L&G announced on November 24th that it had agreed a £4.8 billion full buy-in with the Boots Pension Scheme . Boots also made an announcement that the deal had been done , stating unequivocally that scheme benefits remained unchanged.
In their press release L&G boast of benefits to members
This buy-in secures the benefits of all 53,000 retirees and deferred members of the Scheme, making it the UK’s largest single transaction of its kind by premium size and, for L&G, the largest single transaction by number of members.
Such security comes at a cost. An insurance buy-out is reckoned to cost 20% of member’s funds in fees and in meeting insurance company’s margins. It is not just a risk transfer, it is a transfer of funds that could be invested in gilts and productive finance (two of the three Hunt Mansion House Criteria) to corporate bonds, (aka wet cement).
The buy-out is requiring Walgreen Boots Alliance to pump an extras £670m into the pensions scheme, all of which will be spent on securing the buy-out – but not improving benefits (or even crystalizing discretionary benefits) .
It should not be undertaken lightly. It is deemed to be in the member’s interests but members are rarely if ever consulted on a buy-out. It would seem from this article in Professional Pensions that the member’s union has only been alerted to the Boot’s buy out once it had been done.
Now we hear that Pharmacists are considering submitting a series of formal complaints to the Boots Pension Scheme raising concerns over the treatment of discretionary benefits as part of the fund’s £4.8bn buy-in with Legal & General (L&G).
The Pharmacists’ Defence Association (PDA) said the trustees’ decision to secure a buy-in of the benefits through an arrangement with L&G included the removal of the option to take a full pension from age 60 – benefits the trustee believe and the scheme rules state were discretionary and not a member right.
PDA Union national officer Paul Moloney explained:
“We have considered, with our advisors, the claim by the trustees of the scheme that the option to take an unreduced pension from 60 was discretionary and not a right and believe there is insufficient evidence to fully support this claim. We are therefore questioning whether this option should have been secured as part of the buy-in and not ended with immediate effect.
“Instead, we believe benefit statements issued to members, at the very least are contradictory, and clearly state that a full pension will be payable from a member’s 60th birthday, with no reference to this benefit being discretionary and therefore subject to a regular review by the trustees. Instead, the benefit statements give the impression that an unreduced pension from 60 is a right with no indication that retirement plans should not be based on the benefit statements.”
“Although we recognise the advantages a buy-in can bring to the overall security of benefits it is important that it is done correctly. We believe there is sufficient doubt over the claim that the unreduced pension was discretionary and can be ended with the buy-in.”
The PDA said members who have benefits in the scheme and who have concerns about the change have the right to use the Boots Pension Scheme disputes procedure to complain about the removal of the option to retire at 60 without a reduced pension.
The PDA said, following an online meeting of over 100 affected members, it would now be sending out template complaint letters setting out concerns regarding the discretionary nature of the benefit and the way it has been communicated to scheme members over the years.
But it stopped short of criticizing the buy-out itself and the £670m it was costing Boots.
Where were the PDA during negotiations?
The union first communicated its misgivings to members on December7th. Over two weeks after the buy-out was announced. This was picked up in Pharmacy News
12 days later , it issued a second report to members which has been circulated to the press, Pension Age and Professional Pensions both re-printing Moloney’s statement.
This followed a question in Money Mail , placed by an anonymous Boots pensioner and answered by Steve Webb and reported on by Stephanie Hawthorne and this blog.
Three questions persist
- Are the trustees and ultimately Walgreen liable for discretionary payments from 60 from deferred pensioners
- Why wasn’t this issue raised during the negotiations by member nominated trustees?
- Was the estimated £960m buy-out cost and the £670m pumped into the scheme to get there- the best use of trustee and corporate funds?
The buy-in is effectively a swap of a big insurance policy for the scheme assets. However the trust and its trustees still remain in place. The questions for affected members is to what extent they can influence the terms under which the buy-in operates. Is it a done deal or are the trustees still on the hook for the cost of offering early retirement (if the ombudsman finds against them)?
The second question is over the union representation (or lack of it) on the Boots board. By law 1/3 of trustees must be member nominated, Law Debenture are a corporate trustee leaving 6 remaining , it would be normal for at least one of the trustees to be a union representative – what was the union doing? The trustees are listed here
As for the cost of buy-out, I very much doubt that such sums can be justified in terms of member value. As the FT comments , this is an M&A play
By offloading the pension liabilities, Boots has removed one obstacle to Walgreens selling the business. Last year, the US company abandoned an attempt to sell the chain, pointing to an “unexpected and dramatic change” in market conditions.
These are questions that should have been asked during the negotiations. Once the negotiations had ended and the deal was done, Boots published a statement to members which began
Questions that aren’t going to go away
This has prompted Jnamdoc, the pseudonym of one of this blog’s more prolific commentators to ask
Who is protecting the members’ interest?
the lack of a collective voice for members in the UK is lamentable.
