Journal of Pension Economics and Finance

Issues and Policy

The cult of the equity for pension funds: should it get the boot?

a1 Accounting and Finance Division, The School of Management, The University of Southampton, Southampton SO17 1BJ, UK (e-mail:, fax: +44 23 80593844)

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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 in 2001. 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 adopted by the trustees.


1 The author is grateful to WM and CAPS for supplying the data in table 1, to Shirin Hashemi for research assistance, and to John Ralfe (John Ralfe Consulting), Mike Orszag (Watson Wyatt LLP), Peter Casson (Southampton), Mike Page (Portsmouth), John Board (LSE) and the referees of this journal for their helpful comments on earlier drafts. Although the author is a director of USS Ltd, this paper represents independent academic research and the views expressed may not be shared by USS Ltd.