Boots is pressing ahead with changes to its workers' retirement income despite a warning from the Pensions Regulator that it is likely to harm members' interests. The watchdog says the pharmaceutical-to-retail group could face legal claims in years to come.
Alliance Boots, run by Stefano Pessina and taken over for £11bn by private-equity group KKR in 2007, is offering more than 25,000 pension fund members a higher basic pension if they forfeit future inflation-linked increases.
But Michael O'Higgins, the Government's pensions watchdog, says: "The offer might look attractive, particularly with cash as an incentive, but poorly informed decisions are likely to be regretted years later. We believe most such offers won't be in members' best interests."
Forms inviting Boots' pension members to swap the inflation increase for a higher immediate income will be sent out later this month. Members must decide whether to accept by the end of December and cannot then change their minds.
Some pensions could rise by almost 25 per cent, but in the longer term the income will be lower than payments that increase annually. The longer the pensioners or their spouses live, the worse off they will be. At 2.5 per cent annual inflation, current pensions would exceed the enhanced sum within 10 years; at 5 per cent, the cross-over point is nearer five years.
John Ralfe, a former finance head at Boots who now runs a pension consultancy, says: "If you have the average life expectancy, you will be worse off. There might be 5 per cent of the 25,000 for whom it will be a great deal – but they don't know who they are."
He believes Boots could face mis-selling claims in future years. He is backed by the regulator, who states: "Employers should be aware that incentive exercises are fraught with legal and reputational risks. Without the utmost regard and diligence to members' needs in this very complex financial decision, members' claims on the employer could be made many years after the exercise has taken place."
Boots is paying a financial adviser to help members decide, but Mr O'Higgins, who is a non-executive director of the Treasury, says: "Pension transfers are an extremely difficult financial equation. Most members find it impossible to understand their options unaided."
He admits that people with short life expectancy or no dependents might benefit but says: "Trustees should start from the presumption that such exercises and transfers are not in most members' interests and they should therefore approach any exercise cautiously and actively."
In 2007, the pension trustees threatened to block KKR's takeover unless money was injected into the fund. The bidder initially offered to put in £240m but eventually increased that to £418m, spread over 10 years, with the promise of another £600m to provide a safety net.
Last year's valuation nevertheless showed a £602m deficit on the fund and Alliance Boots admits the swap offer is intended to close that gap. Only 60 per cent of the savings from ending the inflation link will be used to boost pensions. The fund will retain the other 40 per cent, which Boots estimates will be worth £75m.
Mr Ralfe says: "What you're giving up and what you're receiving are not the same. You're only being given back 60 per cent of the pension increase."
The fund's trustees have been chaired since 2009 by Richard Oppenheim, a former Unilever executive who now sits on the supervisory board of Anzag, a German drugs wholesaler taken over by Boots. This month he joined the advisory board of private-equity group Mid Europa Partners.
Alliance Boots admits: "The scheme's finances are expected to improve as a result of this offer." It told members: "The offer is therefore not financially neutral to you and the scheme. In other words, if you accept the offer, the value of the one-off increase to your pension is likely to be less than the value of the future expected increases you are exchanging."
Other pension funds are watching how many Boots pension-fund members accept before deciding if they should follow suit.
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