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Pension Funds

Tesco’s pension deficit falls 56% in six-month period; company agrees to higher contributions

Tesco PLC, Cheshunt, England, saw its defined benefit plan deficit fall 56.4% in the six months ended Aug. 26 to £2.4 billion ($3.1 billion), and agreed to increase its pension contributions.

The deficit has fallen 59.3% compared with figures as of Aug. 27, 2016.

The retailer said in its interim results Wednesday that its triennial pension review had also concluded, with the deficit as of March 31 standing at £3 billion. The sponsoring employer has agreed with pension fund trustees that it will increase annual contributions to £285 million from £270 million.

The discount rate used to calculate the deficit was updated following actuarial advice, said the interim results statement. "In (Tesco'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 favorable actual scheme experience have also contributed to the reduction." The discount rate used was 2.8% as of Aug. 26, compared with 2.5% as of Feb. 25, when the deficit was £5.5 billion; and 2.1% on Aug. 27, 2016.

The statement said the impact of the change in discount rate model was a £2 billion gain "on change of financial assumptions. This has been offset by market movements" of a £196 million loss in the six-month period ended Aug. 26, said the statement.

The retailer operates a number of defined benefit and defined contribution plans, with the most significant of these in the U.K. whose deficit represents 96% of the total deficit. As of Feb. 25, the U.K. deficit accounted for 98% of the total. The principal fund is the Tesco PLC Pension Scheme, London, which had £13.1 billion in assets as of March 31. The plan is frozen.

The interim results statement said following the latest triennial actuarial assessment of the fund, carried out by Willis Towers Watson, and upon finding the actuarial deficit at March 31 was £3 billion, the increase in contributions was agreed. "In the event that the Pension Protection Fund levy for the scheme exceeds £75 million over three years, the group has agreed to pay this excess amount to the scheme over the following three years."

The PPF is the lifeboat fund for the DB funds of insolvent companies.