Correspondence: Andrew Brigden, Fathom Financial Consulting, 48, Gresham Street, London EC2V 7AY, UK. E-mail: andrew.brigden@fathom-consulting.com

¹is a senior economist at Fathom Consulting. Andrew began his career at the Bank of England in 1995 writing sections of the quarterly Inflation Report. Later, he managed a team of analysts conducting research into the money and credit aggregates. Since joining Fathom in 2005, Andrew has worked on a range of consultancy projects across a number of industry sectors.

²is an associate Dean and Chair in Asset Management at the Sir John Cass Business School. Andrew is also the Chairman of Fathom. He has published extensively in both academic and practitioner journals on a wide range of economic and capital market topics, including pensions.

³is a director of Fathom. Immediately before founding Fathom, he was Chief UK and European economist at Morley Fund Management. Prior to that, he spent eight years at the Bank of England. Shamik has also been a senior economist at Oxford Economic forecasting, and started his career at H.M. Treasury in the mid-1980s.

Received 16 August 2008.

Abstract

Following the decline in global equity markets, the rise in bond prices and the downward revisions to assumed mortality rates between 2001 and 2003, the UK's defined benefit (DB) pensions industry went from a condition where surpluses and scheme sponsor contribution holidays were commonplace, to a condition where fund deficits were the norm. This is the condition that persists today. In this paper, a model is presented of a typical DB pension scheme, where explicit account is taken of the linkages between both sides of the pension fund balance sheet. This model is used to assess the likely benefits of taking a more diversified approach to asset allocation compared with the traditional heavy reliance on UK equities. The results show that there are clear gains to be had from adopting a more diversified approach to pension fund asset allocation in terms of the reduction in scheme funding volatility over time.