CREATING VALUE IN PENSION PLANS (OR, GENTLEMEN PREFER BONDS)
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Consistent with this logic, the pension plan assets of Boots, the U.K. pharmaceutical retailer, were made up of 75% stocks and 25% bonds at yearend 1999. But between the spring of 2000 and July 2001, the company’s pension plan sold all its equities and invested the proceeds in duration-matched bonds. Security analysts, accountants, and actuaries were critical of Boots’s new strategy. The lower expected returns from bonds, they charged, would force Boots to increase its contributions to the plan in future years, thereby reducing expected future earnings and presumably firm value. According to financial economists, however, the step taken by Boots would actually increase shareholder value by lowering taxes while, at the same time,...
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