it has assumed the growth for he next ten years. (One day I must follow my instincts.)
The question is whether it will rise again, or whether we truly are in a new world.

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