Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-11-28T01:04:35.231Z Has data issue: false hasContentIssue false

Pensions and Low Inflation

Published online by Cambridge University Press:  10 June 2011

P.M.C. Meredith
Affiliation:
The Old Vicarage, Ide Hill, Sevenoaks, Kent , TN14 6JW, U.K. Tel: +44(0)1732-750-338

Abstract

This Working Party has considered the pensions implications of a prolonged period of low inflation. Experience in the United States of America suggests weaker correlation between equity and bond returns and greater overall volatility of returns. Without a further significant increase in the valuation of equities relative to their underlying economic activity, the cost of pensions will rise, possibly as much as doubling within the next 15 years. It follows that for defined contribution schemes and personal pensions, current contribution levels are likely to produce disappointing and generally inadequate results. Similarly, the costs of defined benefit promises will increase. Future defined benefit provision is also vulnerable to the mismatch of mainly equity assets with mainly fixed liabilities and is therefore difficult to control. Many practical issues of scheme design still reflect past inflation and need to be addressed.

Type
Sessional meetings: papers and abstracts of discussions
Copyright
Copyright © Institute and Faculty of Actuaries 2000

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bishop, G. (1999). Why are long gilts the richest bonds in the world, and getting richer? Salomon Smith Barney, London.Google Scholar
Boskin, M.J., Dulberger, E.R., Gordon, R.J., Griliches, Z. & Jorgenson, D. (1996). Final report to the Senate Finance Committee by the Advisory Commission to study the consumer price index. Washington.Google Scholar
Glassman, J.K. & Hassett, K.A. (1999). Dow 36,000; the new strategy for profiting from the coming rise in the stock market. Times Books.Google Scholar
Martin, W.J. (1999). The value of Q. Phillips & Drew, London.Google Scholar
NAPF, (1998). National Association of Pension Funds: twenty-fourth annual survey of occupational pension schemes. Times Books.Google Scholar
Nowell, P.J., Crispin, J.R., Iqbal, M., Margutti, S.F. & Muldoon, A. (1999). Financial services and investment markets in a low inflation environment. B.A.J. 5, 851897.Google Scholar
Scott, Bernard Sir (1981). Inquiry into the value of pensions. Cmnd.8147, HMSO.Google Scholar
Wilkie, A.D. (1995). The risk premium on ordinary shares. B.A.J. 1, 251293.Google Scholar
Cairns, A.J.G. (1999). An analysis of the level of security provided by the Minimum Funding Requirement. B.A.J. 5, 585610.Google Scholar
Clarkson, R.S. (1999). A continuous performance investigation of selected United Kingdom equities. B.A.J. 5, 801822.Google Scholar
Exley, C.J., Mehta, S.J.B. & Smith, A.D. (1997). The financial theory of defined benefit pension schemes. B.A.J. 3, 835966.Google Scholar
Gordon, T. (1999). The price of actuarial values. Paper presented to the Staple Inn Actuarial Society.Google Scholar
Shiller, R. (1996). Price-earnings ratios as forecasters of returns.Google Scholar
Phillips, T.J. (1999). Why do valuation ratios forecast long-run equity returns? Journal of Portfolio Management.CrossRefGoogle Scholar