Tesco warns employees will have to help plug £159m pension gap

Funding crisis: Tumbling equity prices force companies to boost pensions provision

Tesco revealed yesterday it had a £159m deficit in its staff pension scheme and that its employees will be expected to help it plug the funding gap with increased contributions.

An actuarial review of the retailer's scheme, which takes place every three years, found it had assets that matched only 91 per cent of its liabilities, a shortfall of £159m from being 100 per cent funded. In 1999, at the last valuation, Tesco's scheme was 96 per cent funded.

The company will make up more than two-thirds of the shortfall, and is expecting to pay between £15m and £20m in 2003 towards clearing the deficit, with further payments in subsequent years. The remainder will be made up from staff contributions. The 40,000 employees in its final salary pension scheme will have to fork out an extra 0.75 per cent from their pay packets to help bridge the funding shortfall.

A spokeswoman for Tesco said this was a "proactive and responsible approach" to funding its pension scheme that would make sure the company was able to meet its future pension obligations. Tesco has a relatively young pension scheme, in that it only has 10,000 former staff now drawing a pension from the fund.

Tesco's £159m deficit is much smaller than many of its other FTSE 100 counterparts, which are struggling to curtail the damage caused by falling stock markets on their assets. Analysts at Morgan Stanley speculated yesterday that the deficit at the insurer Royal & SunAlliance could be as high as £1bn. British Telecom recently revealed its scheme was likely to be £1.5bn short of its liabilities, although the gap could be as much as £2.6bn. It is injecting an extra £200m a year into the fund to clear the shortfall. Barclays said last week it would have a £1.3bn deficit if it reported under the FRS 17 accounting standard.

Tesco's scheme had between 60 and 65 per cent of its assets invested in equities at the start of 2002, which has contributed to the deficit. Many pension schemes are now actively selling down their equity portfolio to move into fixed-interest investments that better match their long-term liabilities.

The majority of Tesco's staff of 80,000 are in its Pension Builder scheme, which provides a defined benefit based on the average salary an employee earns throughout their career with the company, rather than their salary just before retirement. This scheme is not affected by yesterday's announcement.

The retailing giant, which is in the bidding to take over its smaller rival Safeway, said the additional pension costs had already been accounted for in its budget for 2003, and that making the move to start meeting its shortfall at such an early stage was in the best interests of both staff and shareholders. Shares in Tesco closed down 3.4 per cent at 163p yesterday.