What does it take to deliver a £4.8 billion record-breaking pension scheme buyout?
Cardano acted as the lead broker and lead strategic advisor on this landmark transaction by the Boots Pension Scheme
In November 2023, the Boots Pension Scheme completed a £4.8 billion full pension scheme buyout with Legal & General. This is the largest ever single buy-in or buyout transaction by both premium size and number of members.
Behind the headlines this transaction offered a timely improvement in security for members by committing £670 million of capital from the Company to secure members’ benefits with an insurer. It also supported the Corporate Sponsor to significantly de-risk their balance sheet. A remarkable outcome for the Trustees and Company considering that as recently as 2019 the buyout funding deficit stood at around £4 billion.
Below we share details on the background to the transaction, the journey that was taken and the outcomes delivered.
A pension scheme that led the market in de-risking over 20 years ago
The Boots Pension Scheme has a long-standing reputation for innovation. In 2001, they took the bold decision to move 100% into high-quality long dated bonds. In the process they sold £1 billion of equites. At the time pension schemes in the UK collectively had 75% of their assets invested in equities and it took a pioneer like Boots to take that first step towards the DB investment landscape we recognise today.
Fast forward 20 years and Cardano was introduced to Walgreens Boots Alliance to help de-risk their pension scheme.
The initial mandate was to explore a range of de-risking structures from both insurers and other alternative providers which could deliver security for members, affordability, and a robust and flexible structure.
The improvement in funding levels experienced by many pension schemes during 2023 increased the number of de-risking options available for Boots. However, this positive development was set against a higher inflationary environment and a slowdown in the UK economy towards the end of the year. Being able to translate corporate and trustee priorities to an actionable outcome-focused strategy at pace played a vital role in the success of the ultimate buyout transaction.
Amongst the challenges to address on the journey ahead was the £1.2 billion of illiquid assets that the pension scheme was invested in, representing around 25% of the portfolio.
A pension scheme that led the market in de-risking over 20 years ago
The Boots Pension Scheme has a long-standing reputation for innovation. In 2001, they took the bold decision to move 100% into high-quality long dated bonds. In the process they sold £1 billion of equites. At the time pension schemes in the UK collectively had 75% of their assets invested in equities and it took a pioneer like Boots to take that first step towards the DB investment landscape we recognise today.
Fast forward 20 years and Cardano was introduced to Walgreens Boots Alliance to help de-risk their pension scheme.
The initial mandate was to explore a range of de-risking structures from both insurers and other alternative providers which could deliver security for members, affordability, and a robust and flexible structure.
The improvement in funding levels experienced by many pension schemes during 2023 increased the number of de-risking options available for Boots. However, this positive development was set against a higher inflationary environment and a slowdown in the UK economy towards the end of the year. Being able to translate corporate and trustee priorities to an actionable outcome-focused strategy at pace played a vital role in the success of the ultimate buyout transaction.
Amongst the challenges to address on the journey ahead was the £1.2 billion of illiquid assets that the pension scheme was invested in, representing around 25% of the portfolio.
A journey that considered a wider suite of strategic solutions
Alongside the alternative solutions that were considered in late 2022 and early 2023 we kept our options open to pursuing an insurer buy-in. Competitive tension through the process delivered increasingly compelling pricing from insurers who were also willing to lean in to find a solution for the Scheme’s illiquid asset portfolio. So, the decision was taken to pivot our focus towards a bulk annuity policy, expected to cover a meaningful portion of the liabilities.
But importantly the full market exploration delivered meaningful benefits:
It helped clarify what was important to the Trustee and the Company
It also meant that when an insurer buy-in became plan A, there was a full understanding as to why and that supported conviction in the latter stages of the process. Something vital for a transaction of this size
We maintained optionality throughout, which maximised flexibility and our negotiating position
A journey that considered a wider suite of strategic solutions
Alongside the alternative solutions that were considered in late 2022 and early 2023 we kept our options open to pursuing an insurer buy-in. Competitive tension through the process delivered increasingly compelling pricing from insurers who were also willing to lean in to find a solution for the Scheme’s illiquid asset portfolio. So, the decision was taken to pivot our focus towards a bulk annuity policy, expected to cover a meaningful portion of the liabilities.
