UK retailer Boots, which shifted its entire pension portfolio into bonds in 2002, says a decline in bond yields is partly responsible for a £40m (E60m) rise in pension charges.
“The forthcoming three-year review of the pension fund valuation is likely to confirm that the scheme’s commitments are fully funded, but will result in an increase in pension charge for the group of approximately £40m in 2004/05,” the firm says.
“Roughly half is due to the fall in bond yields since the last valuation, and half from the roll-off of the amortisation of earlier surpluses.”
It said that early indications of the valuation suggest the £2.27bn scheme’s pension commitments will remain fully funded, but warned the surplus identified at the 2001 valuation is likely to be “much reduced”. In its 2003 annual report, Boots said the scheme was 116% funded.
“The real yield on long-term bonds has fallen increasing the cost of meeting future pension liabilities,” it said.
Boots said that the cut in the surplus expected in the forthcoming valuation, along with lower bond yields, would increase the pension charge under the SSAP 24 accounting standard to around £70m in 2004/05. “In common with other pension funds, increased life expectancy is likely to continue to put upward pressure on the cost of meeting future liabilities beyond this.
John Ralfe, who as head of corporate finance at Boots led the high-profile shift to bonds, stood by that decision. “It’s not to do with asset allocation,” he says, adding that there was no surprise in the fund’s surplus declining, increased longevity or falling bond yields.
He says his strategy would be “absolutely identical” if he were still in charge of the fund. He said Boots’ pension contributions would have been higher if it had stuck with its equities allocation.

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