The Co-operative Group Pension Scheme (Pace) surplus fell by £0.6bn over the past year, after asset values fell by £3.5bn amid market volatility, the group’s latest annual financial report has revealed.

The report showed that the overall net assets of the group decreased by £0.2bn from the start of 2022, with the main movements highlighted including a decrease in the pension surplus, although this was offset by an improvement in the group's cash position of £0.4bn.

The fall in the scheme surplus was primarily attributed to a "significant" fall in investment returns and asset values in 2022, amid a "backdrop of market uncertainty, rising inflation and interest rates".

However, the group noted that scheme liabilities also reduced "markedly" by £2.9bn following a significant increase in the discount rate, which is used to calculate the present value of the scheme obligations.

This was attributed to rising AA corporate bond yields, as the market reflected ongoing economic uncertainty, and was highlighted by the group as demonstration that the pension schemes are well hedged and able to withstand material changes in market conditions.

Indeed, despite the surplus reducing, the accounting funding level increased from 125 per cent to 129 per cent, as although the relative percentage fall in both assets and liabilities was comparable, the fall in asset values in absolute terms was higher than the fall in liabilities.

The group confirmed that the 5 April 2022 valuation for group section of the Pace defined benefit (DB) scheme is also currently being carried out, and is expected to be finalised in mid-2023.

More broadly, the group revealed that it has carried out a review of the provisions for the recovery of surplus in its pension schemes, which concluded that the group can recoup the benefits of the surplus via a right to refunds and this is reflected in the balance sheet position.

The group operates three funded DB pension schemes, Pace, the Somerfield Pension Scheme, and United Norwest Co-operatives Employees' Pension Fund. all of which are closed to future accrual.

The annual accounts also confirmed that while deficit contributions to Pace and Somerfield have now ceased, contributions are still required to the United scheme, and will continue at a rate of £16.9m in 2023, until the point at which the United scheme becomes fully funded.

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