Eighteen years' ago today, Jon Exley, Shyam Mehta and Andrew Smith published what has been described as the most important and influential paper ever written on defined benefit (DB) pensions - The financial theory of defined benefit pension schemes. Take a look back here.
In April 1997, many people thought DB pension schemes provided "something for nothing" - with the value provided to beneficiaries seeming to exceed the financial burden on the sponsoring company.
Most schemes invested in equities and the value of assets was most often based on an actuarial valuation approach - which commonly used dividend yields to calculate asset values.
Exley, Mehta and Smith's paper blew apart some of these views - analysing corporate pensions from the standpoint of modern financial theory and introducing an alternative approach to valuing assets using mark-to-market principles.
It proposed how this new market-based valuation discipline could be introduced and explained how this could be applied to pension schemes - openly challenging the status quo among scheme actuaries on how pension scheme assets should be valued.
The paper ultimately led to the adoption of pensions accounting standard FRS17 in 2001, the shift to a more liability-driven approach to DB investing and a move away from equities in favour of bonds.
Have your say
Do you agree with the findings of this paper? Were its conculsions correct? Has the move to mark-to-market valuations been a good thing? Were schemes right to invest less in equities and more in bonds?
Post your comments below or email [email protected] with your thoughts.
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