John Lewis deficit swells by £250m, steadfast on strategy

Low gilt yields and increasing longevity have been putting pressure on defined benefit schemes’ funding levels.

Combined with the end of contracting-out raising the costs associated with providing DB benefits, this has led to many employers –including supermarket giant Tesco – closing schemes to future accrual in an effort to control costs.

Retailer John Lewis’s most recent annual report, published last month, showed an IAS 19 deficit of £1,249.3m at the end of January this year, up from £1,003.4m in January 2014.

It attributed this to “market volatility in the financial assumptions as the real discount rate used to value the liabilities decreased substantially”.

But Martin Mannion, head of trustee services at John Lewis Pension Scheme, said no changes would be made to the investment strategy in light of the worsening deficit.

He said: “The investment strategy is set based on the agreed actuarial funding basis which is different [from the IAS 19 calculation]. There are no current plans to change that but it will be reviewed as part of the next actuarial valuation.”

John Lewis adopted a scheme combining DB and defined contribution elements last month for new joiners, which will come into effect for existing staff in April 2016.

It comprises two parts: a final salary DB section, which the member will not contribute to, accruing at 1/120ths of final salary, and a DC section, which the member will contribute to and will be matched up to 4.5 per cent of basic pay, with a further 3 per cent of basic pay from the employer.

If the equity market does well over the next few years they’ll be laughing all the way to the bank

Hugh Nolan, JLT Employee Benefits

The older DB scheme had an accrual rate of 1/60ths. Mannion said there were no plans to further change any aspect of the pension provision.

Hugh Nolan, chief actuary at consultancy JLT Employee Benefits, said John Lewis’s decision to alter the scheme was in many ways endorsed by the subsequent rise in the deficit.

Nolan added that some schemes were avoiding gilts and corporate bonds due to a common market perception they are overpriced, instead investing in equities and similar assets where they still see value.

“They’re gambling on better returns than they’d get from a matched position,” he said. “And the expectation is that they’ll be right. If the equity market does well over the next few years they’ll be laughing all the way to the bank.”

Keeping the door open

Few schemes have opted to continue offering some form of DB benefits to their members, as in the case of John Lewis.

It had agreed a 10-year recovery plan following an actuarial valuation in March 2013. The employer made a one-off contribution of £85m in January 2014, to be followed by annual deficit reduction contributions of £44.3m, increasing annually by 3 per cent.

However, in December 2014 the employer agreed to prepay contributions up to July 2021 with a payment of £294.1m because, Mannion said, “the partnership wished to provide some additional security to the scheme”.

John Reeve, senior consultant at Premier, said retaining some DB provision was rare, even where the benefit was scaled back.

“The bulk of people have looked at getting completely out of DB accrual where possible,” he said.

He added even closing the scheme would only slow increases in the liability, not stop them entirely.

“Possibly it gives you the opportunity to move back [into DB] in future,” he said.