Supermarket giant Tesco has halved its overall defined benefit (DB) deficit after adapting its discount rate calculations to better reflect trends in long-dated corporate bond yields.
As of 24 February, the company - which sponsors both a British and an Irish DB scheme - recorded an aggregate IAS 19 accounting deficit of £2.7bn net of deferred tax, just over 50% lower than the previous year when it was £5.5bn.
For the company's UK pension scheme - the Tesco Pension Scheme - there was similar movement, with its IAS 19 deficit falling from £6.6bn to £3.3bn over the period. While assets grew by just £40m over the year to £13.2bn, liabilities were slashed by £3.3bn to £16.5bn.
This resulted in an 80% funding level, or a 13.3 percentage point improvement since last year.
Around £1.3bn of the improvement - or £2bn at the time of the transition - was due to a change in the method for calculating the discount rate, allowing it to improve from 2.5% to 2.9%, after adopting a new process for extrapolating market rates for long-dated corporate bond yields. The new model extrapolates these based on the trend observable in corporate bond yields, while the previous model drew on movement in the gilt yield curve.
The scheme, which represents 96% of Tesco's overall DB deficit, also downgraded its inflation expectations from 3.2% to 3.1, as well as the rate of increase in pensions in payment and longevity expectations.
A triennial valuation for the scheme, dated 31 March 2017, was also completed over the year, giving an actuarial deficit of £3bn, and assets totalling £13.1bn. The company said this resulted in an 81% funding level.
Following the valuation, the company agreed to boost its deficit recovery contributions over the next 10 years from £270m to £285m starting this month, as well as granting an additional £75m in secured assets. It also agreed to cover any Pension Protection Fund levy costs in excess of £75m if required.
Announcing the change to the model last October, chief financial officer Alan Stewart said the scheme's young member cohort meant it was important to recognise long-dated assets.
"Given the understandable interest that always surrounds our pension position, it's 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," he said. "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.
"We've a long-term plan to manage the funding of these liabilities, and a balanced mix of assets to reflect this. Our intention remains to get to a level of self-funding within the scheme over the longer term."
Hargreaves Lansdown senior analyst Laith Khalaf said the company was "enjoying a renaissance".
"The pension deficit has halved on the company's balance sheet, though this won't yield any cash benefit to Tesco right now, as the company has just been through its triennial pension scheme valuation and increased contributions kick in this month," he said. "However, this is a trend we can expect to see more broadly as rising interest rates deflate pension deficits across the market."
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