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See JER article in FTfm "Testing the UK Pensions Regulator" (June 25th 2007)
See JER article in FTfm "Alliance Boots' trustees in strong position with KKR" (Apr 30th 2007)
See John Watson’s FT letter & response from 57 Members of the Boots Pension scheme (Feb 2005)
See comment on Boots Pension Trustees refusal to disclose the independent investment advice by Alex Jolliffe (FT), Jane Fuller (FT) and John Plender (FT) (Feb 2005)
See comment on Boots’decision to move back to equities by Martin Dickson (FT), Antonia Senior (The Times), Anthony Hilton (Evening Standard), John Plender (FT) and Phil Davis (FT) (May/June 2004)
See JER FT letter “Benefits boost via bonds for Boots” (Apr 10th 2004)
See JER Sunday Times’ article "How Boots led the way from shares to bonds" (November 2 2003)
See Harvard Business School Case Study on Boots’ move to 100% bonds (June 2003)
See the FT and Times’ pension comment on Boots’ 2003 results (June 6 2003).
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The 2001 Boots Pension Trustee Review with Q & As was sent to the 72,000 members of the Boots Pensions Scheme at the end of October 2001. The normally bland annual Review was explosive and deliberately written for a wider audience than scheme members. We did not have to wait long for it to find its way into the papers. Both The Mail on Sunday and The Sunday Times ran the story on October 28th.
The Boots Company interim results were announced a few days later, allowing the Company to explain the move to 100% matching bonds. 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, such as The BBC and the FT’s Pauline Skypala, the best analysis came from Barry Riley, also in the FT, who understood the underlying economics "Boots finds a safe prescription", as well as the challenge to orthodoxy of what Boots had done "Pensioners taste power" and "Equity cult finds party is ending".
PwC were very quick off the mark comment. Other vocal supporters included Barclays "A hard Oct to follow" and Merrill Lynch "Sticking the Boot in".
Bacon & Woodrow, now Hewitt Bacon & Woodrow, the Boots Scheme Actuaries, also published a note "Bond investment by UK pension schemes". Most people were bemused rather than supportive and the only explicitly critical note was from Lane, Clarke & Peacock . I am still puzzled by the Government Actuary’s comments in The Economist, "Booting out equities".
I spent a lot of time over 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 even writing 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 favourite article is by Silvia Ascarelli in the Wall Street Journal Europe, "Talking About a (Bond) Revolution". She spent a long time working on it and it shows.
The slashing of annual fees and costs from £10m to £300,000 (mainly the bid/ offer spread on buying and selling equities)also sent a chill through the fund management industry. The transition managers, Legal & General commented on this in the FT in April 2003.
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.
Prior to starting the transition in May 2000 there were a number of important 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. Pensions was very high on the Boots’ agenda.
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.
Exley, Mehta & Smith fitted into Boots’ whole approach to financial management of maximising the after-tax value of the Company. A guiding principle in applying corporate finance concepts to practical issues of strategy and financial policy was that we could not “outguess the financial markets”.
I wrote "Young Guns" in support of the "radical actuaries" in March 2001. Also see "Bumper returns in golden age" by Barry Riley.
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. (See my Discussion with the ASB).
Boots also took a very robust line on pension regulation, including its Response to the Myners’ Review in July 2000 and to the DSS Consultation Paper on Security for Occupational Pensions, which received publicity "Boots backs reform of insolvency laws"
Completing the pension circle required Boots to buy back its own shares, which was announced in March 2002 "Pensions boost for Boots buy-back" and "Boots buyback follows pension restructuring". Reducing risk off balance sheet in the pension fund allowed the company to increase risk on balance sheet through a £300m buyback.
The guardians of credit risk were persuaded that this was a fair swap, although the bulletins from Moody’s and S & P when the bond switch had been announced were lukewarm.
The percentage of index-linked AAA bonds in October 2001, at 25%, was too low. In absolute terms this represented over £600m, a huge amount to buy in a short period. (Most of it bought in the summer of 2000). During 2002 this was increased to 50% through a series of interest rate swaps.
The first swap in March was publicised internally and reported in the FT "Inflation linkage for Boots Fund". 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 Barry Riley and John Plender.
The 2002 Trustee Review was less explosive than its predecessor, but 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" . I also wrote a review piece "Boots Pensions : One Year On".
In October 2002 Boots announced it was reversing its decision to adopt FRS 17 early.
I make no comment on the articles in the FT, Financial News and Daily Mail about my departure from Boots at the end of 2002, "Author of Boots pension shift departs", "Ralfe quits Boots" 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) added some personal comments.
John Watson, Chairman of Boots Pension Trustees, wrote a letter to Professional Pensions in April 2003 reminding people that asset allocation was decided by Trustees, not the Company. This was reported in the FT, along with a letter from me.
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Updated: 28/6/2010
