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.

The two studies described below were made as part of a large-scale programme of official research into a series of topics relating to fertility, mortality and migration. The outcome of all this research (including that recorded below) will be published by the Government in due course but the manner and place of publication have not yet been decided. Although the present paper is announced under joint authorship, it is not a fully integrated effort: Part 1 was devised and written by the first-named contributor and Part 2 by the second. Nevertheless, their preparation took place over the same period of time and during that period steady contact was maintained between the authors by correspondence and meetings, and thus the work proceeded in parallel.

1.1. This paper has its origins in practical work carried out over the last 6 years on behalf of a number of pension funds whose trustees wished to obtain an independent assessment of their investment performance. Annual investigations have been made with two main objectives; first, to compare each fund's performance with that of the other funds under investigation and with investors in general; secondly, to analyse the factors which affected performance in the year and to explain differences between the results obtained by the participating funds. It was hoped that, in addition to providing a historical record, the investigations would reveal strengths and weaknesses in past practice, leading to suggestions for improving performance in the future. As the results for successive years became known it was possible to make statistical analyses over lengthening periods, to reach some tentative conclusions about longer-term performance and to attempt an assessment of the value of investment performance analysis in the practical world where trustees, investment managers and advisers have to operate.

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.