UK- Boots’ £2.4bn pension fund has purchased £200m worth of inflation-linked investments in a bid to improve the match between assets and liabilities. The purchase follows the fund’s decision last October to sell its entire equity holdings and move the proceeds into fixed income. At the time critics said the fund’s decision left it vulnerable to any unexpected increase in inflation.
Purchasing a further £200m will offset the potential side effects of a rise in inflation and is a move that takes the proportion of inflation-linked products from a quarter of the fund last October to a third, or £800m.
Boots achieved the increase with 15-year inflation linked swaps with Royal Bank of Scotland and Barclays Capital. The pension fund pays the banks from its ordinary bonds and the banks guarantees inflation linked payments. Boots says the swaps also protect the investments against deflation by ensuring the amount paid to the fund does not fall in a deflationary environment.
Speaking about the decision to make the investment, John Watson, chairman of the scheme’s trustees said: “its helps the trustees achieve their stated objective of ensuring that the value of scheme assets is always enough to pay all pensions regardless of movements in the financial markets.”
It comes at a time when Dutch pension schemes are showing an increased interest in similar products as a means of hedging against the country’s increasing rate of inflation.
Last month MN Services, Shell pension fund and Inflation Exchange Fund struck a real estate deal giving MN cover by guaranteeing an income stream linked to inflation. PGGM, the e49bn fund for healthcare and social workers, is considering investing in inflation-linked bonds and the e150bn ABP fund’s alternatives unit is looking, among other things, at property overlay strategies.