In recent weeks a particular pensions dispute, murmurings of which first reached the pensions press a few months ago, has gathered quite a head of steam.

Boots, the pharmacy chain, is at the centre of what is becoming quite an acrimonious dispute surrounding allegations by its Union and pension scheme members, that Boots and the pension scheme trustees removed the right of scheme members to take an unreduced pension from age 60. It has been alleged that this happened as part of the pension scheme securing benefits with an insurer.

Background 

It was widely reported in the pensions press last December that Boots had successfully transacted what was viewed at that time as a momentus buy-in (£4.8billion) with Legal and General. The transaction was reported as securing the benefits of all 53,000 pensioners and deferred members of the scheme, in what was apparently the largest single transaction by premium size and the largest transaction in terms of the number of members involved. 

So far so good….. All parties were seemingly very pleased with the outcome.

Well, that is until earlier this year, when the pensions press reported that the relevant Union and Boots pension scheme members were up in arms about the loss of a discretionary benefit as a result.

Initiation of Boots Pension scheme’s IDRP process 

It appears that not long after the successful buy-in* was reported, the relevant trade union for Boots employees, the Pharmacists’ Defence Association (PDA), provided members with advice and template letters to lodge a stage one Internal Dispute Resolution Procedure (IDRP) complaint.

Briefly, IDRP is the process by which pension scheme members can complain to their pension scheme in order to resolve a grievance without having to go through more formal external complaint routes (such as the Pensions Ombudsman (TPO)). The IDRP can either be a one-stage or a two-stage process. If there is a two-stage process, then the first stage in the IDRP may be dealt with by someone other than a pension scheme trustee. 

The grounds of the Stage one complaint, according to PDA, was that the Boots pension scheme trustees' decision to secure the buy-in of the pensioner and deferred pension benefits with L&G as detailed above, included the removal of a member option to take a full (unreduced) pension from age 60. It was initially alleged by PDA that this was on the basis that the pension trustees believed this benefit was a discretionary benefit, not a member right and so no member entitlement to it.

The first stage of the IDRP was unsuccessful, following which it was reported that PDA had then issued template letters (prepared by their legal advisers) for scheme members to use in order to appeal the Stage one decision, i.e. to initiate Stage two of the IDRP.

The latest position 

The latest twist, according to press reports (and the PDA website) last week, is that the Boots pension scheme members, supported by the PDA, will be complaining to TPO after their complaint was not resolved to their satisfaction via Stage two of the IDRP. 

And, in yet another turn, PDA are now alleging that: (1) following the outcome of the Stage two complaint, “it has become clear that the PDA was correct, and the rules gave members the right to take an unreduced pension before age 60”; and (2) “the trustees and company changed the rules on the day the buyout was announced to scheme members and this change withdrew this right. This rule change as only just been disclosed within the Stage Two outcome letters members are beginning to receive”.

Whether this is accurate or not, will no doubt become clear in due course. However, we note that as part of a reply to a member’s query to the “This is Money” financial website via a column which is replied to by Steve Webb, Boots trustees were asked to respond to the following question which they did as follows:-

“1. Was the ability to take a full pension at 60 rather than 65 open to all members of the scheme, or was it subject to any threshold test (eg a minimum number of years' service)?

Answer: The option, from age 55, to apply to the trustee to grant an early retirement pension, which was not reduced for early payment between age 60 and 65, applied to most but not all members of the scheme.”

See this link for the full article and the other questions which Mr Webb asked of Boots as part of his reply to the complaining member.

Therefore, Boots’ reply to Mr Webb’s question, suggests that the unreduced early retirement pension option had to be applied for by the members(s). And, as such, would have to be agreed to by the trustees, which in turn suggests it was not a benefit entitlement and was indeed a discretionary benefit (i.e. a benefit the granting of which was solely at the discretion of the trustees).  

Comment

The area of discretionary benefits is often a thorny one and, as here, can often rear its head in the context of buy-ins when trustees have to decide which, if any, they will effectively “hardcode” into scheme benefits by securing the discretionary benefits with the chosen insurer.

It can also become particularly contentious where members are under the belief that they are “entitled” to a particular discretionary benefit (e.g. the granting of additional pension increases beyond the members’ legal entitlement), either because of previous member communications which has led to them forming that impression or because of “custom and practice” (i.e. previous practice has been to grant a particular discretionary benefit which, over the passage of time, has led to it effectively being codified as a scheme benefit).  

There is also established case law regarding an employer’s duty of good faith or its “imperial duty” (after a significant case in this area). For example, if an employer had a history of granting discretionary pension increases and then decided it was going to stop doing so. The question can often arise as to whether this was a breach of the employer’s duty of good faith. 

*There is some reference in the press reports on this matter referring to the pension scheme transaction being a “buy-out”. However, the initial press reports last year confirmed that the transaction was indeed a “buy-in”. There is a subtle but important difference between the two – in a buy-out, liability for payment of benefits is assumed by a third party (usually an insurer, in this case L&G) whereas in the case of a “buy-in”, the policy is effectively held as an investment of the scheme and the trustees remain ultimately responsible for the liabilities albeit the insurer takes over payment of them. It appears that this is perhaps a buy-in that is in the process of being converted to a buyout. 

If you would like to discuss any aspect of this article or the topic of discretionary benefits generally, please do not hesitate to contact your usual Burges Salmon pensions contact. We regularly advise on the issue of discretionary benefits, particularly in the context of buy-ins and buy-outs.