Marks & Spencer reduces pension deficit with property

Marks & Spencer (M&S) plans to reduce its £704m final salary pension deficit using income from a portion of the company’s property portfolio.

Through the property-backed partnership, it will contribute £500m to the scheme, and expects to meet the rest of the deficit with investment returns from the pension’s scheme’s assets.

The partnership will hold a number of M&S properties, predominantly high street stores, with a current market value of £1.1bn. These properties will be leased back to M&S and a fixed annual distribution to the pension scheme of £50m will be made from partnership profits over the next 15 years. The £500m interest will be held by the pension scheme as part of its total investment portfolio and accordingly, the deficit will be reduced by that amount. Control over the properties will remain with M&S, which includes flexibility to substitute alternative properties.

The retailer has implemented the plan in order to prevent closing the pension scheme to its 123,000 members which includes 26,000 current employees. The terms aim to spread funding of the deficit over a significant period of time, making it more manageable.

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Employees are also being consulted on a range of choices about how their pension builds up in the future. One option will require employees to make contributions which will rise to 7% over the next three years, a second option offers a slower benefits accrual rate and a third whereby only members’ future pay increases up to the rate of inflation (to a maximum of 5%) will count towards their final pension salary each year. 

The retailer has agreed the†terms to fund the deficit with its pension scheme trustee. At 30 September 2006,its accounting deficit stood at £1,031.7m.