Aha!

Suzanne, I think your option 3 has cracked it. Thank you!!

All the best,
MattM

PS As previously mentioned, option 1 does work (as per
http://support.microsoft.com/?kbid=903163) but at the expense of breaking
links to local bookmarks: you get the error "Word cannot open the specified
file".

PPS I should add that the location of the referencing document is clearly a
factor here. If it's on your C drive, or a different server to the referenced
document, then Word clearly can't work out a relative path and will stick
with absolute - this may be why Fred doesn't have the same problem?