Pensions Updateahb-ukpensionportal.co.uk/Uploads/Documents/00/00/00/13/... · 2015-05-05 · Boots...

Boots Pension Scheme

Pensions Update

Autumn 2014 SB4444_BOOTS_pension update_2014 v3.indd 1 15/10/2014 14:48

2


You will all be aware of the recent Walgreens announcement that it is seeking shareholder approval to acquire the remaining 55% equity stake in Alliance Boots. (It bought a 45% stake back in 2012.) The acquisition is expected to happen in the first quarter of 2015. The Trustees and its advisers are following developments closely. To date, we have received numerous reassurances from the management of Alliance Boots that there should be little change in our relationship and the organisation of the UK businesses that support the Scheme. We will continue working with all relevant parties to ensure the future security of the benefits members have built up in the Scheme.

Welcome from the ChairmanI am pleased to introduce the latest issue of our annual newsletter, bringing you up to date on Scheme developments over the year to 1 April 2014.The two main events for this edition are the completion of the latest formal valuation and the Walgreens announcement. We are pleased to see that the results of the valuation, which looked at the Scheme’s funding at 1 April 2013, in tandem with the update from the actuary giving the position a year later at 1 April 2014, show that overall the Scheme’s funding level has been improving. We are on course to clear the shortfall within our expected timescale. The summary funding statement starting on page 4 gives you more details.

Even with the Scheme in a relatively strong position, as Trustees we cannot afford to be complacent and we need to keep on top of changes, not just in the Scheme’s situation but in the pensions world at large (see panel on the right).

Inside, you can see the checklist of immediate activities we have lined up – followed by our major feature on the changes to UK pensions announced in the Budget back in March. While these latest measures could have a huge impact on how in future people receive their retirement income, there is a lot of work still to do on how the rules may affect members of schemes like ours. The feature begins on page 8.

We hope you find this issue informative and enjoyable – it includes the usual facts and figures about the accounts and investments, alongside the articles I have already outlined. Please remember to

keep in touch – we are always happy to receive feedback on the newsletter, and you should also contact us if you have any questions about the Scheme or you need to update your personal details (especially your Nomination form).

Richard Oppenheim, Chairman

SB4444_BOOTS_pension update_2014 v3.indd 2 15/10/2014 14:48

Scheme businessPart of our duty as Trustees – so that we can make plans for the Scheme’s future and take informed decisions about its funding and investment – is to develop ourselves in the role. We need to stay on top of pension and investment issues (and seek training if needed to plug any gaps in our knowledge) and keep track of how effectively we operate as a Board.

With this in mind, we now have a mission statement that describes our aims in two sentences. This is especially useful if we are trying to explain the role in a nutshell – especially in times when we are recruiting to the Board.

3 Walgreens As explained on page 2, we will continue to liaise closely with the Company regarding the progress of Walgreens’ plans to acquire the remaining 55% equity stake in Alliance Boots.

3 New factorsFollowing each valuation, we review the Scheme’s factors based on the Scheme’s financial position against current economic conditions. ‘Factors’ are the figures we use to convert regular payments or income into cash sums (or back). For example, if you give up pension to take cash at retirement, we work out the amount of pension you need to exchange using a ‘commutation factor’. Or if you transfer your pension out of the Scheme, factors are used to work out its transfer value – the amount payable to your new scheme.

3 AVC investment review Although our AVC arrangement is closed to future contributions, we regularly review the range of investment options that we offer to members who are still investing funds in this arrangement. Our aim is to offer a range of options that should cover most members’ needs and to make sure the most suitable options are available, taking into account the performance of current (or potential) fund providers, and the membership profile of the Scheme.

Our mission is:

For the lifetime of every Scheme member and beneficiary, to continue to pay the right level of pension, to the right person, at the right time

by

discharging our duties with due diligence, effectively and efficiently, in accordance with the Scheme’s Trust Deed and Rules, the law, legislation and in the best interests of members.

…and on the right is part of our current ‘to-do list’ of duties:

Pensions Update – Autumn 2014

3


4


Funding statementThis section is the regular update we give you on the Scheme’s financial position. We did not include one in the last edition because there is no requirement to issue a funding statement during a year when a full, formal valuation is in progress.

