The fund assumes no change in investments during the run-up period to retirement and it is assumed to be the starting investment mix for the other strategies. The equity portfolio is maintained for seven years. It is then switched completely into bonds for the last three years. The equity portfolio is maintained for seven years, then it is switched completely into cash for the remaining three years. Investment performance is simulated using investment returns for all years since the Second World War based on U.K. investment returns.
Earnings growth is based on U.K. average wages.
U.K. equity markets, like those in Canada, tanked in 1973 and 1974, yet the strategy called for a switch to cash at that point. Given these poor returns, many people would likely have fled equities. Investors actually lost ground relative to earnings, since they began with a fund equal to three times earnings. The overall results were close to those based on the fund accumulations. The high correlation between bonds and annuity prices forms the basis for encouraging plan members to shift into bonds as they get closer to retirement.