scheme aims to reduce risk by replacing equities with aaa-rated long-dated sterling bonds
The Boots pension scheme's decision to move all of its assets into bonds was made to ensure that it did not expose the company, or members, to risk, according to its advisers.
The company has sold all its equities and moved into AAA-rated long-dated sterling fixed interest bonds.
The move has been made over the last 18 months from a position where it held 75% equities, 20% bonds and 5% cash.
John Watson, chairman of the trustees, said: 'The changes mean that the fund now better matches the needs of its members.
'The bonds have virtually no credit risk and are the closest possible match for the scheme's pension liabilities.'
Bacon & Woodrow, the consulting actuaries for Boots and the pension scheme, also saw the decision in terms of a risk/reward trade-off.
Partner Mike Pomery said: 'The main reason for the move was to control risk. This development brings protection to the members and stability for the company.'
He said the decision was beneficial for members as they would benefit from the stability, although the shareholders no longer had the chance to receive higher returns from equities. This means the company could miss out on any rise in the equity market.
For example, if equities rise by 7% on average, bonds go up 5% and the company is required to pay 5% to get the fund up to liabilities each year, then under the equities scenario the company could take that extra 2% each year.
Pomery stressed the importance to Boots of having liabilities that are matched by assets. He said: 'The company has probably reviewed its risk profile as a whole and identified pension liabilities as a significant source of risk. The business has a range of risks and it must have decided this was an additional one it did not need.'
The introduction of the accounting standard FRS 17 is seen as one of the main reason for the decision of the trustees. The Inland Revenue standard, which is to be phased in between now and 2003, requires companies to include a statement of the financial position of the pension fund including a snapshot of assets and liabilities.
But this is not the only pressure that is being put on pension funds.
James Trask, partner at actuaries Lane Clark and Peacock said: 'Companies currently have to deal with Minimum Funding Requirement, low equity prices as well as FRS 17. The price of bonds has already been pushed up by these factors and I think pressure on demand will continue.'
However, Trask is dubious about whether the imposition of the new accounting rule should dictate the long-term investment strategy of a pension fund.
He said 'The investment strategy of a pension fund has to be considered over a long period and should not be altered too much by short-term considerations. But Pomery said that the decision was based on the basis of the long-term investment outlook and that the fact it prevented the company being hit by FRS 17 was a bonus.
Trask questions whether the investment decision that the Boots pension fund made would be appropriate for any others.
He said: 'I wouldn't expect a lot of companies to go down that route and if they did there would not be enough bonds to go around ' they have taken 2% of the AAA rated bonds. One of the golden rules of investment is diversification and the Boots Pension fund has clearly broken this.'
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