Friday, 24 November 2017

    M&S scheme halves contributions after slashing deficit

    A 77% reduction in funding shortfall sees retailer’s pension fund bucks the trend

    Trustees at the £6.2bn Marks and Spencer defined benefit pension scheme will have watched the discount rate debate unfold with interest. However, if asked their opinion about the deficit problem gripping most UK DB schemes, they might well have answered ‘what deficit problem?’

    For at the end of November the Marks and Spencer group announced it has redrawn its funding plan to reflect a huge improvement in its funding deficit. At its most recent valuation, in March 2012, the scheme had a deficit of £290m – down from the £1.3bn recorded in March 2009. The company said that increased sponsor contributions agreed in 2009 (£60m a year until 2017/18) and “strong investment growth and sound risk management” were behind the improvement.

    You have to wonder whether that asset outperformance achieved over three years could be reversed in the next three

    The 120,000-member scheme is closed to new entrants and has just 14,000 active members.

    So what explains the apparently dramatic turnaround in the M&S scheme’s fortunes? According to the March 2012 annual report, £170m was shaved off the deficit by switching, as many schemes have taken advantage of, from using the Retail Prices Index to using the usually lower Consumer Prices Index for up-rating pensions. The funding plan agreed in 2009 means about £300m had been pumped into the scheme by March 2012. This leaves about £500m out of the £1bn reduction down to asset growth outperforming liabilities.

    Marks and Spencer’s speedy recovery will be timely ammunition for The Pensions Regulator

    John Ralfe, an independent pensions adviser and former head of corporate finance at Boots, applauded the extent of employer contributions that he described as “large even for a scheme with a sponsor the size of Marks and Spencer”.

    But Ralfe added that the 77% reduction in the deficit might not be the long-term solution it appears: “You have to wonder”, he said, “whether that asset outperformance achieved over three years could be reversed in the next three”.

    On the back of this success trustees have agreed that the company can more than halve its contributions to the schemes payable up to 2016/17, from £60m to £28m a year. Marks and Spencer’s speedy recovery will be timely ammunition for The Pensions Regulator which has been arguing that schemes have sufficient flexibility to manage their liabilities using the current mark-to-market method.

    most schemes are not so fortunate as to have a sponsoring employer with the muscle of Invensys or high street behemoth Marks and Spencer to fall back on

    A rise in Marks and Spencer’s share price at the announcement gave further evidence of the market’s perception of the importance of pension obligations on the health of UK companies. The share jump also relit rumours of a private equity takeover.

    The retailer’s announcement coincided with software firm Invensys’ £715m gift to its pension scheme, made possible by the £1.7bn sale of its rail business to Siemens.  However, most schemes are not so fortunate as to have a sponsoring employer with the muscle of Invensys or high street behemoth Marks and Spencer to fall back on.

    Indeed, Jonathon Land, who leads PwC’s pensions advisory business, noted a “growing divergence between strong and weak companies” in their ability to service their schemes.

    Writing in the latest edition of the accountancy’s Pensions Support Index, which measures the level of support provided to DB schemes by companies in the FTSE 350, Land said this trend was despite the stabalising of the level of support demanded by DB schemes and highlighted “the importance of assessing covenant when formulating a scheme’s financial management plan as the plan will look very different depending on whether the sponsor is strong or weak”.

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