# A view from Boots' Finance Chief ( What does this mean?)



## Brendan Burgess (26 Nov 2001)

An article in the Financial Times starts as follows:

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr>  We all hope that the UK is not on the brink of recession. But if our natural optimism is not matched with a sharp dose of realism, any looming UK recession will be long,deep and painful.

Whatever the absolute risks of a recession, the relative risks of recession are higher than generally recognized because the financial position of many companies is more fragile than it appears<hr></blockquote><!--EZCODE QUOTE END-->

I can't figure out the logic of the first paragraph at all! What is he trying to say? If...A, then...B. I can't see how B follows A.

As for the second paragraph, I just don't know what <!--EZCODE ITALIC START-->_  the relative risks of recession_<!--EZCODE ITALIC END--> means

Can anyone throw any light on this?

I only read the FT sporadically, so if any regular reader sees this queried in the letters column, let me know.

Brendan


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## Grundy (26 Nov 2001)

*What does it mean?*

It means <!--EZCODE BOLD START-->* <!--EZCODE ITALIC START--> "sell, sell, sell"<!--EZCODE ITALIC END-->*<!--EZCODE BOLD END-->.:no


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## Brendan Burgess (27 Nov 2001)

*Re: What does it mean?*

Hi Grundy

I know it's encouraging people to sell, but it doesn't seem to me to be explaining why.

Is it bad writing or am I just being too critical these days?

Brendan


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## CM (27 Nov 2001)

*More BS?*

For what it's worth it doesn't make any sense to me either!


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## Grundy (27 Nov 2001)

*Connellspeak*

Quite incomprehensible, <!--EZCODE ITALIC START-->_ Boss_<!--EZCODE ITALIC END-->.

I guess it is saying that if people don't wise up and realise that a recession is on the way it will turn out too be all the worse - but that a little dose of realism might stave off the worst effects of the upcoming rec.  I still don't follow it.

The second paragraph is real "angels on pins" stuff.:jem


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## Brendan Burgess (28 Nov 2001)

*Why the article worries me*

This article was written by John Ralfe, head of corporate finance, The Boots Company. The Boots Pension Scheme recently said it had moved its £2.3b assets from equities into bonds. 

The article is primarily about what he sees as a threat to retirement incomes from the UK Government's plans to replace the minimum funding requirement.

And Ralfe does make some good points in the article. But what worries me is the lack of clear thinking in the first paragraph. Now I know we cannot all be expected to write with the preciseness and coherence of UDS, but the rubbish in the first two paragraphs should not have been printed. 

Here are some more excerpts which deal with pension funding generally.

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> Companies with large pension funds that are heavily invested in equities could easily find themselves in difficulties. Further falls in the stockmarket may generate pension fund deficits, requiring increased company contributions, damaging some companies and weakening the stockmarket.

Investing in equities through the pension fund is a form of "double gearing". In financial terms, it is the same as a company issuing a long-term bond and investing the proceeds in a  diversified portfolio of shares in other companies.<hr></blockquote><!--EZCODE QUOTE END-->

But are there not big risks in investing in bonds? If the pension liabilities are fixed in terms of future increases, maybe bonds are suitable. But if inflation takes off, the liabilities of a pension fund would rise while the assets remain constant.

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> The market risk for individual companies can be substantially reduced by holding matching bonds rather than equities. [/url]
<hr></blockquote><!--EZCODE QUOTE END-->


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## Rupert Bear (28 Nov 2001)

<!--EZCODE ITALIC START-->_ Boss_<!--EZCODE ITALIC END-->, I'm really only guessing here but I think there was a recently introduced FRS (accountancy standard) which has the effect of directly recognising asset movements in the pension fund in the company accounts whilst not equally adjusting the liabilites.

So if equities in a pension fund fall it has a direct impact on company earnings which it didn't used to.

It seems that Barclays are following an investment strategy which minimises accounting impacts on profits but which most actuaries would regard as inappropriate for the pension fund.

Lucky for them that the bear market has worked out very nicely for them (at least in the short term).
:rupert


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## Brendan Burgess (28 Nov 2001)

*Is this new accounting standard deterring the best strategy*

Thanks Rupert

So here is my understanding of the issue, even if I still don't understand the first two paragraphs of the FT article.

FRS 17 is the new accounting standard which deals with pensions. If Boots plc has a surplus in its pension fund, it must
show that suprlus in its accounts, which is good. If it has a deficit, it must show the deficit as a loss which is bad.

As the FT article points out, many companies have pension funds which are much bigger than the sponsoring companies, so an adverse move in the pension fund assets could wipe out the profits of the sponsoring company. 

So by switching to bonds, the company can be sure that there will be no surprises in the short term. But in the long term, their pension fund will be more expensive and could slowly wipe overwhelm the sponsoring company.

And as you say, Rupert - most actuaries would regard this as an inappropriate investment strategy for the pension fund.

So Boots didn't switch out of equities because they thougth that equities were due to crash - they switched out of equities to avoid and short term surprises?
Brendan


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## Rupert Bear (28 Nov 2001)

*Re: Is this new accounting standard deterring the best strat*

<!--EZCODE ITALIC START-->_ "So Boots didn't switch out of equities because they thougth that equities were due to crash - they switched out of equities to avoid and short term surprises?"_<!--EZCODE ITALIC END-->

Don't know, <!--EZCODE ITALIC START-->_ Boss_<!--EZCODE ITALIC END-->, have to ask them.  I don't know why I brought Barclays into the picture in that last posting.


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## Brendan Burgess (29 Nov 2001)

*Re: Is this new accounting standard deterring the best strat*

There is a good article on the issue on the [broken link removed]

Apparently, Boots have closed their defined benefit scheme to new members, so their future liability is fairly well known at this stage. The fund is in surplus, so they may as well switch to gilts.

Brendan


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## CM (29 Nov 2001)

*Media spin*

So the media spin that this decision by Boots was obvious confirmation that the crash was around the corner may not have been so accurate after all - eh?


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## monksfield (30 Nov 2001)

*Boots*

The fact that the scheme is closed to new entrants does not mean that the liabilities are known/fixed in any way.The pensions will be paid by reference to final salaries many years hence and the liabilities are pretty open-ended.
Some switch into bonds could be warranted if there were substantial pensions in payment already though even these are not entirely fixed.The switch into bonds cannot be attributed to the scheme's closure to new members.


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## Brendan Burgess (1 Dec 2001)

*Re: Boots*

Hi Monksfield

Good to see you back again - we missed you.

I agree that a closed fund has not got fixed liabilities, but they are a lot more certain than an open fund. 

A higher percentage of their members will already have retired.
They will know how many members they will have while an open fund will have no idea.

Brendan


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## amsmtg (4 Dec 2001)

*Re: Boots*

Can someone put a link up to the article in the FT?

Thanks very much


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