Pensions saw strong double-digit returns in the last years of the 90s. They had negative returns in the first years of the last decade. If anyone extrapolated from the last three years of the 90s and predicted double digit returns for the decades ahead or the first three years of the last decade and predicted flat or negative returns, they should have been taken far away from any position with any responsibility for pensions.

Unfortunately, the world does not work this way. Such absurd extrapolations are common practice as Sacramento Bee columnist Dan Walters showed us in a discussion of the returns on California pensions. Not only is it foolish to assume that a recent past of low returns will translate into low returns in the future and vice versa, the opposite is in fact true.

The plunge in trend price to earnings ratios (PEs) associated with the collapse of the stock bubble in 2000-2002 meant that it was possible for the stock market to provide higher returns over a sustained period. In the same way, the run-up of PEs to unprecedented levels at the end of the 90s ensured that returns would have to be lower in the future.

Those familiar with arithmetic understand this simple point. Unfortunately, relatively few such people are admitted to the debate over pension fund accounting.