Boots Pensions
It is over 14 years since October 2001 when The Sunday Times and Mail on Sunday ran the story that Boots Pension Fund had quietly switched 100% of its £2.3bn pension scheme to AAA/Aaa long dated sterling bonds, including 25% index-linked.
The reasons for the switch, described by The Economist in 2006 as a “landmark”, were outlined in the 2001 Boots Pension Trustee Review with Q & As sent to the 72,000 members of the Boots Pensions Scheme.
The Boots Company interim results were announced a few days later, allowing the Company to explain the move, which had taken 18 months to execute. The immediate impact was overwhelming - boring Boots got more column inches in the next two months than the previous two years.
In addition to the news stories the best analysis came from the FT's Barry Riley, who understood the underlying economics - "Boots finds a safe prescription", as well as the challenge to orthodoxy of what Boots had done - "Equity cult finds party is ending".
John Shuttleworth of PwC, who sadly died in 2005, was very quick off the mark to comment. Other vocal supporters included Barclays Capital"A hard Oct to follow" and Merrill Lynch "Sticking the Boot in".
Bacon & Woodrow, now Aon Hewitt, the Boots Scheme Actuaries, also published a note "Bond investment by UK pension schemes". Most people were bemused, but there were critical comments from actuaries Lane, Clarke & Peacock, (would they say the same now?) and the Government Actuary in The Economist, "Booting out equities".
I spent a lot of time in the following weeks getting the message across, including "Why bonds are right for pension funds" in Risk Magazine, taking part in a BBC Moneybox Special "Pensions in Peril" and a piece for The Actuary magazine "Why move to bonds?"
I also had several letters in the FT addressing specific misconceptions over bond credit risk, inflation risk and the impact of FRS 17 on Boots' approach. My Times' letter responded to rumblings from the mighty Hermes, "Boots pension fund move helped reduce investor risk".
My (still) favourite article, ten years on, is Silvia Ascarelli in the Wall Street Journal Europe, "Talking About a (Bond) Revolution".
The slashing of annual fees and costs from £10m (mainly the bid/offer spread on buying and selling equities) to £300,000 also sent a chill through the fund management industry.
Boots' move to bonds did not spring fully fledged in October 2001. We had been discussing it, every which way, and moving people in the right direction, since the Autumn of 1997, and did not start to execute until May 2000.
Prior to starting the transition there were a number of pension milestones, including Boots Pensions selling all its £130m property assets and investing in ILGs, the Company resuming contributions in 1999 after a long holiday and adopting a market-based actuarial valuation.
The largest debt Boots owes is to the seminal paper of Jon Exley, Shyam Mehta and Andrew Smith of April 1997. When I was sent a copy of "The Financial Theory Of Defined Benefit Pension Schemes" in October 1997 I knew immediately it was one of the most profound things I had read for many years. The overview is a good starting point.
The market based approach to pensions is based on original work by US financial economists in the late 1970s and early 1980s, including Fischer Black, Bill Sharpe, Irwin Tepper and Jack Treynor. The seminal article on company pension funding is by Fischer Black, "The tax consequences of long-run pension policy" in 1980. Zvi Bodie was a great supporter of what Boots had done.
Boots was a big supporter of the ASB on pensions Response to ASB Discussion Paper on Pensions (October 1998) and I was an consultant to the ASB on pensions.
Completing the pension circle required Boots to buy back its own shares, which was announced in March 2002, in the FT as "Pensions boost for Boots buy-back" Reducing risk off balance sheet in the pension fund allowed the company to increase risk on balance sheet through a £300m buyback.
Since pensions were inflation linked up to 5% per annum, 25% index-linked AAA bonds was too low, although in absolute terms it was over £600m, a huge amount of inflation linking to buy in a short period.
During 2002 this was increased to 50% through a series of interest rate swaps. The first swap in March was reported in the FT "Inflation linkage for Boots Fund" and PwC also commented "Boots reduces risk yet further". (Scroll down to page 3).
In October 2002, a year after making its announcement, Boots Pensions won the European Pension Scheme of the Year Award prompting accolades from the FT's Barry Riley and John Plender.
The 2002 Trustee Review showed the Trustees had delivered what they said they would. The FT and Mail on Sunday had headlines of "Bonds switch yields £700m gain for Boots" and "Boots has the last laugh on its doubters".
In October 2002 Boots announced it was reversing its decision to adopt FRS 17 early, a decision made by the new Finance Director.
I spent a few days time in Boston in late 2002, helping Harvard Business School to turn Boots Pensions into a Case Study.
I make no comment on the articles in the FT, and Daily Mail about my departure from Boots at the end of 2002, "Author of Boots pension shift departs", and "Pension supremo walks out at Boots". Barry Riley "Perils of going against the grain", John Plender "Sorry footnote" and John Shuttleworth (scroll down to page 4) of PWC, added some personal comments.
Despite assurances from John Watson, Chairman of Boots Pension Trustees, reported in the FT in April 2003, in May 2004 Boots announced it had moved 15% of the assets back into equities and property.
See comments on this by Martin Dickson (FT)"Has Boots Pension fund taken leave of its senses?", Antonia Senior (The Times), Anthony Hilton (Evening Standard), John Plender (FT) and Phil Davis (FT)
The Trustees refused to disclose the investment advice which had led to this change. See John Watson's FT letter & response from 57 Members of the Boots Pension scheme (February 2005). John Plender in the FT criticised this lack of transparency by the Trustees.
In 2007 Alliance Boots was bought by the private equity firm KKR. I wrote two FTfm articles on the protracted and heated negotiations with the Trustees to protect the pension fund:"Alliance Boots' trustees in strong position with KKR" (April 2007) and "Testing the UK Pensions Regulator" (June 2007).
"The Boots’ bonds architect on the merits of switching"
Pauline Skypala FTfm November 2011
"What does the Boots deal tell us about the powers of the Pensions Regulator?"
FTfm June 2007
"KKR do not want to be seen as barbarians at the gate"
FTfm April 2007
"Benefits boost via bonds for Boots" FT Letters April 2004
"How Boots led the way from shares to bonds"
Sunday Times November 2003
"The interests of the company and trustees were identical - it was a "win/ win" for scheme members & shareholders"
FT Letters May 2003
"We looked at it every which way. We were wanting someone to come up with something we hadn’t thought of"
Silvia Ascarelli Wall Street Journal Europe January 2002
"Current accounting gives the impression that pension fund equity investment has the superior return of equities, with the lack of volatility of bonds"
Risk Magazine November 2001
