Boots leads conservative charge with bonds move


About four or five years ago, many investment specialists were ready to sound the death knell for the bond, preferring instead to go along with the rising optimism associated with equity ownership, writes Una McCaffrey

There seemed to be no ceiling on the potential returns equities could bring, while bond yields were low and diminishing. Equities were exciting and varied, while bonds were conventional and, dare we say it, boring.

A few years on, in the best tradition of a market cycle, times have changed once again, with bonds gradually coming back to reclaim their position in the range of investment options on offer to individuals with money to spend.

Nothing illustrated this shift more than a decision about a year- and-a-half ago by an unlikely investment player: Boots the Chemist. Over a period of 15 months, Boots sold all of the equities in its £2.3 billion sterling (€3.5 billion) defined-benefit pension fund, replacing them with long-dated sovereign bonds, probably the most conservative investment option open to the company.

The company kept the decision quiet until the process of selling off its equity portfolio had been completed, thus managing to make profits on the deal without attracting attention that could have threatened returns at the time of sale. Pension fund members were informed of the move only after everything was done and dusted.

In a trustee communication, Boots argued to scheme members that the shift in emphasis offered them increased security for their assets at a time when returns on equities were becoming less certain.

The move into bonds would match pension assets and liabilities, said the communication, with the value of assets held now sufficient to pay all pensions, regardless of market movements. Crucially, this means that Boots should never be forced into a position where it needs to address a deficit by increasing company contributions to the fund.

"This is not the case with equities," the company warned, still smarting from the memory of having to make up a shortfall in the fund during the 1970s.

Prioritising security of returns can also be linked to the recent introduction of new accounting standard FRS 17. Under FRS 17, the investment risks associated with defined-benefit pension schemes must be clearly highlighted in company accounts. It is understandable that organisations such as Boots would try to avoid the negative publicity that would arrive on the back of a badly-judged, loss-making equity investment.

Another selling point came from the management costs associated with bonds, with the company claiming to save a cool £9.75 million in annual management charges simply by getting out of equities. Such figures made it hard to argue against the initiative, no matter what your perspective may have been. Given that the Boots pension scheme is one of the 50 largest in Britain, with 72,000 members and company contributions of £50 million per annum, it is hard to argue that the company's move was not significant, if not indeed pioneering.

This significance is enhanced by the fact that many company pension schemes are currently facing periods where, because of demographic trends, large numbers of employees are due for retirement around the same time. Security of investments during such periods is hard to sniff at.

Whether other companies decide to follow the Boots trend remains to be seen, with few expressing much interest in dumping the potential returns still associated with shares over the long term, despite the spectre of FRS 17. Another factor is the limited availability of AAA-rated bonds in the market.

For private and corporate investors alike, a more fundamental argument against moving entirely into bonds (of any type) is the old "eggs in one basket" rule, which argues that investments should always be diversified. In the case of bonds, obeying this rule would be proven worthwhile if the wider economy sustained a dose of inflation over a lengthy period - returns might be steady, but how useful is that when the price of everything else is rising?

You (and Boots) have been warned.