John Lewis is conducting an extensive two-year review into its pension provision after revealing its final salary scheme deficit rose by almost 29% in 2012.
Can this great company maintain its final salary arrangement or does something need to give?
The threat to John Lewis’s scheme is financial. Quite simply, they face the choice of paying off their deficit within a reasonable “recovery period” or building new stores.
Put in union-speak “jobs or pensions?”.
John Lewis do not have a third way, they have no shareholder to whom dividends can be paid, they can only distribute profits to “partners” as bonuses, or through pension payments or through expanding and modernising the business.
If they do not expand and modernise, they risk their long-term capacity to pay bonuses and fund pensions. The choices are neither simple or easy; as I said – something has to give.
I was speaking with Jonathan Camfield a very perceptive actuary on Friday. His view was that the lasting pension legacy of Gordon Brown’s tenure as Chancellor was the announcement in his March 2003 budget of a move to guarantee pension rights which became enshrined in law in the Pension Act of 2004. The introduction of a Statutory Funding Requirement for pension schemes marked the point at which pensions stopped being an activity of mutual endeavour and became a corporate liability.
How John Lewis must wish that had never happened!
How Steve Webb must wish that he could return to a world where the pension contract between member and employer was one of mutual respect and understanding and not based upon statutory obligations!
The obligations that Gordon Brown visited on pensions are onerous enough to have collapsed defined benefit provision well beyond the declines illustrated in the chart above.
If the next European Pensions Directive is enacted then the numbers of private sector workers accruing defined benefits will approximate to zero as we discover just what “guarantees” mean in a pan-European insured sense.
The management of John Lewis clearly recognise the threat
The partnership admitted that funding the scheme was the largest single annual investment it made and that it had also pumped £125m into it in January.
The accounting charge for the pensions included within the operating profit was £138.1m up 11.4% (£14.1m) on last year and was due to the change in the financial assumptions and growth in scheme membership.
In all the deficit grew by 28.8% (£184.0m) to £822.1m due to the 19.6% (£621m) increase in liabilities to £3.796bn outstripping the growth in assets of 17.2% (£437m) to £2,973.9m. The asset increase included the £125m one-off cash contribution.
John Lewis estimated that under its last valuation the scheme would have ended the year with a surplus of approximately £280m, however the next valuation is due this month and it warned that the funding position was likely to weaken due to lower gilt yields.
“The pension is one of the most important benefits offered to Partners, but also accounts for the greatest single investment made each year by the Partnership.”
Unless we move as a nation to a new pensions contract which does away with statutory funding requirements and returns us to a system of mutual understanding over what can be paid and to who, the system of guaranteeing defined benefits will continue to decline.
When you take the mutuality out of pensions , you take good pensions out of mutuals. John Lewis’ brave stand for ongoing Defined Benefits for their staff looks threatened and there seems precious little that anyone is prepared to do about it.
- Yesterday these were tomorrow’s problems.. (henrytapper.com)
- Attempt to ease pressure on final salary pensions ‘too little, too late’ (telegraph.co.uk)
- Call out the instigators (henrytapper.com)
- The best pensions in the world (telegraph.co.uk)
- UK & World News: John Lewis reveals staff bonuses of 17% after surge in profits (VIDEO) (journallive.co.uk)
- John Lewis announces 17% staff bonus (bbc.co.uk)