UK - Marks & Spencer and J Sainsbury have announced agreements to help cut the deficit in defined benefit pension schemes through property partnerships. Elsewhere, BT has reported an increase in its pension deficit on an accounting basis.The retaiiler Marks & Spencer Group has agreed an £800m (€938m) funding deal with the trustees of its DB pension scheme over a period of eight years to help address a deficit of £1.3bn at the last triennial actuarial valuation at 31 March 2009.
The funding plan will consist of cash contributions of £35m from M&S for the first three years, rising to £60m a year until 2018, which is equivalent to a total of £376m. In addition approximately £124m will be contributed to the scheme through transfer of assets from existing US debt hedge contracts held by M&S.
Meanwhile the scheme trustees will be granted a further £300m stake in the property partnership established in 2007. The partnership was initially used by M&S to contribute the equivalent to £500m into the pension scheme, and in 2008 the company agreed to pre-fund £200m of its annual contributions to the DB fund by increasing the pension scheme's stake in the property partnership. (See earlier IPE article: M&S to 'pre-fund' scheme with more property)
The further extension of the scheme's stake will entitle the pension fund to a fixed annual distribution of around £36m for 15 years from 2017, and a capital sum in 2031 equal to either £350m or any funding deficit in the pension scheme, whichever is lower. These actions are expected to reduce the £1.3bn deficit by £800m, with the remaining £500m "expected to be met by investment returns on the pension scheme's existing assets".
Properties valued at £750m will be transferred to the partnership with the aim of providing the pension scheme with increased security and an annual income of £35m for 20 years. The properties will then be released back to Sainsbury in 2030 in return for a cash payment equal to any remaining deficit up to a cap of £600m.
The funding plan agreed with scheme trustees will see the merger of the J Sainsbury Pension and Death benefit Scheme and the J Sainsbury Executive Pension Scheme into a single scheme, while the annual deficit payments will increase by £11m to £49m for ten years.
J Sainsbury claimed the property partnership allows the company to make lower annual contributions to avoid locking in higher annual cash payments based on depressed March 2009 values. As the company claimed the deficit more than tripled from £443m in March 2006 to £1.23bn in 2009 because the valuation date coincided with a low point in asset values. And should the scheme reach a funding surplus the £35m annual income from the property deal will be used to satisfy Sainsbury's future service contributions.
Figures for the year to 31 March 2010 showed the discounted value of liabilities increased by £9.9bn as the discount rate more than halved, in real terms, to 1.83%. Because of the discount rate and inflation assumptions, BT admitted the pensions operating charge in 2010-11 is expected to be £100m higher than the previous year at £300m.
The latest triennial valuation of the scheme in December 2008 reported a £9bn deficit, and led to an agreement with trustees for a 17-year recovery plan. However BT noted that the Pensions Regulator is still reviewing the valuation and recovery plan. BT stated: "As matters stand it is uncertain as to whether TPR will take any further action. This uncertainty is out of our control." (See earlier IPE article: BT could face TPR intervention over £9bn deficit)
Since the funding valuation BT claimed asset values increased by £4.1bn at the end of March 2010, resulting in an estimated reduction in the deficit on a valuation basis to £7.5bn by the end of 2009. But despite this BT warned: "Declining investment returns, longer life expectancy and regulatory changes may result in the cost of funding BT's defined benefit pension scheme (BTPS) becoming a significant burden on our financial resources."
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