Sainsbury's closes deficit after strong asset returns

Negative real gilt yields have pushed many defined benefit schemes further into deficit. However, schemes with strong employers and a willingness to match their liabilities can still see improvements in their positions, according to consultants.

Sainsbury’s most recent annual report showed a post-tax pension deficit of £651m as of March 14 2015, down from £679m last year.

“The year-on-year reduction in the deficit was driven by outperformance of assets, partly offset by a fall in the real discount rate that increased the present value of funded obligations,” the company said in its preliminary results.

However, Shaun Southern, partner at consultancy LCP, said the employer’s contributions to the scheme also had a significant effect on the funding level.

Their strategy and contributions have helped them weather the storm better than most. Their liabilities have gone up, which you’d expect, but it’s been compensated

Alan Collins, Spence & Partners

The company’s 2013 annual report stated that it expected to contribute £86m to the scheme over the 2014 financial year.

But Southern said: “Things have got £28m better, they’ve essentially lost [£58m].”

Bond turnaround

The scheme was heavily invested in corporate bonds, with 36 per cent of plan assets invested last year. Southern said this would also have helped reduce the deficit.

Hugh Nolan, chief actuary at scheme services consultancy JLT Employee Benefits, said schemes that have seen their funding level hit by gilt yields may see their fortunes improving.

But he added: “Over the last year or two, gilts and corporate bonds have done quite well. I suspect equities will do better… I don’t think gilt yields can go much lower.”

Sainsbury’s agreed an eight-year recovery plan with the scheme after the results of its most recent triennial valuation were finalised in August 2013.

Under the plan, the company will pay annual contributions of £49m for each financial year to 2020. The plan will be reviewed every three years.

Sainsbury’s established a Scottish limited partnership – a type of asset-backed funding structure – in June 2010 with properties worth £256m. In March 2011 a further £501m of properties were transferred to the structure. Both transfers were carried out as part of a 30-year sale-and-leaseback arrangement.

The scheme will receive an annual payment from the partnership until 2030, when the properties will revert to Sainsbury’s in return for a payment equal to the remaining funding deficit of the scheme.

The retailer closed its DB scheme to future accrual from September 2013. The scheme made compensation payments of £17m during the last year to employees transitioning to the defined contribution scheme from the DB scheme.

Deficits prevail

Most UK DB schemes are currently in funding deficit. The Pension Protection Fund’s most recent 7800 Index, which charts the funding positions of all UK schemes eligible to join the lifeboat, showed that 4,849 schemes were in deficit as of February this year.

This is an improvement on the previous month, but still well above the 3,753 schemes in deficit in February 2014. Just 1,208 schemes were in surplus in February this year.

Alan Collins, director at consultancy Spence & Partners, said schemes that are improving their deficits in the current environment are typically using a combination of three factors: investment strategy, employer contributions and liability matching.

Commenting on Sainsbury’s, he said: “Their strategy and contributions have helped them weather the storm better than most.”

He added: “Their liabilities have gone up, which you’d expect, but it’s been compensated.”