Supermarket giant Tesco has increased its annual pension contributions to its defined benefit scheme by £15m a year following its latest triennial valuation, which revealed its deficit has increased by £250m.

Its full year results, published 4 October, found on an actuarial basis that the deficit stands at £3bn, an increase of £250m on its last triennial valuation. Assets stood at £13.1bn and these assets represented 81 per cent of the benefits that have accrued to members, after allowing for expected increases in pensions in payment. As a result of the valuation, Tesco’s contributions will increase from £270m to £285m from April 2018.

However, measured on an IAS 19 basis, puts its pension deficit in better light; the deficit has reduced from £5.5bn in February 2017 to £2.4bn at the end of the half-year. It said this is due to an update of the discount rate used to calculate the figure.

“In the group’s view, it now more appropriately reflects expected yields on corporate bonds over the life of the scheme’s liabilities. The application of latest industry life expectancy tables and favourable actual scheme experience have also contributed to the reduction,” the report said.

Tesco has several pension schemes, covering both funded and unfunded DB schemes and funded defined contribution schemes. The most significant of these are the funded DB schemes for the group’s employees in the UK (now closed to future accrual) and the Republic of Ireland, and the funded DC pension scheme for employees in the UK.

Of these schemes, the UK DB deficit represents 96 per cent of the group deficit (25 February 2017: 98 per cent, 27 August 2016: 96 per cent). The principal plan within the group is the Tesco PLC Pension Scheme, which is a funded DB pension scheme in the UK, the assets of which are held as a segregated fund and administered by the trustee. The scheme is closed to new members and future accrual.

The expenses of the scheme for the period were £16m (25 February 2017: £22m, 27 August 2016: £13m).

Commenting on the results, Hargreaves Lansdown senior analyst Laith Khalaf said: “The pension continues to be a thorn in the side for Tesco, though an additional £15m of annual contributions is not as bad as it might have been. The company’s pension valuation has fallen at an inauspicious time, with low bond yields exacerbating the deficit. If the Bank of England follows through on its recent rhetoric and starts to raise interest rates, Tesco’s pension black hole could collapse, but Tesco won’t see any cash benefit for the next three years.

“Indeed, largely as a result of some whizzy changes to its financial assumptions, Tesco has seen a £3.1bn improvement in its statutory pension deficit in the last six months, yet again this yields no cash benefit to the company. C’est la vie in the madcap world of valuing future pension liabilities.”

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