Valuations take place every three years, and the scale and difficulty of all the calculations involved are such that the Trustees, the Company and their respective advisers are given up to 15 months to complete them. (We receive more informal updates from the actuary in the years between valuations.)

During a valuation, the Trustees and Company agree a funding target for the Scheme, based on its liabilities (the benefits and costs it must pay) and allowing for a safety margin. The percentage of the target made up by the Scheme’s assets is the ‘funding level’. If it is more than 100%, the Scheme has ‘surplus’ funding – if it is less, there is a shortfall.

The latest valuation – looking at the Scheme’s position on 1 April 2013 – is now complete, and this statement shows the results alongside the figures from the latest update at 1 April 2014.

1 April 2013 valuation

Assets £5,373 million

Funding target £5,687 million

Shortfall (£314 million)

Funding level 94%

1 April 2014 update

Assets £5,253 million

Funding target £5,327 million

Shortfall (£74 million)

Funding level 99%

100%0% 100%0%


5


Action planFollowing a valuation, the actuary recommends any change needed to the contributions going into the Scheme to restore it, if necessary, to full funding. After the 2013 valuation, the Trustees and Company agreed a course of action to deal with the shortfall. The Company agreed to pay a series of additional contributions, as shown below:

• 2013/14: £19.4 million

• 2014/15: £53.4 million

• 2015/16: £53.4 million

• 2016/17: £53.4 million

• 2017/18: £10.5 million

• 2018/19: £19.5 million

These payments, along with projected income from investment returns, were expected to make up the shortfall by 2020. We are encouraged by the improvement in the funding level in recent years – if the situation continues along the same lines, we would not expect there to be a shortfall at that time.

As you can see, the Scheme’s position has continued to improve and, at 1 April 2014, the Scheme had nearly reached full funding. The latest increases have been largely due to a change in financial and investment conditions.

Whatever happens, the Trustees and the Company will agree any change required to the level of contributions following the next full valuation of the Scheme, at 1 April 2016. If necessary, the Trustees and Company will again agree a course of action to deal with a shortfall.

‘Solvency’ positionThe figures shown so far are based on the assumption that the Scheme will continue into the future, in its current form (the ‘ongoing’ situation). We must also include the ‘solvency’ position in the statement, which shows the position if the Scheme were to wind up – that is, if it closes completely and transfers all the assets to an insurance company to pay benefits. (We are legally required to show this – it does not mean the Company has any plans to end the Scheme.)

The ‘solvency’ position is lower because the insurance company would charge to take the Scheme on, and then invest in very secure funds with lower returns – these differences make the liabilities, and as a result the funding target, higher.

At the 1 April 2013 valuation, the solvency funding target was £8,133 million, giving a solvency funding level of 66%. By 1 April 2014, the target had fallen to £7,324 million, giving an improved solvency funding level of 72%.

Finally, we must confirm that since the last statement:

• The Scheme has not made any payments to the Company; and

• The Pensions Regulator has not had to intervene in our running of the Scheme.


6

Facts and figuresIn the accounts

Member profile

This table shows the changes to the Scheme’s membership over the year to 31 March 2014.

At 31 March

2014 2013

Pensioners (who are currently receiving Scheme benefits), including husbands, wives and dependants

27,453 27,204

Preserved pensioners (who have benefits left in the Scheme to draw at a later date)

35,718 36,659

Deferred pensioners (who are over normal retirement age but yet to draw their benefits)

192 189

Total 63,363 64,052

Highlights from the 2013/14 Report and Accounts

The overall value of the Scheme’s assets at the start of the year (1 April 2013) was …

During the year to 31 March 2014, the Company contributed...

The Scheme’s investments generated an income of…

The change in value of the Scheme’s investments (minus its administration costs) came to...

The Scheme paid out benefits worth...

So, overall, the value of the Scheme’s assets at 31 March 2014 was...

£5,392.2m + £19.4m + £153.4m - £137.0m - £157.2m = £5,270.8m


7


InvestmentsDuring September 2013, the Trustees appointed Wellington Investment Company to manage a global bond portfolio for the Scheme. An initial investment of £300m was made with Wellington with the view to help diversify the Scheme’s overall bond exposure which has predominantly been sterling based. The monies were sourced from available cash held by the Scheme. We continue to balance the Scheme’s assets towards those which change value in line with the expected rise and fall in its liabilities – in other words, the amount the Scheme expects to pay out in benefits and costs.

