UK - Mercer Investment Consulting has identified what it terms a "red herring" in Marks & Spencer's issue of new bonds to cover pension payments.

"There is a potential tax benefit to companies and thus to their shareholders, from prefunding a pension fund, as the fund can earn a gross investment return," Mercer said. "However, there does not appear to be any tax benefit from linking the funding of the pension fund with the issue of a new bond. So this aspect of the transaction may be something of a red herring."

The comments follow the retailer's issue of 400 million pounds (607 million euros) of 10-year bonds in March to fund extra pension fund contributions.

Pensions top the list of retail tycoon Philip Green's questions for the company's management as part of his proposed takeover bid.

Mercer questioned rating agencies' treatment of the bond issue as neutral in terms of credit rating. "Without going into great detail, we are doubtful that the opinion of the ratings agencies - that such transactions are 'essentially' neutral in credit terms - can be applied generally, especially in situations where pension deficits are very large in relation to existing outstanding debt or in relation to the size of the enterprise."

And it said that the expectation that the proceeds of the bond issue would be invested in fixed income in the pension fund is "not necessarily the case and that funds could easily be invested in equities.

"if the proceeds are invested in equities instead of bonds, then there is potentially an accounting gain under FRS17 arising from the possibility that the company could use an 'expected' return on assets for the pension's charge in the P&L that exceeds the actual cost of the debt raised."