[long_equity_returns] [expected_returns]

On 25  October  1999, a UK actuarial profession working party (Simon Head & others, including myself) presented a paper entitled “Pension Fund Valuations And Market Values” to the Institute of Actuaries at Staple Inn. The paper's focus was upon how market values of assets could be taken into account.

A follow-up working party (also including myself) was set up at the beginning of 2003, the objective being to try establishing how the associated financial parameters could reasonably be selected. For undisclosed reasons, the second working party was terminated during 2004 before we could issue our report. Out of curiosity, I have continued the analysis we had tried to conduct. For long redeemable bonds, we found that the return could reasonably be taken as the initial redemption yield but I'm more interested in equities.

The first approach was based upon “yield plus growth”. Whether lagged for a single year or over 3 years, the results were extremely poor and we gave up on that. However, we found that an expected return of around thrice the initial dividend yield was a reasonable fit. For UK [US] equities, over all periods of 15 years falling within 1968 and 2018, the ratio averaged 2.83 [3.40], with a standard deviation of 0.97 [0.69]. For UK-based discount rate analysis, I am currently using that 2.83 for equities and 1.13 for long conventional gilts.

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