WH Smith’s decision to overhaul its pension investment policy by introducing
a liability-driven investment could kick-start a rush into LDI policies as
companies strive to plug holes in their pension deficits.
Last week, the FTSE250 retailer reported pre-tax profits of £64m for the year
ended 31 August 2005 compared with a loss of £135m in 2004. WH Smith said it had
paid down its FRS17 deficit from £205m to £94m and decided to move 94% of the
assets in its pension scheme into an LDI structure.
LDI policies are complex instruments that aim to match assets to the size of
a liability. Jerome Melcer, actuarial director at BDO Stoy Hayward, said that
investment banks were operating actively in the LDI market and were pushing
their offerings aggressively to companies.
‘LDIs have been wheeled out as the best approach to managing defined benefit
schemes,’ Melcer said.
‘With trustees wanting to be more comfortable with their deficits, and the
investment banks pushing their products, the use of LDI policies should be on
Steve Davies, retail analyst at Numis, said it would be interesting to see
how many companies followed WH Smith’s example. But Davies warned that, unlike
the major efficiency drive led by WH Smith CEO Kate Swann and new group finance
director Alan Stewart, which had exerted a positive impact on the company’s
profits, the move to LDI had not changed his view of the magazine and stationery
Despite a 1% reduction in sales from continuing operations to £2.5bn and a 2%
drop in retail like-for-like sales, the cost-cutting measures have brought
profitability increases in excess of 50%.
‘The pension deficit developments may have affected valuations a year ago
when Permira Private Equity showed interest in WH Smith, but since then
management has done what a private equity firm would do anyway and the pension
deficit is no longer a major driver in valuations,’ Steve Davies said.
WH Smith is not the first FTSE350 group to move its pension assets into an
LDI, which links assets to bonds or derivatives. Four years ago, Boots moved its
pension assets into an LDI, only to take a large proportion of its fund back
into equities in 2003.
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