UK - The Boots pension fund has lowered its allocation to fixed rate bonds to increase its inflation linked assets by £200m, bringing the asset class up to 33% of scheme assets.
Boots achieved the increase via 15 year inflation linked swaps with Barclays Capital and the Royal Bank of Scotland (RBS). Boots - which controversially jettisoned its equities holdings - has devised what it calls an “upward only inflation linked swap” with its fund manager, Legal & General.
Under the swap structure, the Boots scheme pays Barclays and RBS a fixed amount from its fixed rate bonds portfolio and receives inflation linked amounts indexed to inflation. The notable feature of this arrangement, Boots claims, is that the amounts it receives via the swaps do not decrease with deflation.
Whilst the amount Boots receives from the pair is unaffected by deflation, there is no limit on the amount that Boots can receive. The fund claims that it has minimised the credit risk it is taking through a monthly cash collateral agreement.
Additionally, the Nottingham based fund revealed that the value of its total assets increased by approximately 4.2% during the first quarter of 2002. John Watson, chairman of the Boots’ trustees attributed this increase entirely to the fact that the scheme pulled out of the equities markets during 2000 and 2001.
He added that if the fund had not proceeded with the controversial move “there would now be a significant deficit” in the scheme’s funding.
By Geoffrey Ho
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