ANNEX: CHARTS/TABLES  Table 1: Annualised volatility of UK interest and inflation rates  1970-1992 1985-1992 1993-2006 1998-2006  10-year spot yield 211 125 98  10-year forward 10-year forward yield inflation rate 236 124 117 85 78 54  Note: Average monthly standard deviation, annualised and exp ressed in basis p oints Source: Bloomberg and BoE calculations  BIS Review 47/2006  7  Chart 1: Volatility of sterling overnight interest rates  Per cent Ext ension of BoE lending facilit ies  15  MMR Int erim Reforms  10 5  high  0  low  -5 -10  1994  1996  1999  2002  2004  Source: BoE calculat ions  Chart 2: Volatility of international overnight interest rates  Per cent 7 6 5  £  4 €  3  US $  2 1 0 1999  2000  2001  2002  2003  2004  2005  2006  Source: Bloomberg and BoE calculat ions  Chart 3: Cumulative folded distributions of overnight/policy rate spreads Sample period: Jan 2002 - 11 Mar 2005  Sample period: 14 M ar 2005 - M ay 2005 50  50  50  8  60  € 30  70 Int erquart ile Range  20  80  10  90  Cumulative frequency, per cent  $  40  £  Cumulative frequency, per cent  Cumulative frequency, per cent  £  $  40  60  € 70  30 Int erquart ile Range 20  80  10  90  0 100 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0  100 0 -1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0  P ercent age point s  P ercent age point s  Cumulative frequency, per cent  50  BIS Review 47/2006  Chart 4: Outstanding sterling bank deposits by private non-financial companies £ billion 120 100 80  time deposits, repos and CDs  60 40  interest rate bearing sight deposits  20 0  1998  1999  2000  2001  2002  2003  2004  2005  2006  Source: BoE  Chart 5: UK corporate sector retained earnings, investment and financial balance  % of gross operating surplus Saving (retained earnings)  Investment  80 60 40 20 0 -20  Financial balance  -40 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Source: ONS  Chart 6: Accumulation of cash by private non-financial corporate sector (average 2003-04) Per cent of gros s s aving 60 50 40 30 20 10 0 UK  US  France  Canada  Italy  Jap an  Germany  G7  Not e: Gross saving is defined as non-financial corporat e profit s aft er net int erest and t axes, less dividends paid.

How much risk a company should take in its core business and in the provision of pensions is obviously a matter for its board. A famous paper in corporate finance 5 finds that, subject to some (admittedly fairly strong) assumptions about tax etc, the market value of a company (measured as the sum of the value of all its financial liabilities, equity and debt) should not depend on its capital structure. Rather, its capital structure affects the risk to equity holders, and so the headline return they should rationally require to compensate for risk. Within this framework, defined-benefit pension schemes can be viewed as deferred compensation and so as entailing a form of indebtedness (in many cases, de facto indexed-linked borrowing) for their sponsors, to be ‘serviced’ alongside their more conventional external indebtedness. Perhaps that has become most obvious when a fund is calculated as being in deficit. It would seem that in recent years there has been a keener awareness of this way of thinking analytically about pension obligations. If there has been an ‘awakening’, maybe it was triggered by a combination of the volatility of the value of equities held by funds, especially when they fell sharply a few years ago; the volatility of the discounted value of their liabilities as long-maturity real rates fell; regulatory requirements governing the closure of deficits; and fluctuations in the net value of funds having for the first time to be reflected in firms’ capital in their financial accounts.