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Morrisons agrees deal to clear DB deficit

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  • Morrisons agrees deal to clear DB deficit

UK - Supermarket chain Morrisons has confirmed it has agreed a package of measures with the trustees of its two defined benefit (DB) schemes which will eliminate the remaining deficit within the next month.

The firm's preliminary results revealed the supermarket chain contributed an extra £148m (€193.2m) over the past year, which reduced the deficit of the schemes, one of which is the former Safeway pension scheme, from £416m in 2005/06 to just £68m.

Richard Pennycook, group finance director, highlighted in his presentation while the two schemes "have been closed to new members for a while" they still represent "very significant balance sheet components" as the total liabilities are valued at approximately £2bn, which are matched mainly by equities and bonds.

He pointed out two years ago, the two schemes were in deficit by £416m and had, at 77%, "too high a level of exposure to equities" and also relied on mortality assumptions that were under review by the UK actuarial profession.

To combat this, Pennycook said Morrisons has "spent the past year in discussions with our pension trustees about a range of measures designed to strengthen the schemes, reduce their volatility, lower future costs, and eliminate the deficit".
 
He added: "I am pleased to confirm that these discussions have been successful. We have agreed a much more prudent funding strategy for the schemes, based on 54% equities, and a contribution of £200m from the group to eliminate the deficit."

In the interests of tax efficiency, Pennycook revealed the first £100m installment - £75m into the Safeway scheme and £25m into the Morrisons scheme - had been paid before the end of 2007, while the second installment will be paid "this month", adding once it has been completed the remaining £68m deficit will be "eliminated".

He also emphasised Morrisons will have cleared its pension deficit despite using stronger mortality assumptions which have added an extra £130m to pension liabilities.

"Our new mortality assumptions, in line with those recommended last month by the Pensions Regulator (TPR), have added 3.6 years to assumptions that were regarded as prudent two years ago.  For now, this will put us in the top 5% of FTSE companies for prudence - but I am sure others will be making significant moves in the year ahead," added Pennycook.

The decision to use stronger mortality assumptions follows a consultation by TPR last month to introduce a mortality funding 'trigger' based on long cohort projections, which the industry has criticised for the possibility it could increase pension liabilities by up to £75bn. (See earlier IPE stories: TPR to introduce mortality funding 'trigger'; Mortality trigger could increase liabilities by £75bn)

Elsewhere, insurance company Prudential revealed in its 2007 figures the last valuation of its largest defined benefit scheme, the £4.7bn Prudential Staff Pension Scheme (PSPS), was only 94% funded with a deficit of £243m.

However, since the valuation at April 5 2005, the group has been contributing between £70-75m a year as part of a 10-year plan, and in 2007 the total annual contributions made by Prudential amounted to £82m.

The Prudential group currently operates four defined benefit schemes, three of which are in the UK - including the PSPS and the smaller Scottish Amicable scheme - and the next triennial valuation is expected to take place at the beginning of April 2008.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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