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Impact Investing

IPE special report May 2018

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Boots win highlights shift to risk management issu

The move made by the Boots pension fund in the UK to shed all its equities and to do so before the severe declnes in the market have provoked considerable comment in the market. It is clearly one of the funds, and perhaps the most clearcut example, of the general comments by the judges that they were impressed by the general understanding of risk management issues. “Pension schemes are aware that there are various sources of risk and are becoming more disciplined in their risk budgeting.”
Boots’ risk analysis led it to take what many pensions people consider to be an extreme position, but by capping its contribution level and avoiding the increase in contributions that many funds are experiencing, it is hard to see what it has got wrong in the current circumstances.
Boots felt it was inappropriate to comment on winning one of the IPE awards for the UK. But this is not any desire to keep silent about what it has done, as the sponsor has been generous in its approach to sharing its experiences with the industry as well as explaining its significance to members.
Boots knew it was throwing downthe gauntlet to other funds to justify the degree of mismatching they are willing to undertake.
Certainly, it has engendered considerable debate with those responsible for funds considering whether they too should follow such a least-risk strategy, and protect funds from the poor investment results of the past couple of years, for example. Of course, as pension funds point out when considering the Boots approach, this means excluding the fund from the benefits of the upside of good equity exposures.
The fundamental question that Boots is making those responsible for running pension funds face, according to some commentators, is that of how much risk they and those who ultimately pay the contributions, whether employees or employers, are prepared to take. Perhaps, beguiled by the bull market, these risks were taken without being subjected to the full analysis they should have been. From a risk watching viewpoint , Boots has definitely done the pensions industry a service.
With a simple well focused strategy, very confidently executed, Boots has indeed shown why it is a worthy winner and a contender for the European prize.

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