Beware reckless caution

We are in danger of ushering in an era of reckless caution. Equities are meant to be the workhorse of pension growth, yet headline after headline keeps telling us how badly they have performed in recent years.

It is right that the public should be told that around a third of the value of their DC pensions has been lost since the beginning of the credit crunch. But unless there is a little more balance in the information they receive, many will, not surprisingly, lose faith in equities.

This would be a shame, given the statistical likelihood that they will outperform other asset classes over the long periods typical of pension saving. This year’s Barclays Equity Gilt Study makes the point very eloquently. Yes, equities are at the end of an awful decade, with an annualised return of -1.5 per cent, taking into account inflation, compared to a positive 2.4 per cent for both gilts and cash.

But in the 100 discrete 10-year periods of data available since Barclays started collating the figures in 1899, equities have outperformed gilts in 81 of them and cash in 92 of them. Extend the investment horizon to 18 years and cash has only outperformed once out of 92 times, while gilts managed to beat equities on nine occasions.

The last time the FTSE100 stood below 4,000, back in 2003, the FSA got PricewaterhouseCoopers to look at the issue of whether its long-term savings projections of 5,7 and 9 per cent were justifiable. That research, concluded at the bottom of a near-halving of the FTSE, still found in favour of equities over the long term.

Since the 2003 research we have had a range of serious investment gurus describing the current prospects for the economy as the worst since the second world war. This can understandably only foster less trust in equities and lead to people exercising more cautious investment strategies, potentially leading to smaller pension pots.

One solution would be for the FSA to commission fresh research on the issue. That would give the pensions community some credible evidence with which to support the case of equities to employees, trustees and employers, presuming such research finds in favour of equities. The alternative is an increased risk of DC pensions falling even shorter than they are already on course to.

On a final note, this month also sees the launch of our new letters section. The philosophy of Corporate Adviser has always been to reflect the views of you, the reader. You may find you disagree with the views expressed by our contributors or the slant we have taken on a particular story or issue. Or you may wish to express support for certain viewpoints. Whatever your perspective, if you have anything you wish to bring to the debate carried on in these pages, your letters and emails are most welcome. We will include all we are able to.