As there are no members contributing to the Scheme and building up further benefits, our approach reflects the greater need to protect the assets already held by the Scheme, rather than grow them further. Our current aim is to keep close to 85% of the Scheme’s assets in these ‘protection’ investments, with the remaining 15% in ‘growth’ investments, like equities (company shares), which aim for relatively high returns over long periods, but can also fall sharply in value in the

short term. The aim is for these growth funds to provide enough income (on top of the Company’s contributions) to help achieve and maintain an appropriate level of funding, without exposing the Scheme’s overall assets to too much risk.

Another way of managing risk is to ‘diversify’ – that is, choose different types of investment, fund managers or global regions – so that if any one fund has a period of poor performance it need not affect the total assets too greatly. For example, we have diversified our growth investments between company shares and property, as the two markets tend to ‘behave’ somewhat independently and one falling in value does not necessarily influence the other.

At 31 March 2014, the asset spread was, in fact, in line with the target split:

• Bonds, cash and swaps – 80%

• Pensions Funding Partnerships – 5%

• Equities – 10%

• Property – 5%

The growth funds also gave positive returns over the year to 31 March 2014, each performing ahead of their target returns with the exception of Property. The Active Bond portfolio performed in line with the target (the Credit Screened Bonds and Swaps portfolios keep ongoing track of the Scheme’s liabilities, so do not have performance targets in the same way.)

Fund 12 month performance

(%)

12 month target

(%)

Active Bonds 2.6 2.6

UK Equities 9.0 8.8

Overseas Equities

7.7 7.6

Overseas Equities (Currency Hedged)

17.9 17.8

Property 10.7 12.7


8


In the news: 2014 BudgetWhile the Government has been steadily introducing reforms to the UK pension system for some years now, the Chancellor announced some of the most significant changes yet in the March Budget. (Some of these measures were then confirmed or updated in July.)

We are currently working through the new rules – which mostly take effect from April 2015 and will apply in the main to individuals whose pensions have not yet started – to understand the full impact of the changes and what they might mean for the Scheme. Their main aim is to allow more flexibility for how people receive their retirement benefits, although most of the new measures apply to those with ‘defined contribution’ savings.

Defined contribution and defined benefitOur Scheme is a ‘defined benefit’ arrangement, where your pension is linked to your service and salary. In a defined contribution scheme, the employee builds up a retirement account (with contributions from the company as well as any they pay themselves), deciding how to invest it during the course of their membership. Then they use the money they have built up in the account to buy their benefits.

Small pensionsThe small pensions rule (or, in official terms, ‘trivial commutation’) was already in place before the Budget. Scheme members with small amounts of benefit below a certain limit – perhaps they were only at the relevant employer for a short time, for example – can take it all as cash rather than receive a pension. This applies to members of both defined benefit and defined contribution arrangements.

The Budget announcement increased the small pension limits – meaning more people will have this option open to them:

• For single schemes, you can take your benefits as cash if their value is no more than £10,000 (previously, this limit was £2,000).

• If you have benefits due from several schemes, you can take the total amount as cash if their overall value is no more than £30,000 (increased from £18,000).

Defined contribution optionsPreviously, defined contribution savers had to use at least part of their account towards an income. This normally means an annuity – that is, a regular income bought with a cash sum upfront (so pensions are a type of annuity). Some schemes also offered ‘drawdown’ arrangements, where the member can start receiving


9


income from their retirement savings, while continuing to invest whatever is left. The member could normally take up to 25% of their account as tax-free cash.

The new measures:• Allow defined contribution members to take up to their

entire benefit as cash, whether or not they are above the ‘small pension’ limit. The first 25% would still be tax-free, with the member’s highest tax rate applying to the rest.

• Relax the restrictions on drawdown immediately, before removing them altogether.

There are two forms of drawdown:

1. Flexible drawdown, where the member can take whatever income they like from their pot, as long as they leave enough to provide a certain income in retirement. This minimum income has gone down from £20,000 to £12,000, and will not apply at all from next April.

