Mothercare pension scheme deficit reduces to £60m

Mothercare has revealed that its overall defined benefit (DB) pension scheme deficit had been reduced to £60m by 30 June this year, as the company also confirmed that it has agreed to reduce deficit recovery contributions (DRCs) in its latest full year financial results report.

The company's last full actuarial valuation on 31 March 2020 showed a DB deficit of £124.6m, resulting from total assets of £383.7m and total liabilities of £508.3m.

Based on current available valuation projections, total assets were at £330m and total liabilities were £390m — resulting in the £60m deficit.

In order to support Mothercare's new debt financing arrangements, the company has reached a formal agreement with the trustee board for a further reduction in DRCs.

The revised recovery plan now sets out aggregate contributions of £29m in the financial years March 2023 to March 2027.

This represents a £30m reduction in the aggregate cash payments that were to have been made to the pension schemes in that period under the previous arrangement.

The scheme also had a temporary surplus at the financial year of £12.4m, compared to a £25.6m deficit in 2021. Mothercare said this was due to corporate bond yield increases.

"Over the year changes in the financial market conditions resulted in the discount rate increasing by 85 basis points and long-term inflation expectations increasing by 35 basis points," said the report.

"The combination of these resulted in a reduction in the liabilities by £36m, with the increase in inflation partially offsetting the increase in the discount rate. An allowance was also made for the potential impact of the Covid-19 pandemic on future improvements, which resulted in a fall in life expectancies, reducing liabilities by £6m.

"The returns on the scheme assets were however lower than expected, resulting in an asset experience loss of £7m and the company contributions over the year exceeded the income statement charge by £3m."

Back in April, Mothercare has notified its DB pension trustees it will not be able to pay the first instalment of DRCs in full due to reduced cash generation following the suspension of its Russian business.

However, Mothercare chairman, Clive Whiley, said that the company has now turned a corner.

"The year under review was bookended by the Covid-19 pandemic and the Ukraine conflict, however, despite the persistence of these difficult global challenges, we have begun to demonstrate the potential of Mothercare as an asset light global franchising business," he noted in the report.

"This represents an inflection point for the business, with the combined benefits of more normalised circumstances and the updated financing arrangements greatly enhancing our financial flexibility.

"Accordingly, whilst mindful of the global inflationary environment and its impact on both consumers and the business we remain positive on the long-term prospects for the Mothercare brand."

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