The biggest names in grocery are coming under pressure from increasingly burdensome pension obligations.
Pension liabilities at the supermarkets and their 12 biggest FTSE-listed suppliers have increased 13% since July 2010 to £63.5bn, according to research conducted by Pension Capital Strategies for The Grocer.
Tesco’s pension liabilities have increased by £1.5bn to £8bn since 2010 and Sainsbury’s liabilities have shot up by £1bn to £5.6bn over the same period. As a percentage of its market worth, Sainsbury’s pension liabilities are now 100%, which PCS MD Charles Cowling defined as the threshold above which companies were at a “material risk” from their pension schemes. Premier Foods has gone well beyond that point with liabilities of £3.4bn, more than 15 times its current market value.
The only two grocery businesses in 2010 with liabilities comparable to Premier Foods were Uniq and Northern Foods, which no longer exist as separate entities.
“As we’ve seen in the retail space in the last few months, companies with the biggest liabilities are held back by them and really struggle. They have to work twice as hard to achieve the same results as others,” said Cowling. Falling interest rates are to blame for rising pension liabilities. Interest rates on quality bonds are used as the basis for working out pension liabilities so today’s exceptionally low rates are bad news for pension schemes.
“Some really need interest rates to rise again,” said Cowling. However, so long as the Bank of England’s policy of quantitative easing continues, rates were unlikely to go up, he said.
If companies are to avoid running a deficit (where liabilities exceed pension assets) their pension assets will have to rise, and that can mean committing extra resources to prop up schemes.
Of the companies surveyed, only M&S is currently running a pension surplus. Tesco, Imperial tobacco, SAB Miller, Premier Foods, Reckitt Benckiser and Cranswick are all running deficits of more than 20%.