Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/230418 
Authors: 
Year of Publication: 
2018
Series/Report no.: 
Cardiff Economics Working Papers No. E2018/12
Publisher: 
Cardiff University, Cardiff Business School, Cardiff
Abstract: 
Contrary to public perception, this article finds Universities Superannuation Scheme (USS), the largest defined benefit pension in UK, is more likely to be in surplus rather than deficit. Evidence is provided to show that neither low gilt yields nor high valuations imply low future returns on equities. Falling interest rates since 1980s are essentially the result of successful monetary policies to control inflation, whereas the declines after quantitative easing are to prevent debt deflation. In both cases, the economy benefited and firms made healthy profits. Such findings shed light on the current industrial debate as to whether gilt yields are appropriate discount rates for valuation of defined benefit schemes. Finally, evidence also indicates that gilt yields and downward biased discount rates form the basis of its valuation. Long-dated index-linked gilt yields were found to explain 99% variation of past liabilities of USS. Since falling interest rates do not imply lower future returns, the liabilities have been hugely overstated, giving rise to large and volatile deficits.
Subjects: 
pension
defined benefit
discount rate
risk-free rate
equity risk premium
Document Type: 
Working Paper

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