Closing a defined benefit scheme to future accrual is no longer considered a controversial move in the private sector.
In many cases it is absolutely the wisest thing to do in order to ensure the health of the sponsoring company and to secure the benefits of existing pensioners in the scheme.
But when that company is a giant such as Tesco – one of few private sector DB schemes still open to new members, and a generous one at that – it’s a big deal. And the proposed closure is one aspect pointing to serious issues on the company’s balance sheet.
Some way before the wheels came off for Tesco during its annus horribilis, in which it emerged it had overstated profits, former boss Sir Terry Leahy was adamant it would not close the scheme.
Illustration by Ben Jennings
But after announcing in January its intention to explore closure, the retailer chose to tie the start of the formal consultation to the news of its £6.4bn loss last week, which would certainly give weight to the argument that the scheme is a threat to the sponsor.
Every little helps, and it should give Tesco some amount of leverage in its subsequent discussions with unions.
But also, scheme members generally aren’t privy to the wider backdrop of moribund DB pension provision in the UK. And that’s where tagging the consultation to Tesco’s record losses was a canny move – any reduction in pension benefits will make more sense in this context and it should serve to dampen slightly any backlash.
Undoubtedly unions will be looking to negotiate a favourable deal as members are shunted towards defined contribution, with terms that in some way compensate for the reduced security of DC but also reflect the generosity of the current DB plan.
It will be interesting to see how the shifting sands of the DC world are factored into those discussions. How will workers and their representatives judge the ability of DC to provide a retirement income for life in a post-flex context?
There is increasing focus on how DC schemes are structured, something explored in our feature this week. Assessing the merits of any DC offering for Tesco staff could prove that little bit trickier given providers are in the midst of an innovation cycle.
Maxine Kelly is acting editor at Pensions Expert. You can follow her on Twitter @MaxineEK and the team @pensions_expert.
