Boots defends switch to bonds

This week’s announcement by Boots to move all its final salary pension scheme assets out of equities and into bonds is seen as a drastic shift in the business world, but one that could start a trend.

John Ralfe, head of corporate finance at Boots, told’The decision by the trustees in the company to move from equities to bonds wasn’t driven by the new accounting standard FRS 17. The decision was taken to match pension assets and liabilities to reduce risk for pension scheme members and company shareholders.’

FRS 17, which takes effect in stages until 2003, means that companies will have to show their pension schemes in a more transparent light by valuing assets and liabilities at market prices. This is expected to lead to increased volatility in the p&l account, but in contrast to many companies Boots has supported the new rule and this year the company reported a pension scheme surplus of Pounds 250m under it.

But actuaries doubt Boots’ underlying reasons.

James Trask, actuary at Lane Clark & Peacock which compiles an annual survey on company pension scheme disclosures, said: ‘The timing is quite interesting.

It is an extreme stance to take. The trustees of Boots’ scheme should be very pleased by going into bonds. There’s less volatility in the pension scheme and less costs to trustees.’

Ralfe said the decision as stated in the trustees’ report was primarily due to economic and shareholder value.

However, in this year’s LC&P’s annual pensions survey it states: ‘We note that the impact of FRS 17, based on their figures, would have been to reduce operating profit by Pounds 65m. We wonder whether the market would have reacted to the publication of Boots’ results in the same way if the FRS 17 pension cost had been included in the headline totals, rather than simply disclosed.’

Boots is due to publish its interim results next week. The company said it would give an update on FRS 17 then.

Trask dismissed predictions that Boots’ move to bonds would start a trend because of the limited supply of bonds.


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