2. Capped drawdown, where the member could choose to receive income of up to 120% of an equivalent annuity. This limit is now 150%, again before it disappears completely next April.

It is worth knowing about the new options for defined contribution members for two key reasons:

• It is likely that the same options will apply to any AVCs you might have (which build up in an account in the same way).

• You could transfer your benefits out of the Scheme into a defined contribution arrangement to take advantage of the new options. However, the Government recognises that moving from a defined benefit scheme – where your pension is more rigidly fixed, but predictable as a result – to a defined contribution scheme would only be appropriate in certain situations. Accordingly, people will only be allowed to do this if they have taken independent financial advice first.

To find a fully qualified adviser in your area, try the Unbiased website portal, www.unbiased.co.uk.

Retirement ageIn past issues, we have reported how the Government is steadily increasing State pension ages over the coming decades to reflect longer life expectancies.

Latest plans include raising the minimum retirement age for taking any pension benefits from workplace pension arrangements like the Scheme to track the State pension age increase. So when State pension age reaches 67 in 2028, the minimum retirement age for workplace pensions would also increase to 57. (There is no immediate impact on members but, if the change takes effect as proposed, it would affect everyone born on or after 6 March 1971.) The minimum retirement age would then go up in line with increases in the State pension age at a 10-year interval. We will report back on any further developments.


10


Who’s whoOur role as Trustees is to run the Scheme in line with its own rules and current pension law, while safeguarding the interests of our members. It is a responsible and demanding role that calls for a certain calibre of individual and, with the kind of senior business expertise and understanding of pensions issues that we bring to the Trustee Board, you can be confident that your benefits are in good hands. To supplement our knowledge and ensure the Scheme benefits from the best possible guidance, we also appoint professional advisors to provide advice and carry out certain tasks on our behalf.

We also work in sub-committees, mostly made up of a combination of Trustees and other specialist colleagues, which focus on individual aspects of running the Scheme and then report back to the rest of the Board.

This allows us to draw on the skills and experience of colleagues not otherwise involved in the Scheme, and take informed decisions as efficiently as possible.

Since our last issue, Ken Murphy has left the Board. We would like to thank Ken for his service to the Scheme, and welcome his successor, Dave Vallance (below).


11


Trustees Committees Principal advisors

Company-nominatedRichard Oppenheim (Chairman)Patrick DunneDavid FosterMark Muller Dave Vallance

InvestmentRichard Oppenheim (Chairman)Aidan Clare (Group Treasurer)Mark MullerDavid Thompson

ActuaryRobert Mellor (of Aon Hewitt Ltd)

SolicitorsSacker & Partners LLP

AuditorsKPMG LLP

Member-nominatedAngela FarrellSimon HallidayIan HawtinDavid Thompson

Ill HealthDavid Foster (Chairman)Mike Bradbury (Pensions Technical Manager)Ian HawtinDr John Marsden (Chief Medical Officer)

Financial advisorsEY

Investment advisors and managersLegal & General Investment Management (bonds and equities)Schroder Investment Management Ltd (property)Wellington (bonds)Savills (agricultural property)

AuditDavid Thompson (Chairman)Angela FarrellDavid FosterValuationRichard Oppenheim (Chairman)David Thompson

All the Committees are supported by the Scheme Secretary.


12


Staying in touchPlease contact us if you have any questions (about your benefits, or anything featured in this issue) or would like to see copies of any official Scheme documents. You should also get in touch if any of your personal details have changed, or you need to complete a new Nomination Form.

Helpline: 0115 959 1670 (internal) 721670E-mail: [email protected]

Write to: Alliance Boots Pensions, Nottingham, NG90 7GP

Hold the dateWe hope you will be able to join us at this year’s AGM – here are the details:

Date: 13 November 2014

Time: 5.15pm

Place: [Theatre Suite, D80]

Into 2015...February/March April September October November

Expected acquisition of Alliance Boots by Walgreens

Pension increase

Annual funding update

Pensions Update 2015

Next AGM

SB44

44


Pensions Updateahb-ukpensionportal.co.uk/Uploads/Documents/00/00/00/13/... · 2015-05-05 · Boots...

Documents

Transcript of Pensions Updateahb-ukpensionportal.co.uk/Uploads/Documents/00/00/00/13/... · 2015-05-05 · Boots...