FTSE 100 fund manager Legal & General is taking control of the £4.8 billion pension plan covering past and present employees of Boots in a landmark deal announced today.
It secures the benefits for 53,000 retirees and deferred members and will make it easier for the high street chemist chain’s US owner, Walgreens, to sell the firm, which will now be free of a major financial obligation to members.
L&G said the agreement was the biggest of its kind in the UK. Boots will pay around £670 million as the liabilities are transferred, according to a separate statement it issued.
The development was being seen in the City as both the latest sign that current market conditions for such transactions are in a sweet spot and that a long-expected sale of Boots could now be easier.
Independent pensions consultant John Ralfe – a former head of corporate finance at Boots – said the transfer would help remove a “stumbling block” to Walgreens’ sale of the chain.
He pointed out that the funding position of retirement schemes in general has been “transformed … because interest rates have gone up and that means liabilities have gone down”, making it “a good time to offload legacy pensions, which could be “an albatross around the neck” of companies.”
L&G said pension transfer business was worth £13.4 billion to it so far, in a “record year”.
Its CEO of "Retirement Institutional" business, Andrew Kail, said: "We are continuing to see an unprecedented acceleration in demand in this sector, driven by more pension schemes being closer to buyout than ever before."
And there was a second pension buy-in deal today, with Rothesay, the pension insurance firm, completing a buy-in over the £4 billion scheme run by the Co-operative. It covers 50,000 members – 17,655 pensioners and dependants as well as 31,896 deferred members.
Sammy Cooper-Smith, head of business development at Rothesay, said: “Economic conditions continue to contribute to a very busy bulk annuity market, resulting in a number of exciting opportunities as more schemes than ever pursue insurance solutions.”
The trend for so-called bulk annuity deals is an important one for the City, not least as a source of dealmaking at a time when mergers and acquisitions have been quiet and the pipeline of firms seeking to float on the stock exchange has too.
Ralfe – who played a major role in moving Boots’ pension scheme into bonds and has advised the Work and Pensions Select Committee in Parliament – pointed out that some of the UK’s biggest corporate names have already offloaded liabilities.
He said the run of transactions comes as many of the others have been preparing similar deals for some time, waiting for the right conditions.
“They’ve been able to do it more quickly than they expected,” he added, which means "a lot of the companies that still have a continuing pension problem are quite small. By and large, they’re not the FTSE 100.”
Nonetheless, the UK’s top tier stock index still has a big name with an eye-catching liability: BT.
The former state monopoly and fixed-line telecoms firm has a market value of just over £12.2 billion. And its pension liabilities are thought to amount to £40 billion.
The City’s fund managers and pension funds have long been on watch for any sign that BT will look to offload its retirement scheme, which has also been seen as a disincentive for any potential suitor for the company.
“However you look at it, this is a relatively small company in terms of the size of its pension scheme it is supporting,” Ralfe pointed out.
In terms of UK companies with big legacy retirement schemes, “British Telecom is the daddy of them all,” he said.
