1.1. Profits are essential to the economic viability and indeed the survival of any enterprise. Life assurance companies are no exception whether they be mutual or proprietary, Unless profit—or as it is often termed, surplus—is available for distribution to shareholders and/or policyholders, the reasonable expectations of shareholders or policyholders will not be met: nor will the office be able to accumulate and maintain adequate contingency funds.

1.2. The word profit will be used synonymously with surplus throughout this paper. Profit is defined as the excess during any period of income over outgo, where outgo includes the necessary increase in valuation reserves.

1.1. Occupational pension schemes in Great Britain and in many other countries are experiencing a very difficult period. For several years now actuaries valuing funded pension schemes have been faced all too often with the unenviable task of presenting to their clients the unpopular message that their pension schemes are going to cost more in the future than they did in the past. Furthermore, the increasing pressure to revalue pensions in course of payment and to replace withdrawal benefits by some form of preserved rights is either threatening employers with intolerable funding burdens, or is causing some departure from the established practice of fully funding retirement benefits.

1.1. In this note it is argued that models of the gilt-edged market which are based on yield curves are unnecessarily restrictive and should not be expected to give a satisfactory statistical ‘fit’ in current conditions. The new model which is formulated relates market prices directly to the life and coupon without diverting into the computation of redemption yields. Indeed, it is suggested that the yield calculation destroys the inherent simplicity of the underlying equations—which follow from a simple assumption concerning the return from different portfolios. The method avoids the inconsistency inherent in the conventional analysis of discounting future investment proceeds at a uniform rate of interest when the yield curve itself implies that interest rates will vary in the future.