UK - Boots Pension Scheme's move out of equities has split the consultancy industry. Some view Boots as the first of many to move fully into bonds while others warn of the risks of following suit.
Towers Perrin partner Mark Duke said the retail giant’s decision to sell its entire equity portfolio “a wake up call” for pension schemes many of which, he claimed, faced higher risk than Boots.
He said: “Boots have quite rightly concluded that a less risky portfolio will better protect the pension plan members and the company’s shareholders. Other pension funds may conclude that they need to be invested in lower risk equities.”
But rival firm Lane Clark & Peacock said Boots had broken two of the “golden rules” of successful investment strategy – firstly, not diversifying and secondly not allowing liquidity.
Partner Jeremy Dell also pointed out the triple-A corporate bonds that Boots had invested in posed a significant reinvestment risk, most notably from inflation.
Dell calculated that subsequent shortfalls in the pension scheme could see Boots forced to make extra contributions of up to £30-£40m a year.
Dell warned: “A 100% triple-A bond strategy may appear sensible in terms of mitigating investment risks, but the company and its workforce may be assuming other risks as a result.”
KPMG Pensions stressed the importance of pension schemes meeting MFR requirements – which require many schemes to invest in equities – before they can make a similar move to Boots.
Partner David Fairs said: “Companies that have a significant cushion over the minimum required under MFR regulations can afford to switch to bonds in order to stabilise their position in relation to FRS17, producing greater balance sheet stability.
“Many other pension funds, however, will simply not be able to afford to switch to bonds, much as they might like to.”
Fairs called on the government to help the pensions industry move forward by ending the conflict of the solvency measures of FRS17 and MFR.
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