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.
Paul Tucker: Uncertainty, the implementation of monetary policy, and the management of risk Speech by Mr Paul Tucker, Executive Director and Member of the Monetary Policy Committee of the Bank of England, at the Association of Corporate Treasurers, Newport, 19 May 2006. *  *  *  Many of us would probably say that we do not much like uncertainty, whether at work or home. But we cannot escape it, and it provides opportunities. Rather, we want to be compensated for the risk, or to mitigate it, or both. What I think we actively dislike is avoidable uncertainty. And from the point of view of society, we should dislike uncertainties that are both avoidable and especially costly to mitigate for those who bear the consequent risks. I am going to discuss some sources of avoidable uncertainty – or volatility – that have affected you as corporate treasurers. And I will discuss some unavoidable sources of uncertainty, and what they might mean for risk management, at the level of firms and of the financial system as a whole. Avoidable uncertainties: the monetary regime, and the implementation of monetary policy For too many years in the UK, we lived with a large but avoidable element of macroeconomic uncertainty. It was unclear what rate of inflation households and businesses should expect to prevail over the medium-to-long run. In other words, it was unclear what policymakers were trying to achieve; whether their goals shifted about; and whether policy makers would succeed in delivering those goals.