Sainsbury’s Pension Scheme has reduced its post-tax deficit by £262m in the past year, following exceptional employer contributions and an increase in the discount rate.
The discount rate is the investment return assumed when calculating present value of pension scheme assets, and changes to it can have profound effects on a fund’s finances. Last year food manufacturer Premier Foods attributed a more than £570m reduction in its deficit to a change in discount rates.
There’s a bit more focus on the importance of the discount rate. Even a minor tweak has improved the position for Sainsburys
Hugh Nolan, Spence & Partners
The £7.2bn Sainsbury’s scheme posted a post-tax deficit of £389m as at March 12 this year, according to its most recent results. This is an improvement from the £651m reported in March 2015.
The results said: “The reduction in the deficit was mainly driven by a contribution of £206m to the group’s pension scheme which included the first 50 per cent of a one-off £250m contribution, with the second 50 per cent to follow in 2016-17, and an increase in the discount rate, partly offset by lower fair value of plan assets.”
The discount rate was increased to 3.65 per cent from 3.5 per cent the year before. The rate is based on 21-year sterling corporate bond yields.
In July last year the company issued £500m in debt, comprised of perpetual subordinated capital securities and perpetual subordinated convertible bonds. This enabled the contribution of £125m to the scheme. A similar amount is due to be paid in the 2016-17 financial year.
The scheme’s recovery plan was agreed to address its deficit following a triennial valuation in March 2012.
The scheme is divided into three sections: final salary, career average and cash balance. It closed to new members in July 2002 and to future accrual in September 2013.
Cash contribution
Calum Cooper, partner at consultancy Hymans Robertson, said the most significant action in terms of improving the deficit had likely been the cash contribution.
“It sounds like the biggest thing they’ve done is pay a lot of cash and they’ve had some benefit [from the discount rate],” he said.
The discount rates used to calculate liabilities on an IAS 19 basis are closely linked to corporate credit, regardless of the scheme’s underlying investments.
“The discount rates for company accounts are pretty tightly prescribed,” Cooper said. “They require you to use an AA-rated corporate bond yield and therefore assume the return you’re getting is that.”
“It bears no relationship to whether you have more or less chance of paying your benefits,” he said, adding that the change in the discount rate was likely due to the widening of credit spreads since the start of the year. As a result, the sponsoring employer’s cost of borrowing would go up even as pension deficits decreased.
Discount rates
Hugh Nolan, director at consultancy Spence & Partners, said schemes and employers were increasingly mindful of the effect the discount rate could have on the calculation of scheme liabilities.
“It seems to me there’s a bit more focus on the importance of it,” he said. “Even a minor tweak has improved the position [for Sainsburys].”
However, he added that while the discount rate can be helpful in calculating liabilities, the liabilities themselves will not change.
“It doesn’t actually affect what the liability is, it will cost what it’s going to cost,” he said.
