On November 24, 2023, Legal & General confirmed a £4.8 billion full buy-in deal with the Boots Pension Scheme. The deal secures the benefits of all 53,000 retirees and deferred members of the scheme, making it the largest single transaction of its kind in the UK by premium size. The insurance transaction with Legal & General was chosen to protect members' benefits against increased life expectancy, market uncertainties, and other risks, while fulfilling Boots' strategic goals for the Scheme.
The early retirement benefit was an integral part of the Boots Pension Fund for Boots employees, and this change has raised significant concerns among people. The changes primarily relate to the rules around early retirement. Before the takeover, most members believed they would not incur a withdrawal penalty for taking their pension between the ages of 60 and 65. Meanwhile, they were aware of a 4% reduction that still applies each year between the ages of 55 and 60 if they decide to withdraw it within that time frame.
For this reason, many members in their 50s were actively planning to take their pension early and had based financial arrangements on the figures provided by the Boots scheme. However, this policy has now changed without notice, prompting many people to register formal complaints as they are afraid of being left out of pocket.
So, how might the L&G insurance decision to buy the Boots Pension Scheme affect your early retirement plans? Here is our take on the situation.
What is the Boots Pension Scheme?
The Boots Pension Scheme is a defined benefit scheme (often referred to as a final salary pension) that was launched in 2001 and closed to new members in 2010. New members were instead given the option of joining the Boots Retirement Savings Plan.
As a defined benefit scheme, the payout amount is determined by factors such as your salary and the number of years you’ve been a member of the employer’s scheme. This provides a guaranteed income for life, unlike a defined contribution scheme (e.g., the Boots Retirement Savings Plan), which does not promise a specific benefit amount at retirement, as the payout depends on the amount saved and the performance of the investments. Another advantage is that defined benefit schemes are managed by a Board of Trustees, eliminating the need for you to make complex investment decisions regarding your retirement savings.
However, most companies outside the public sector tend not to offer them, as defined benefit plans are considered more expensive and complex to manage compared to defined contribution plans.
How Does a Defined Benefit Scheme Work?
As mentioned earlier, most defined benefit schemes are salary-related pension schemes. This means that both the employer and the employee make regular contributions to a fund to ensure there is enough money to cover the payout obligations to its members.
Often, this money is invested in equities, such as stocks and shares, to try to grow its overall value. Clearly, there is an element of risk with this approach, as the stock market can be volatile. However, over a prolonged period, higher-risk strategies tend to generate greater returns, which in turn increase the overall value of the fund. For example, the S&P 500 is an index that tracks the 500 largest companies in the US. Between 2003 and 2023, it returned an average annualised return of 10.20%.
In recent years, most salary-related pension schemes have adopted a ‘de-risking' approach, which involves selling equities in favour of purchasing government bonds or gilts (as they are known in the UK). These are considered more predictable, providing the scheme with greater certainty that it will meet its payment obligations. However, they typically yield lower returns.
What Happened?
Last November, the Boots Pension Scheme agreed to pay £4.8 billion to the insurer Legal & General in a buy-in deal. The transaction will transfer most of the economic risk of the scheme to Legal & General, significantly reducing Boots' exposure and enhancing the security of members' pension benefits.
At the time of the takeover, the pension scheme was in deficit, meaning that the total value of its assets was less than the combined value of all members' pensions. Consequently, as part of the deal, Boots introduced £670 million of funding to cover this shortfall.
Typically, these deals involve the pension scheme purchasing an annuity policy from the insurer to cover the amount needed to be paid to its members. Annuities are specific types of insurance products that provide a guaranteed income for the rest of your life in exchange for a lump sum.
As a result of the takeover, the Boots Pension Scheme will continue to pay out members' pensions from the income generated by the annuity policy purchased from L&G.
What is all the fuss about?
Members of a scheme usually do not notice significant changes after a buy-in occurs. However, in the case of the Legal & General deal, thousands of Boots Pension Scheme members will now incur a withdrawal penalty if they want to take their pensions early.
As discussed earlier, many members believed they had the right to withdraw their full pension at age 60 without penalties, as opposed to waiting until age 65. However, they have now been informed that this entitlement was always at the discretion of the trustee and was not a fixed entitlement or legal requirement that Boots was obliged to offer its members after the buy-in. (The buy-in takeover would not have been sustainable if all discretionary benefits, such as the option for early retirement, were included).
For Boots employees, this means they will either have to wait until they are 65 to receive their full pension or retire earlier at the cost of receiving a reduced pension.
Why did the takeover happen?
If the value of a pension scheme is declining, its trustees might choose to safeguard members' pensions by facilitating a ‘buyout’. This protective measure is designed to secure members' pensions for the long term. Recently, many large employers have taken this step to eliminate pension “risk,” so this can allow companies to focus more on managing their core business.
As a trusted British brand found on most high streets, Boots initiated the takeover to ensure the financial security of members by practically guaranteeing their retirement income entitlements.
What should you do?
For many members, Legal & General's decision to buy the Boots Pension Scheme has caused confusion about their early retirement plans. If you find yourself in this situation, know that you are not alone. The advisors at Cameron James are here to help you.
We can provide more insight into the changes and their potential impact on your personal situation. Additionally, if you are considering transferring your Defined Benefits Scheme to another provider, we can guide you through that advice process. Book a free consultation with us below or by clicking here.
FAQ
When did L&G takeover the Boots Pension Scheme?
In November 2023, the insurance company L&G announced they would takeover the Boots Pension Scheme in a £4.8 billion buy-in