But importantly the full market exploration delivered meaningful benefits:
It helped clarify what was important to the Trustee and the Company
It also meant that when an insurer buy-in became plan A, there was a full understanding as to why and that supported conviction in the latter stages of the process. Something vital for a transaction of this size
We maintained optionality throughout, which maximised flexibility and our negotiating position
We built impressive momentum across various workstreams, which meant that in Summer 2023 a full pension scheme buyout came into sharp focus. An outcome that was seen as particularly attractive to the Trustees. There was a desire to complete the transaction before the end of the year.
Source: Cardano (2024), trend shows 18-year spot real gilt yields
Key objectives:
Security
To enhance the benefits of the pensioner and deferred members
Pricing
Deliver stretch insurer pricing to make the transaction affordable
Illiquids
A truly optimised outcome for the illiquid assets
Pace
To move at the pace more akin to an M&A transaction than a traditionalbuyout
Buyout transition
To think outside the boxabout the speed that the ultimate buyout and wind-up of the pension scheme could be achieved
An outcome that delivered on the objectives and drove innovation in the market
Working in collaboration with the Company, Trustees and the wider advisor group, the transaction was completed in late November with the following key highlights.
An outcome that delivered on the objectives and drove innovation in the market
Working in collaboration with the Company, Trustees and the wider advisor group, the transaction was completed in late November with the following key highlights.
Dramatically reduce pension risk and reliance on the corporate sponsor
1
Member entitlements fully secured with a leading household insurer in Legal & General
2
Significant parent company guarantee simplified and reduced, plus two large asset-backed contribution (ABC) structures in the process of being unwound
3
Negotiated unprecedented insurer support for an accelerated path from buy-in transaction to buyout and wind-up of the pension scheme
4
Near-term sponsor cash requirements protected through a pioneering multi-tranche deferred premium facility
Capture the attractive pricing window
5
Thorough market testing through a highly competitive multi-round quote process
6
"The best pricing in the market in 2023" according to the insurers involved
7
Outcome-focused ethos meant an impressive pace throughout, including just five weeks from exclusivity to transaction (unheard of for a trade of this size and complexity)
8
Strict confidentiality maintained across advisors, insurers, reinsurers, asset brokers and beyond
Deliver a highly optimised illiquid asset solution
9
A tactical execution of an innovative, multi-layered exit strategy was developed and implemented
10
Optimised solution ultimately delivered across (a) in-specie insurer transfer, (b) broker-led sales, (c) redemption and (d) an innovative insurer-led sale mechanism via the Scheme
Ultimately the process led to safeguarding the benefits of 53,000 members and achieving strategic objectives long sought by all stakeholders.
Cardano has enabled us to deliver a transformational outcome for the Boots Pension Scheme and our business through an integrated approach to strategy and a deep understanding of both corporate and pension scheme priorities.
The outcome focused process thoroughly tested the risk transfer, expanding the art of the possible on pricing, structuring and asset strategy. They helped turn an intractable challenge into an excellent result.
Walgreens Boots Alliance
Cardano only provides services to professional clients, and nothing within this article shall be construed as investment, tax or legal advice.
Cardano is the lead transaction advisor to record £4.8bn full buy-in with Boots Pension Scheme
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Cardano is the lead transaction advisor to record £4.8bn full buy-in with Boots Pension Scheme
Posted in category:
News
Reading time: 2 minutes
Today Walgreens Boots Alliance and the Trustee of the Boots Pension Scheme announced a buy-in with Legal & General. This is the largest single transaction ever undertaken in the UK. Cardano acted as the lead broker to the transaction and lead strategic advisor to Walgreens Boots Alliance.
Cardano sponsored Professional Pension’s Key Themes 2024 session. Watch the session on demand as Adolfo Aponte and Jon Loach share top tips for schemes looking to navigate an increasingly busy market.
Cardano, the investment management and advisory business, reveals in a new report – New world, new decisions – that a majority (70%) of Chief Financial Officers (CFOs) are uncertain about the ultimate objective of their Defined Benefit (DB) pension schemes.
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