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Sainsbury tries something new to reduce deficit

UK - The J Sainsbury pension fund cut its deficit to just £55m (€80.3m) in its last financial year through a £240m cash injection and by revising the terms under which members take tax-free cash.

According to the company's results published earlier today for the year ending March 24 2007, the employer J Sainsbury made two cash injections to its pension fund in 2006 in a bid to plug the £431m pension deficit - one in March 2006 worth £110m but recognised in its 2005 figures, and a second in May worth £240m and accountable to the 2006 results.

Further changes have been introduced by the pension fund on the back of the Finance Act 2006 which saw the fund realise an extra £72m for the financial year.

More specifically, the defined benefit schemes introduced revised terms allowing members to surrender a greater portion of their pension as tax-free cash, and this in turn, along with "certain minor changes" allowed the fund to adjust its required funding assumptions to produce £72m in past service gains.

"The unfunded pension liability is unwound when each employee reaches retirement and take their pension from the Group payroll or is crystallised in the event of an employee leaving or retiring and choosing to take the provision as a one-off payment," state Sainsbury's results.

With the additional cash injections, revisions to the level of tax-free cash members will take as well as improved investment returns, the pension fund now has a deficit of just £55m under IAS19 accounting rules.

A spokeswoman for J Sainsbury said "a key part of the deficit closure was also because of favourable market movements".

Actuarial assumption updates mean retirement benefit obligations have reduced by £59m while alterations to financial assumptions have cut retirement benefit obligations by £108m and an additional actuarial gain of £89m.

Sainsbury is also assuming 80% of its members will take 25% tax-free cash, reducing the benefit obligations by a further £119m.

In order to raise the £350m cash injection, Sainsbury - which today announced profits of £380m - resisted moves elsewhere to sell its property portfolios and instead chose to set up a property securitisation and hold onto its £8.6bn property portfolio, as the company believes its property is an asset which will continue to gain value as its business gains in value.

Rival high street retailers Marks & Spencer and Tesco recently engaged in sale-and-leaseback arrangements on their previous property portfolios and used the funds to help plug their pension deficits.

The J Sainsbury defined benefit pension scheme is currently made up of two funded final salary schemes - the J Sainsbury Pension and Death Benefit Scheme (JSPDBS) and the J Sainsbury Executive Pension Scheme (JSEPS) - both of which closed to new members on January 31 2002.

Sainsbury was also recently the subject of a takeover bid by CVC, the private equity consortium, but its management rejected the offer because it did not believe the price offered reflected a fair price for the conditions attached.

High street chain AllianceBoots is now going through similar talks with private equity firm KKR and the pension fund is demanding at least £500m of the asking price be contributed to the pension fund's £1bn deficit.

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