Tesco agreed a pension deficit funding plan with its trustee for its defined benefit (DB) scheme.
The agreement comprised cash contributions of £270m per year.
The supermarket also consulted with employees on plans to close its DB pension scheme and replace this with a defined contribution (DC) scheme.
“There is no doubt about it that the current scheme is one of the best, if not the best, on the market, offering as it does to Tesco employees a guaranteed risk-free way of accumulating valuable pension provision for their later lives.
“Tesco is now clearly going through a difficult patch in terms of its business affairs and is looking to improve its profitability and reduce costs on a number of fronts.
“Should the scheme closure go ahead, existing entitlements to date will, of course, be preserved and it is hoped that Tesco being the good employer we know them to be will find it possible to provide an alternative scheme, albeit one of a DC nature and less generous than the present one, which will enable their employees to continue making adequate provision for their retirement in years to come.”
Malcolm Mclean, senior consultant at Barnett Waddingham
“Three years ago, Tesco would have been seen by most observers as a ‘gold-plated’ covenant with its DB pension obligations under control. Roll forward to this announcement and this perception has clearly shifted in the eyes of the City and, in all likelihood, the pension trustees.
“The Tesco situation acts as a cautionary tale that reiterates the fact that the employer covenant, i.e. its ability to support the pension scheme, is not static and can deteriorate relatively quickly.
“It highlights the importance of trustees ensuring, as they sail on calmer waters, that they monitor the employer covenant in appropriate depth and, ideally, put in place meaningful downside protection measures to ensure that their members’ interests are taken into account when their employer hits choppier waters.
“Although the pension deficit numbers in the Tesco situation are unusually large, the general theme is not an uncommon one for UK pension schemes. It provides a timely reminder that even in this phase of increasing consumer and business confidence, DB pension benefits are not necessarily secure.
“In the current economic climate, a scheme’s ongoing reliance on a robust employer covenant remains clear and is likely to persist. The focus of an increasing number of trustees is turning to how they can put measures in place today to protect their members’ position if the employer enters the perfect storm.”
Matthew Harrison, managing director at Lincoln Pensions
“I believe that the key issue around DB scheme closures is not pension deficits – Tesco’s deficit is large but manageable given the size of the business – but rather the ongoing cost of continued DB accrual for employees.
“The retail sector is very competitive with low margins. Tesco is one of the last major retailers to provide DB benefits to employees, which, inevitably, are more generous than competitors’ DC schemes.
“If this puts it at a competitive disadvantage, at a time when there is pressure on profits and less pressure on recruitment or retention, then inevitably Tesco has been forced to look at cheaper [DC] alternatives.
“DB provision in the private sector is well and truly on the way out. The cessation of contracting out next year [April 2016] is also a factor here. Organisations that are forced to revisit DB pension provision or to face increases in national insurance [NI] costs are inevitably following the herd and closing DB schemes to all employees. Active membership of private sector DB pension schemes now stands at little more than 1.5 million. At a stroke, Tesco will reduce the number of active employees in DB schemes by nearly 15%.
“Tax changes are also to blame here. Repeated changes to tax allowances for pensions, and threats of more to come, have increasingly made saving for a pension less tax efficient, and for many it no longer even makes sense to direct savings into a pension.
“This is going to be a disastrous year for DB provision in the private sector. Like Tesco, and following their example, very many employers will, very sadly, simply conclude that ongoing DB provision no longer makes commercial sense. I predict that ongoing DB provision in the private sector is going to be all but wiped out in the next 18 months. The pressure will then be on the next government to look at the continued generous provision of DB benefits in the public sector.”
Charles Cowling, director at JLT Employee Benefits