Gilt by Association - by Duncan McClements - Model Thinking

UK pensions are governed by two very different regulatory regimes. The difference shows up in the returns. Assets held in Defined Benefit schemes have returned barely half what those in Defined Contribution schemes have since 2007 - £201 versus £448 per £100 invested. The gap is almost entirely explained by regulation. Today, private sector DB schemes, worth £1.2trn, hold just 18% of their assets in equities and 69% in government bonds.1 DC schemes, worth £600bn, hold 76% in equities.2 This gap exists because DB schemes must match assets to liabilities, which in practice means holding gilts. The problem is that stocks and bonds have very different long-term returns. Since 1900 global equities have returned 5.0% per annum after inflation, compared to 1.7% for bonds.3 This 3.3 percentage point annual gap compounds relentlessly: over a 40-year career, £100 in equities grows to roughly £700 in real terms; in bonds, under £200. Equities are more volatile year-to-year, but over pension-relev

UK pensions are governed by two very different regulatory regimes. The difference shows up in the returns. Assets held in Defined Benefit schemes have returned barely half what those in Defined Contribution schemes have since 2007 - £201 versus £448 per £100 invested. The gap is almost entirely explained by regulation. Today, private sector DB schemes, worth £1.2trn, hold just 18% of their assets in equities and 69% in government bonds.1 DC schemes, worth £600bn, hold 76% in equities.2 This gap exists because DB schemes must match assets to liabilities, which in practice means holding gilts. T