Connected Research

Union policy research in the 21st century

Well that worked, didn’t it?

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A belated reaction to last Friday’s decision by Alliance Boots to close its two final salary pension schemes to future accrual.

The company insists that the decision has not been made on cost grounds, but there appear to be two rationales drawn from the company’s own reported words:

1. protect the business from the effects of pension funding volatility

2. ensure the long-term sustainability of the group’s UK retirement savings schemes (which of course encompass DC provision as well as the DB schemes being closed).

With regard to (1), Boots was the first major company to opt to switch its pension fund assets entirely into bonds rather than equities – a move it undertook around ten years ago (for some techie background, see here for article by John Ralfe, written while he was Boots’s head of corporate finance and a member of its trustee investment committee). Bonds are low growth vehicles but which don’t jeopardise capital assets, and such a move was touted at the time as a solution which would lock equities-driven asset values into the asset bases of mature schemes.

Only, it doesn’t seem to have worked. One likely reason for this is the increasing growth in longevity in retirement – which, to compensate for without recourse to the scheme sponsor, is likely to require pension funds being invested in assets that are, well, a little more exciting. Indeed, The Times reports that the Boots schemes has previously switched back at least a portion of its assets into equities and property since the date of the last assessment of the scheme’s health (March 2009). Reading between the lines of the story in The Times, I’m wondering whether, despite having been in surplus last year, the forthcoming formal valuation is likely to show a deficit in the schemes, perhaps driven by a combination of increasing longevity and the impact of the Bank of England’s quantitative easing programme in lowering bond yields (and thus inflating scheme liabilities). Certainly, the purchase of equity-based assets within the last year is likely to have been a policy which, currently, will show strong returns. If there is such a deficit, it will require a recovery plan to be put in place, entailing higher expenditure from the company. This would certainly explain the rationale of ‘protecting the business from the effects of pension funding volatility’ – a somewhat differently-faceted explanation than one based on cost alone.

This is also a timely reminder in the context of Ofcom’s Pensions Review that schemes need to invest in a range of investment vehicles appropriate to their membership profile, not to concentrate in one or other type of vehicle. A mix of assets is likely to remain the most sensible investment strategy. Again, of course, it also amounts to a plea for a long-term perspective on pension fund investments- one to which, however, the private equity owners of Alliance Boots may not necessarily be sympathetic.

As regards the second explanation, the Times’s revelation that 70% of Boots employees are not members of any schemes (the DC schemes have around 5,500 members, compared to around 15,000 in the closing DB ones, out of a total UK workforce of around 75,000), in conjunction with its own reference earlier in the article to the 2012 reforms, tells its own story. Given these extremely low participation rates, auto enrolment will indeed present its own challenges as regards the total sums invested in providing employee pensions, even on the basis of use of the National Employment Savings Trust scheme, still less on the presumption of the continuation of Alliance Boots’s scheme which is likely to operate on the basis of a higher employer contribution rate than that which will fund NEST, at least in the first instance.

If the issue is one of the effects of the quantitative easing programme in inflating scheme liabilities, then today’s call by the NAPF for the issue of more long-dated and index-linked gilts is timely as regards the continued survival of other DB schemes. It’s a call that the NAPF has made before, and it remains a supportable one.

Finally, it also remains true that the best protectors of members’ interests in pension schemes continue to be a cadre of well-trained, independent and vocal member-nominated trustees firmly backed by trade union organisation. Schemes with such an independent presence on the trustee boards are likely not only to be well-run but also more accountable in terms of the decisions they make. That’s a lesson which all too often is only learned when it’s too late.


Written by Calvin

05/02/2010 at 4:49 pm

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