UK - Pension schemes should keep faith with the equity market and not fear the risk of volatility over the longer term, according to consultancy Punter Southall.

Speaking at a conference on UK companies with defined benefit pension schemes, Richard Jones, managing director of transaction services at Punter Southall, argued that long-term investors would not face the same issues as short-term investors in today's volatile equity markets.

"For the short-term investor," he said, "the volatility of equity markets can create significant problems, as they are exposed to the risk that equity markets will fall, creating a shortfall at the very time when they are looking to exit from their investment.

"For a long-term investor, this equity market volatility does not create as many issues because they have time on their hands and can wait until the market eventually recovers.

"Infrequent measurement and spreading of deficits when they do arise means that, as long as any fall in the equity markets is not realised through the sale of equity holdings at the bottom of the market, then the overall impact of a short-term dip in the equity markets should be minimal."

Jones conceded that most investors could not take a long-term view of their pension schemes, but he said a broad range of options had been developed in recent years.

"First, pension funds have been using diversified growth unitised funds, which are designed to provide returns similar to equities, but with half the volatility," he said.

"Then, UK pension schemes have used derivatives to protect equity downside by giving up its surplus that is not required.

"Finally, pension plans have put in place dynamic de-risking strategies, becoming more sophisticated in monitoring their funding positions and putting in place actions to capture positive equity performance."
 
Even though the equity market has offered poor returns over the last decade, current conditions are favourable for pension funds, Jones said.

According to Punter Southall, investors can expect equities to outperform bonds over the longer term by at least 3% a year, rising nearer to 5.5% a year "if UK equities can deliver substantial real dividend growth in the long term".

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