Boots fund sells its equities
Kirstie Hamilton
Boots moves to protect pensions
BOOTS, the retailer, will cause a sensation in the fund-management industry this week when it admits it has switched its entire £2.3 billion pension fund from equities into bonds.
In the past 18 months Boots has quietly engineered a revolution in its pension fund - and others are likely to follow.
This weekend it started sending a review of its pension scheme to its 72,000 members, giving details of the changes. David Thompson, finance director, is due to make a statement when Boots reports its half-year results next week.
Falling stock markets have left companies deeply worried about the state of their pension funds, and accounting rules that come into force next year will highlight those weaknesses.
By switching from shares to bonds, Boots' pension-fund trustees say they have reduced the risk both to members of the fund and to the company. They have also cut costs from £10m a year to just £250,000.
John Watson, chairman of Boots Pensions, said: "Our aim is to ensure the value of fund assets is always enough to pay all pensions, regardless of movements in the markets."
Boots sold the fund's shares over the 15 months to July 2001 at rates equivalent to the FTSE 100 index at 6,000. On Friday, it closed at 5,188. The fund then put all its money into safe AAA-rated corporate bonds, denominated in pounds.
The Boots fund, like most British company schemes, guarantees a final salary. This type of pension, known as defined benefit, is being phased out in favour of defined-contribution schemes, which make no such promises and are therefore less onerous to employers.
Pension funds in Britain have traditionally invested a large proportion of their funds in equities in the expectation of receiving higher returns than from bonds. If the shares outperform, the company is able to reduce its contributions, with a smaller benefit going to fund members.
Almost a third of the London stock market is thought to be owned by British pension funds, making it the largest single group of investors. Many funds have started reducing their holdings of equities as the markets have fallen, but none has made such a dramatic, high-profile move as Boots.
One pension-fund expert familiar with Boots' position said: "This move rocks the boat for other companies and for the fund-management industry as a whole. It has huge ramifications for the industry."
Boots is not among the companies that have had problems with their pension funds - its decision to switch to bonds is purely strategic.
But if funds were to switch from equities to bonds en masse, it would have a dramatic effect on the stock market and the entire fund-management industry. A shortage of buyers for shares could also make it harder for companies to raise new capital.
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