I am hoping that you can give some advice for myself and other members of the Boots defined benefit pension scheme.
The recent announcement that the Boots pension fund has been bought out by Legal & General was followed up with standard letters to all members outlining the buyout.
Also stated in the letter was a change to the early retirement rules. Previously there was no penalty for taking your pension from 60-65, and a 4 per cent reduction for each year taken before the age of 60 down to 55.
Boots pension scheme: Deal transfers responsibility to Legal & General
I like many others (I’m in my 50s) was actively planning to take my pension early and have made financial arrangements based on figures provided by the scheme.
This has now changed with no notice, and as far as I am aware no grace period.
I have tried contacting the pension department by email and I am currently waiting for a response. Can you give any advice that may be useful to myself and other members?
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Steve Webb replies: To help understand what is going on here, it may be useful if I start by explaining how salary-related pension schemes work, and how the trustees seek to ensure that there is enough money to make sure your pension will be paid.
In most such schemes the employer and employee make contributions to build up a fund so that there is money available when you retire to meet the pension promises which have been made to you.
In decades gone by, the money in such funds would typically have been invested for growth, probably with a relatively high allocation to shares or ‘equities’.
Stock markets go up and down, so there is an element of risk to this strategy. However, over a period of decades this higher risk strategy will usually generate higher returns, increasing the amount of money in the fund.
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Many of these schemes have now closed and so the balance between workers and pensioners is shifting.
In parallel with this shift in the membership of the scheme, the way the money in the scheme is invested will also have changed.
Most salary-related pensions have been steadily ‘de-risking’, selling equities and buying Government bonds and similar assets. These typically generate a lower but more predictable return.
This gives the scheme greater certainty that it will have the money needed to meet the pension promises it has made and also reduces the risk that the scheme may have to call on the employer for a top-up.
Some schemes will simply carry on in this way, steadily paying out pensions as they fall due, potentially for several decades more.
However, in some cases the trustees will decide that they would like to secure member pensions once and for all.
They do this by undertaking a ‘buyout’ – a transaction between the scheme and an insurance company.
What is a pension scheme buyout?
In simple terms, the trustees hand over all of the assets of the pension scheme and in return the insurance company promises to pay an agreed schedule of pensions for as long as they are due.
One attraction of such a deal to the trustees – and to the members – is that this is generally thought to increase the certainty that pensions will be paid in full.
There is no longer any direct exposure to the ups and downs of financial markets and it doesn’t even matter if the sponsoring employer goes bust.
And although a large insurance company going bust is not impossible, they are held to very high ‘solvency’ standards, which means they have to have a lot of capital to tide them over economic ups and downs.
In many cases therefore, having your scheme benefits ‘bought out’ with an insurer is a good thing and probably increases the certainty that your pension will be paid in full for as long as you live.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
However, a key issue – which your experience highlights – is that it matters a great deal exactly which pension promises the insurance company takes on.
In simple terms, the trustee will set out the rules of the scheme and the payments which it wants to insure and the insurance company will give a price for providing those payments.
For most of the payments it is simply a matter of paying out in line with scheme rules.
However, some pension schemes may offer ‘discretionary’ benefits.
These are payments to which members may not have a legal right, but which can be made at the discretion of the trustees or employer – perhaps at times when the scheme’s funding is in a good position.
One example would be in cases where the scheme rules only require inflation protection up to a cap but the trustees or employer can decide – on a discretionary basis – to go further.
My understanding is that for some of these benefits the trustees have decided to ‘lock in’ some discretionary payments as part of the buyout deal.
For example, the ‘discretionary’ payment to dependants will now be payable as of right by the insurance company.
However, it seems that the trustees have decided not to ‘lock in’ what seems to have been the discretionary ability to pay pensions in full from the age of 60 rather than 65.
For those affected this is obviously a very significant change if they would otherwise have received a full pension at 60.
Unfortunately, the fact that some pension statements will have been sent out based on a pension age of 60 rather than 65 is unlikely in itself to generate a legal entitlement, as these are likely to stress that they are only ‘estimates’.
It is the pension scheme rules which determine what people are entitled to.
From the perspective of the trustees, they will have weighed up the overall proposal from the company and taken professional advice before deciding whether proceeding with the deal was the right thing to do.
I imagine in making that decision they will have considered the £500milllion of additional contributions that the company was committing to enable the scheme to achieve the additional long term security from the insurance company, as well those discretionary benefits that would be ‘locked in’ and those that wouldn’t be.
What does Boots say about the changes?
To try to help give a better understanding of what has happened and why, I put a series of questions to Boots on your behalf and I am posting below my questions and the company’s full answers, which I hope will be helpful.
1. Was the ability to take a full pension at 60 rather than 65 open to all members of the scheme, or was it subject to any threshold test (eg a minimum number of years’ service)?
Answer: The option, from age 55, to apply to the trustee to grant an early retirement pension, which was not reduced for early payment between age 60 and 65, applied to most but not all members of the scheme.
2. Some members have had statements for many years based on a full pension at 60.
Did the trustees consider any sort of transitional arrangements for those who might be close to 60 and have made financial plans on the basis of those statements?
Answer: As you would expect, the trustee has taken significant legal advice around this important decision and the transaction as a whole.
The discretionary nature of the early retirement enhancement is clearly set out in the rules of the scheme. Retirement quotations reflected the need to apply to the trustee.
There are transitional arrangements in place for members where an early retirement quotation was recently issued.
3. Given that the trustees chose to carry over some discretionary benefits (such as pensions for dependents) to L&G, why was the discretionary ability to take a pension at 60 not carried over?
Answer: There was no legal requirement to do so. The buy-in transaction would not have been affordable if all discretionary benefits had been included.
