Loss-making supermarket giant Tesco took a further step towards ending its defined benefit provision this week, as it began formal discussions to close to new members and future accrual.
The retailer’s move follows a challenging 12 months in which it made the headlines for overstating profits, culminating in a statutory pre-tax loss of £6.4bn for the year to the end of February.
Its intention to close the DB scheme was confirmed earlier this year, but the formal consultation was announced this week in conjunction with the company’s annual report and will run for a minimum of 90 days.
A Tesco spokesperson said: “We announced on January 8 our plans to consult colleagues on the closure of our company’s defined benefit pension scheme. We are now in the process of talking to all 300,000 colleagues about what the proposed scheme would mean and listening to colleague feedback.”
Charles Cowling, director at consultancy JLT Employee Benefits, said the closure was the inevitable outcome of the rising costs of continued DB accrual.
“Irrespective of the fact it’s going through a difficult time financially, if you’re providing staff with a generous DB scheme… in a business like retail with thin margins, that makes a huge difference,” said Cowling.
Trustees need to be asking themselves, what are they doing to monitor and protect themselves in the event the sponsor deteriorates quickly and hits choppy waters?
Matthew Harrison, Lincoln Pensions
Matthew Harrison, managing director at covenant specialist Lincoln Pensions, said Tesco’s financial situation provided a good opportunity for it to follow its peers out of DB.
“To an extent they have been opportunistic in using this downside trading environment to enable them to do this,” he said.
“But there’s also an argument they’ve followed their peers and wouldn’t be competitive if they continued to offer a DB benefit.”
However Pauline Foulkes, national officer at the Union of Shop, Distributive and Allied Workers, which represents affected staff, said it would push Tesco to explore ways to retain the DB scheme.
She said in a statement: “We will be seeking further details of the company’s proposals through a consultative group, including the business case and rationale for the proposed changes, what can be done to maintain a defined benefit pension scheme and for the defined contribution scheme Tesco is proposing to replace it with.”
Growing deficit
Tesco’s annual report released on Wednesday showed it had made a contribution to the scheme of £563m last year, plus an additional payment of £13m.
The group’s net pension deficit increased to £3.9bn, up from £2.6bn in 2014, 95 per cent of which represents the UK scheme’s obligation.
Tesco will pay additional annual contributions of £270m on an ongoing basis under a new recovery plan to tackle the deficit.
Harrison said employer covenants and deficits can deteriorate very quickly and he urged trustees to continually monitor business performance to ensure adequate downside risk protections are in place.
“Trustees need to be asking themselves, what are they doing to monitor and protect themselves in the event the sponsor deteriorates quickly and hits choppy waters?” said Harrison.
He said that during difficult periods trustees should undertake a more granular analysis of financial performance including projections from management and more regular meetings with the company.
“The information and dialogue you have with management is only as good as what you then do with it. It’s not usually appropriate just to have a conversation with the financial director, the information needs to be analysed and assessed,” he said.
Retail players hit the tunnel
Ahead of the closure, Tesco was one of just four FTSE 350 retail sector employers offering DB provision to new employees, according to a sector review by JLT Employee Benefits last month.
It said six employers, including Tesco, are responsible for pension liabilities valued in excess of 50 per cent of their market capitalisation.
Total disclosed pension liabilities across retail companies grew to £36.3bn in 2015, from £33.7bn in 2014.
Neil Latham, principal at consultancy Punter Southall, said the mounting risks for employers had killed any appetite for continuing to provide DB arrangements.
“It’s bound to be inevitable, unless we are more realistic about how we are going to fund a DB arrangement,” he said.
Latham added: “Collective DC would have worked 15 years ago but I don’t think it will fly – it’s too little too late.”
