The fund is increased by contributions and positive investment returns, the latter normally being a major element. On the other hand, the fund is  reduced by benefits (including premium payments and other expenses) and negative investment returns.

Since 1964, for annualised real returns above average wages over periods of 15 years, UK equities {long conventional gilts} have averaged 4.4% {2.1%}, with a standard deviation of 3.3% {3.2%}, with a minimum of (1.4%) {(5.8%)} and a maximum of  12.5% {5.9%}. While I was surprised that even long conventional gilts outperformed pay increases over long periods, that’s what the figures show. A range of real returns over wages are charted here.

So, where pay increases need to be reflected, including equities seems reasonable. In fact, Jon Exley and I debated this topic at the actuaries’ Chester pension conference in July 2002. His stance was that equities had no place at all in a DB pensions assets portfolio whereas I argued that, sometimes but not always, there was a place for equities. On the day, I won by 6 :1. My 2002 slides are here.

Accounting numbers are merely imaginary. In order to understand the economic reality of  future funding requirements, we need to concentrate upon cashflows.

Crucially, prudence can only be assessed in relation to best estimate, the latter  typically never being presented to UK clients. At one point, actuaries  were required to present “neutral estimates”€� but that was dispensed with some years ago, a shame.