How did the Boots pension scheme change?
It was bought out by Legal & General
Why couldn’t Jon Swinson retire?
Because Boots paid L&G £640m to buy-out their pension liabilities rather than pay pensions they’d promised but didn’t guarantee.
Boots said that pension savers previously had the option to draw their pension penalty-free from 60 but that this was a discretionary benefit that they had no legal entitlement to, and that it was up to the scheme’s trustee to decide what members were allowed.
The trustee of the Boots scheme said: “We recognise that the change to the discretionary early retirement terms will affect the expected retirement income for those members who choose to retire before normal retirement age. While the trustee has in the past been able to offer enhanced early retirement terms, this has always been with the company’s support on a discretionary basis. It was never something to which members were automatically entitled.
“Continuing to pay unreduced pensions for those members who choose to retire early would have made insuring the scheme with Legal & General unaffordable.”
Boots said it had made transitional arrangements
“aimed at alleviating the impact on those who had recently had a quote for early retirement”.
But Jon Swinson was too young to benefit from those arrangements. Lily Russell-Jones in the Times reports
If he takes money out now he will get £11,669 a year and a lump sum of £77,799 — £83,727 less than he was expecting over a 20-year retirement.
This strikes me as odd, L&G have been paid to provide annuities to members like Jon, but the annuities form part of the scheme assets and the members are still part of the scheme. The rules of the scheme still allow for discretionary payments and they override the terms of the buy-in. In short, Boots could still pay discretionary payments to Jon, they’re saying they’ve spent all the money on his annuity and he’ll have to manage without. Did anyone ask Jon whether he wanted an annuity rather than a scheme pension? If he knew he’ swapped discretionary increases for a “gold-plated” annuity, would he have agreed? These are reasonable questions to ask.
So why should Boots pay more than it has to , to a former employee?
In a court of law, Jon Swinson would have no claim. the £83,727 he has lost was discretionary and though his calculations were made by using previous projections offered by Boots’ pension scheme , there will have been small print surrounding them.
I wrote about the situation last December . In an article entitled “have Boots sold their deferred pensioners down the Swanee“, I said
The grim reality for deferred members of the Boots Pension Scheme is that their plans to retire at 60 look to have been scuppered by the buy-in.
Steve Webb could offer little more comfort to the Boots’ deferred pensioners. Frankly, I think members who are employed, those who are in retirement and those who are working elsewhere all have the same claims on the trustees whose job it is to treat people as people and not as commodities.
There are other ways of managing DB pension schemes.
Employers aren’t faced with binary decisions on buy-out. It is not a “pay-up or shut up” situation. Employers who haven’t the will to run their own pension scheme on, can enlist the support of private capital. Edi Truell now offers capital to schemes to back run on, Punter Southall have teamed up with private equity firm Carlyle to do the same. There are deals to be done with M&G using captive insurers.
These alternative ways to finance a pension scheme involve risk-sharing, so that other people’s capital is at risk if things don’t work out. They also involve sharing the upside when things go right, so that the capital backers get a share of future surpluses. The surpluses that can pay the discretionary benefits that Jon Swanson lost.
These capital backed journey plans rely on getting better investment returns by investing assets using a longer term horizon than can be scanned by an insurance company. Put simply they are able to take risks and reap rewards that buy-out pension providers cannot take.
This is why pension schemes chose to invest for the future rather than buy annuities as they went along.
While Boots were within their rights to request their Trustees to purchase annuities that have locked out Jon Swinson from a part of his anticipated pension, they should have explored these alternatives. They should have consulted better with their members (whether still in employment or “former” as Jon Swanson was).
We’ve had a number of these buy-ins and buy-outs recently, of which Boots is just one. Who knows what discretionary benefits have been forsaken – probably most members impacted will have no idea what they have lost.
With alternatives to buy-out available, isn’t it time that we took a step back and asked ourselves why so many members are paying a price to shore up their employers balance sheet?
The Boots situation was relatively unique in that the substantial cash contribution that Wallgreen paid in to fund the buy-out would not have been available and there was an obvious on-going risk to the continuity of employer’s covenant towards the Scheme if the buy-out was not to go ahead. While I can’t be certain of the Boots situation, these early retirement pension enhancement provisions are usually conditional on being in continuing employment with the sponsoring company at time of retirement. The Trustees could then be reasonably take the view that the Members’ best interests were being served by securing the buy-out without reference to the discretionary benefit.
Whether an insurance company buy-out was the best way of securing those benefits is a different decision.
If however those conditions do not apply, for example the Scheme is already more than fully funded an a buy-out (solvency) basis or the employer has indicated its willingness to provide additional contributions to bring scheme funding up to a 20% overfunded level against the run-on cost estimate, the Trustees duty is to protect the resources of the Scheme (assets and future contributions) to pay the benefits as set out in the Trust Deed, including any discretionary benefits.
Recent Parliamentary answers and statements from the TPR appear to indicate that Trustee’s decisions in this area are subject to scrutiny, particularly those of employer appointed sole professional trustees, to ensure they are being made to secure the best outcome for the Member.
The problem with Pension Funds is that they make the finances of the “no longer employed” the concern of management, when management’s only interest is the employed, that is those allegedly making a positive contribution to the bottom line. After all, looking at the publicly quoted salaries of current senior managers at BP for instance, you can’t imagine them being concerned about pensioners whose pensions are 0.1% of their salary! So what better solution is there than to dump the Pension Fund and make it someone else’s problem? “Pesky pensioners! I’ve got real world problems to resolve! Now, where do I tee off this afternoon?”