UK – The decision by the £2.3bn (e2.7bn) Boots group pension fund to switch to a 100% bond portfolio yesterday, as reported on IPE-Newsline, could signal the start of a trend amongst pension funds, but one that will be restricted to the UK, says Avinash Persaud of State Street.

Persaud says that UK portfolios typically have a larger equity exposure, between 70%-80%, than bond exposure, compared to between 50%-60% equity exposure on average elsewhere in Europe. In addition, the introduction of the FRS 17 accounting standard could also influence changes in asset allocation in the UK, says Persaud.

However, Persuad points out that the sterling sovereign market (Bulldogs) is not big enough for all pension funds in Boots’ position - where the pension fund is bigger than the company itself, to follow suit.

Yesterday’s move was about a reduction in reported risk and consequently the fund’s portfolios now comprise 100% AAA sovereign sterling bonds, with overseas and foreign exposure eliminated, Persaud explains.

If others were to follow suit, says Persaud, the demand for sterling issues would ultimately have to be met by foreign issuers, which could result in an initial outflow of sterling, if their liabilities were not fully hedged.