Like many others, I believe that equities will out-perform bonds over the long term (NOT necessarily over short terms). The holy grail is not being offered, sorry about that. For defined benefit pension schemes, the Trustees should feel able to invest in equities (or property) if, and only if, they are confident that they have enough time before they have to secure a major tranche of the liabilities. This crucial aspect should really be discussed with the sponsor as part of agreeing the Statement of Investment Principles but is it?

As a member of a UK actuarial profession working party (originally due to report some time in 2004), we looked at trying to estimate long-term returns. For whatever reasons, that working party was terminated before we could issue our report. So I have continued those sums.

For bonds, we found that the bond return could reasonably be taken as the initial redemption yield.

For equities, we found that an expected return of thrice the initial dividend yield was a reasonable fit.  We also looked at “yield plus growth”. Whether lagged for a single year or over 3 years, the results were extremely poor and we gave up on that.

Since then, I have refined the calculations further. For periods of 15 years, starting between 1953 and 2007, the equity multiple has varied between 0.49 and 5.05, the average and standard deviation, respectively, being 2.61 and 0.90 (see here).