On November 24, 2023, Legal & General confirmed a £4.8 billion full buy-in deal with the Boots Pension Scheme. The deal secures benefits for all 53,000 retirees and deferred members. It is the largest single transaction of its kind in the UK by premium size. Boots chose the insurance deal with Legal & General to protect members' benefits and meet the Scheme’s strategic goals.
The early retirement benefit was key for Boots employees. This change has raised significant concerns. 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 ages 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.
Many members in their 50s planned to take their pension early. They based their finances on the figures Boots provided. However, this policy changed without notice. Many people have registered formal complaints, fearing financial loss.
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) launched in 2001. It closed to new members in 2010. New members could instead join the Boots Retirement Savings Plan.
A defined benefit scheme pays out based on your salary and years in the employer’s scheme. It guarantees income for life. A defined contribution scheme, like the Boots Retirement Savings Plan, does not promise a specific benefit. The payout depends on savings and investment performance. Another advantage is that a Board of Trustees manages defined benefit schemes, so you don’t need to make complex investment decisions.
However, most companies outside the public sector avoid defined benefit plans. They cost more and are harder 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. Both employer and employee contribute regularly to a fund. This ensures enough money to cover payouts to members.
The scheme often invests this money in equities, such as stocks and shares, 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. They sell equities and buy government bonds or gilts (as they are known in the UK), which are considered more predictable. This gives the scheme greater certainty it will meet payment obligations.
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, the pension scheme buys an annuity policy from the insurer to cover the payments owed 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, trustees have now informed members that this entitlement was always discretionary. Boots had no legal obligation to offer it after the buy-in. (Including all discretionary benefits, like early retirement options, would have made the buy-in takeover unsustainable.)
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.