Reworking the analysis of the text does not, however, affect the main conclusions regarding the impact of QE. Charts D and E are the equivalents of Charts 6 and 7, showing the calculated deficits with and without QE for a fully funded and a 30% underfunded pension scheme respectively. As before, QE makes little difference in the case of a fully funded scheme, but moves it towards deficit in the case of a significantly underfunded one.
Discounting the flow of future pension liabilities by a corporate bond rate only makes sense if the fund is no longer required to meet those liabilities in the states of the world where the bond defaults. But this is not generally the case: broadly speaking, the fund needs to meet its liabilities whatever happens. In normal times, this does not matter very much as the spread of investment-grade bonds over gilt yields is pretty small and does not vary very much. But during the peak of the crisis, the spread – even for investment-grade bonds – rose significantly (Chart A). Consequently, when standard accounting conventions are followed an additional factor needs to be added to Charts 4 and 5, reflecting the impact of changes in the corporate bond spread. That is shown by the mauve bars in Charts B and C respectively; the profiles of the other components of the deficit are unchanged. The main consequence of this is that the value of liabilities falls markedly during the period up to early 2009, indeed so much so that it counteracts the loss in asset value due to the fall in equity prices and pushes the fund into surplus. But it would be unwise for the sponsors and trustees of a pension fund to take comfort from this, given that the fall in the value of liabilities was merely an artefact of an increased probability of default on corporate bonds!