Trustees who should represent members, and should more properly have used the overfunding in the scheme to protect customary discretionary benefits, will instead hide behind the TPR mantra of untempered at any cost de-risking and ‘flight path’ aspirations to insurer as a poor excuse for not representing members’ interest.
The expected insurer profit on the transaction will be circa £1bn, money that should have been invested by Trustees to help provide discretionary benefits. This will be brushed under the carpet, lost in opaque accounting disclosures…
The point of having discretionary powers should be to recognise that in some circumstances, such as in the midst of an inflation and low growth cost of living crisis, Trustees should use discretions to spend surplus on protecting members’ living standards.
Once again it is the ‘industry’’, that should be there to protect and serve members’ interests, that wins. Everyone wins, members lose. It’s a national disgrace.
For to him who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.” — Matthew 13:11–12,
I think it more accurate to say that Boots called potential insurers (plural). These insurers would be in competition and they’re not charities.
I thought the trustees were supposed to put the members’ interests first. It seems to me that, of late, some seem more concerned with protecting the employer’s balance sheet than the members’ real interests. Especially at a time of high inflation, securing members’ contractual entitlements is not necessarily the same thing as meeting their reasonable expectations – let alone their needs. ‘Frozen pensions’ – or partially frozen, if inflation exceeds LPI – are back. I wonder if there is any data on how many buy ins or buy outs have benefits which have either no inflation protection or limited protection?
I think we need The Pensions Regulator’s role to be clarified to protect the Member’s interests over the lifetime of the Member (i.e. top consider future and not just past service benefits).
Secondly we need TPR to have powers to approve buy-outs against that objective and require Trustee Board to justify why a buy-out is in the Members’ interests against the Scheme’s status quo. This would therefore require consideration of future discretionary benefits e.g. to protect the real value of the pensions or in this case to preserve early retirement with enhanced benefits (which may well have been regarded as an inducement for employees to take up employment with Boots and to join the pension scheme).
In this case the Trustee Board may feel justified that the additional £670M contribution secured better benefits than would have been available following scheme wind-up. However if that £670M had been available, can they justify paying the buy-out cost premium over alternative routes to secure scheme benefit run-on without employer support (e.g. a capital backed journey plan or use of a consolidator not targeting buy-out such as the Pensions Superfund proposed)?
All three of these suggestions are eminently sensible and just, and I’d challenge any of the main political parties to include provisions for protecting retirement incomes in their manifestos. A vote winner for sure!
If only the UK had a pension regulator that was actually interested in protecting and enhancing the value of retirement incomes for members. Instead we get a Regulator that could be mistaken as an instrument of the DMO, and a trade body for the Insurers.
Perhaps the PLSA could take on a role to enhance and protect the value of retirement incomes for DB members?
The PDA has only been recognised (for pharmacist and related jobs) by Boots since 2019 (after a very long and hard-fought process). I would be very surprised if they had any involvement in the process of appointing trustees (that wouldnt typically be covered in a recognition agreement). In any case, even a union nominated trustee (where there are any) would be seriously restricted about what they could say about transactions like this. I would be surprised if the trade union knew anything about it (formally at least) until after it was announced.
I’m sorry to hear that this is how it works Neil. Shouldn’t unions be pressing for more say in how sponsors manage their pension obligations and discretionary payments?
In the specific context of Boots – the PDA had to fight a lengthy battle just to be able to talk to the employer about pay and basic terms and conditions.
Where industrial relations are on a more positive footing (or, at least, where the unions didn’t have to fight just for recognition), my experience (as both a trustee and trade union official) is that trustees rarely ever think it is appropriate to speak to the trade union(s).
Senior trade union reps who are trustees have to be very careful in balancing their duties / responsibilities (often / usually by choosing to do one role or the other, as it can be too difficult to be both).
There is no statutory right for trade unions to be consulted on how sponsors manage their obligations. That would be a nice thing (in theory), but we have been pressing for a statutory right just to negotiate members’ pension provision for decades, and haven’t even gotten that yet.
I have been under the misapprehension that unions were really important to the selection of member nominated trustees. I do think that now is a time when unions can be very influential, in the choices people take when turning pot to income and in the choices trustees and emplyers are taking on the future of the DB pension scheme,
The TPR used to talk of unions as “member representatives” which is of course what trustees should be. I know you think a lot about these things Neil
Yes, unfortunately that’s the thrust of the blog. Through a whole range of guidance and coercion TPR marshals trustees to protect the PPF, shepherding schemes over to insurers. You can’t help but feel the working member is under represented (while the economy is under invested).
TPR – of insurers for insurers.