Newspaper article The Evening Standard (London, England)

Time to Come Clean on the Big Pensions Problem

Newspaper article The Evening Standard (London, England)

Time to Come Clean on the Big Pensions Problem

Article excerpt


BOOTS caused turmoil in the pensions world earlier this year when it became known that the retailer's pension scheme was no longer invested in equities. It had quietly switched all its assets into bonds and in doing so turned conventional thinking on its head - as on average British pension funds have a 70% equity content.

Yesterday, the Centre for the Study of Financial Innovation held a discussion at which Alan Ralfe, the man responsible for Boots' decision, explained the thinking behind it and gave his personal views on the challenges facing final-salary pension schemes.

Boots switched, he said, because it was illogical to think of the pension fund balance sheet and the company balance sheet as separate and unconnected items. The fund should be treated as part of the group, and the asset allocation of the funds considered as part of the overall capital structure.

It followed from this that reducing the risk in the pension fund allowed a greater degree of risk to be put into the company balance sheet, whereas leaving the pension fund in equities had the opposite effect.

Further secondary benefits flowed from going into bonds. The cost of running the fund was cut, the risk to members was reduced, the cost of investment management was slashed from [pound]10 million to just [pound]250,000 and profits on the share portfolio were locked in.

But even if other companies are persuaded by the Boots argument, it will not be so easy for them.

Some could certainly convert into bonds, but there is [pound]700 billion of money out there and nowhere near enough fixed-interest securities, let alone securities of the right maturity, to absorb the wall of money that would result from a mass desire to convert. Theoretically-perhaps, every company in the country could issue bonds and use the proceeds to buy back their own shares. In practice that is not going to happen.

On the other hand, is doing nothing an option? …

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