UK supermarket chain Tesco has slashed its pension deficit by almost £3bn (€3.5bn) over the course of 12 months on the back of improving corporate bond yields and its decision to update the discount rate model used for accounting purposes.
In its preliminary results for 2017-18 announced on Wednesday, Tesco said the pension deficit had fallen to £2.7bn, from £5.5bn at the same time last year.
The supermarket group’s chief financial officer Alan Stewart said the reduction stemmed from a combination of factors.
“45% is driven by the external factors, the mortality and the experience of the scheme; 55%… is due to the change in the discount rate methodology where we’re now looking at the bonds,” he told investors in October.
Rising yields on corporate bonds, which drive the discount rate used for accounting purposes, also proved beneficial, the company said.
Annual contributions to the pension deficit remained steady over the full-year period, but Tesco said they would increase by £15m to £285m from April this year. “This is a small increase on the previously agreed £270m, and is in line with our expectations,” Stewart told investors last year.
Stewart also noted that it was “worth pointing out that our scheme is very young compared to the majority of schemes. Only 18% of all members are currently drawing a pension.
“This means the liabilities are very long term, with over half of the benefits due to be paid in a period beyond 30 years from now.”
Dave Lewis, Tesco’s chief executive, welcomed the news, which saw the UK’s largest grocer report annual profits of more than £1bn for the first time in four years.
“We have further improved profitability, with group operating margin reaching 3% in the second half. We are generating significant levels of cash and net debt is down by almost £6bn over the last three years,” he said. “All of this puts us firmly on track to deliver our medium-term ambitions and create long-term value for every stakeholder in Tesco.”
Analysts were broadly positive on the results. Barclays Research estimated the pension deficit could drop to £2.1bn by 2021.
JPMorgan Cazenove said: “We turn buyers of Tesco shares for the first time in five years as its cash flow, top line and balance sheet have improved on a standalone basis. We see Tesco as the most visible turnaround in our food retail universe.”
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