UK - Northern Foods has confirmed it is at an "advanced stage" of developing a liability-driven investment (LDI) strategy for its £784m (£987m) defined benefit (DB) scheme, although it hinted a buyout had not been completely ruled out.

In its full year results for the year ending March 29 2008, Northern Foods - the makers of Goodfella's pizza and Fox biscuits - revealed the pension fund had moved from a deficit of £8.7m at April 1 2007 to a surplus of £61.6m before tax.

Northern Foods admitted while the assets of the scheme had reduced in value during the year following the falls in global equity markets - as they are invested 68% in equities - the credit crunch has increased corporate bond yields which has reduced liabilities by "several tens of millions of pounds", albeit this was offset by a switch from a short to medium cohort projection of pensioner mortality.

However, Jez Maiden, chief financial officer, revealed despite this the scheme was now in surplus following a special deficit funding programme which has seen the company contribute £115m to the scheme since 2004, with the final £22m contribution paid in June 2007.

Maiden pointed out because Northern Foods has a "significant pension asset and liability in relation to the company size" it wants to make sure it will not suddenly end up with a deficit requiring large contributions, and so is in the "advanced stages" of developing an LDI strategy with trustees.

He told analysts the firm is "setting out to run a company not a pension scheme" and highlighted the "focus of the work over the last 12 months" has been trying to "manage that risk [volatility] away" using an LDI approach to bring its assets in line with its liabilities and to diversify the assets away from primarily equities.

However, when questioned whether the scheme would consider buying out the scheme, Maiden said: "I think for the size of the scheme we have that would still be a relatively expensive move, but it's something we certainly always keep under review".  

More specifically, Northern Foods claimed the key is to minimise future deficit contributions, and to recognise "future service accrual needs to remain affordable to both the company and scheme members".

That said, the firm also reported a net pension financing credit - which it reports separately within financing rather than operations - of £15.7m, up from 12.5m in 2006/07, which it said reflected the "additional cash injected into the pension scheme and improved bond rates".

However, in his results presentation Maiden said while the net pension financing credit had contributed to a free cashflow of £39m in 2007/08, he admitted one of the "challenges" facing the firm in the year ahead was a reduction in the pension financing credit, alongside currency fluctuations - particularly in the Irish market with the Euro - and  a seasonal trading bias.

He predicted the figure would fall an estimated £6.5m to approximately £9.2m, which was attributed to "year-end market factors" such as the "reduced market value of equities and higher bond yields".

In addition, the firm highlighted the current company contribution to the scheme - 9.9% of payroll - fell from £13.4m to £6.8m in 2007/08, and confirmed this is "not expected to change in 2008/09".

However, Northern Foods admitted the "future cost of delivering benefits beyond the current year is currently under review in light of current benefit costs and the scheme investment strategy".

The trustee of the principal UK DB scheme is currently undertaking the triennial valuation of the fund, as of March 31 2008, and Maiden confirmed the company would issue a further update on the pensions situation "towards the year end".

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