Wednesday, 19 October 2011

An offer Boots’ pensioners can refuse

An offer Boots’ pensioners can refuse

Not many companies try to solve their pension problems by cutting workers’ retirement incomes. Well not blatantly, anyway. But step forward Boots the chemist.

Alliance Boots, as the health and beauty company is now called, was bought by private-equity group KKR for £11bn in 2007. That may explain why the company that used to be known for its squeaky-clean image and girls in white coats is now being more so ruthless.
The trick is to offer pension-fund members an immediate increase in their pensions of nearly 25 per cent. But the price for that is to forfeit future inflationary increases.
Most actuaries would have difficulty working out whether that was a good deal, nevermind Boots’ former staff. But here’s a clue: only 60 per cent of the saving from losing the increase is used to boost the basic income. Then other 40 per cent will be used to offset the fund’s £602m deficit.
So unless you expect to die imminently, have no spouse to inherit your pension, or want to live a life of luxury now and poverty later, you’d end up a loser by swapping the increases for the higher income. At 5 per cent inflation, the rising pension would overtake the enhanced static payments within five years.
But people notoriously under-estimate their longevity. And even without an understanding of discounted cash flow techniques, they place more value on immediate cash than future promises. So many will be tempted to take the money now and ignore the future.
Boots would not have made the offer to more than 25,000 pension members if it did not expect a decent take-up. The pensions regulator does not like this sort of swap but is powerless to stop it. The trustees ought to make their view known. It’s time for them to do their duty and show their independence – even if they are employed by the company.

"We are calling upon all SIPTU Members who have retired from Boots to reject this "offer" and to retain their current pension benefits" stated Martin O'Rourke.

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