Care or hubris? – How Tesco got in such a pensions mess.

every lidl helps

Every little helps?

The right old mess that Tesco has found itself in , is blamed partially on its mishandling of its pension strategy. How can an organisation with the motto “every little counts” have such a large pension deficit? Come to think of it, what is it doing offering to insure the longevity of an itinerant and anonymous workforce?

By “itinerant and anonymous” I mean workers whose jobs are rarely central to their lives. There are of course a hardcore of Tesco professionals, but those who work on the retail floor are as disposable as the superstores which yesterday’s announcement saw consigned to the bin.

The hallowed halls of the NAPF are portraited by the pension directors of the supermarkets, not just its current chair Ruston Smith (Tescos) but such luminaries as “one f Jef the ref” Pearson (Sainsburys) and  John Ralfe of Boots. Supermarkets have long been suckers for providing pension guarantees and bragging about it.

Those that have stayed clear of insuring their staff’s longevity – Lidl, Aldi and by and large Asda, are the current winners in the supermarket price-wars that have cruched Tesco over the past three years. Walmart’s intercession put a brake on Asda and the wily WM Morrison put a break on Safeway.

While Morrisons got the kudos for introducing a defined benefit scheme for staff in 2012, in practice it was only guaranteeing a lump sum (not a lifetime income) – a smart choice with pension freedoms on the other side of the hill. Morrisons also got the marketing of its scheme right by investing in financial education on the shopfloor.

A victim of its own spin

Of course the corporate argument for these DB schemes  has been spun around the corporate and social responsibility of our supermarket giants. Last century’s philanthropists like Jesse Boot and the Cohens (the co in Tesco) leave their mark in the name but there is a massive gap between practice and reality.

Terry Leahy may have been one of Tony Blair and Gordon Brown’s kitchen cabinet but the harsh reality of supermarket economics comes down to reducing the staff costs to customer footfall ratios, grinding suppliers into suicidal deals and bringing Britain’s transport system to its knees getting stuff around the county.

Then there are those “Finest*” multi-buys.


There are few who look to Tesco as an exemplum of progress. That is why we are all secretly smug at its £6bn write down.

The dead hand of corporatism

Wherever corporate complacency sets in, lazy decisions come home to roost. It is the constant disruption of the status quo that makes organisations like Google hum. I’m humming with content that this blog has just won a thumbs up from google for its mobility (thanks word press) but pissed that I’m going to have to redesign many of the frames of which are not mobile friendly enough.

Listening to google, I am listening to their customers, my customers of the future. I cannot stand in the way of change, I must bow to it and use it to make my business better. This is what Tesco have failed to do. That the pain isn’t being fealt even more by the shareholders is because the washing is being aired (albeit belatedly).

An Atrophied trade body

Smith-Ruston-Approved-2013-Thumbnail for for press page2

Chair – Ruston Smith of Tescos

CEO - Joanne Segars NAPF

CEO – Joanne Segars NAPF

When Joanne Segars of the NAPF began a recent talk “with auto-enrolment almost over..” the coin dropped. The pensions industry is about the past, it’s about Terry Leahy  and the vision of corporate Britain that prevailed in the 1990s. It has nothing to do with Google or Facebook or even little old Pension PlayPen.

But Tesco started out as a shop in East London, the employers still to stage auto-enrolment include the Googles and Facebooks of the 2020s.

The decision of Tesco to enroll its non-engaged workforce into a defined benefit plan when it staged auto-enrolment in 2012 now looks a monumental act of hubris, one that only three years on is having to be unwound.

The message is clear, the world has changed. We need change in pensions and that doesn’t mean relying on personal pensions to sort out the mess. Personal Pensions have not changed since they were introduced in 1987, they are themselves nearly 30 years old. They do not share pension risks any more than Tesco’s DB plan shares pension risk.

They are simply a receptacle into which employers can discard the risk they used to own, like rusty supermarket shelves are dumped into a skip.

Not just about today- it’s about tomorrow

We shouldn’t wring our hands and look backwards, we shouldn’t accept what we have today is right, we should be looking forward to the future, as Tesco’s successful competitors are doing finding new ways to satisfy customer needs.

We need to care about our customers, and in pension management that means about meeting the needs of our staff. We know what people want, all the surveys say the same thing, people want a regular income in retirement (and not the Lamborghini). Now let’s find a way to provide that, using the collective power of hundreds of thousands of workers, without mortgaging our equity with guarantees.

target pensions

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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11 Responses to Care or hubris? – How Tesco got in such a pensions mess.

  1. George Kirrin says:

    Henry, I’m not sure why you lump Leahy and Souter (not Soutter) together, although they have both been knighted.

    Souter’s Stagecoach seems to me (but what do I know?) to have grasped the social media age with its Megabus products (I use their app when visiting the USA, for example), and I’m sure Leahy’s Tesco has done so too. I get free wifi in my local Tesco, for example, and we can see the explosion in on-line shopping when we have to get out of the way of eager staff packing trolleys for delivery orders.

    Souter used to drive buses and work as a conductor, so he knew his business and his passengers’ experiences a lot better than many other CEOs and other boardroom inhabitants. I also thought Leahy kept “in touch” too, and was not responsible for corporate jets and supplier relations.

    Tesco seems to me to be about accounting and auditing (2014). I’m not sure what your parallel point is about Stagecoach, although they did have at least three profits warnings a while ago now (2002?).

    I would be interested in more analysis about both businesses’s investments, and while you’re at it, the investments made by their pension schemes. Tesco made great play not so long ago about taking investment management in-house to their Cheshire offices. How have they fared with the capital entrusted to them? Accounting liabilities tell only part of the picture, as we all (should) know.

  2. henry tapper says:

    It was more that they became darlings of the Blairites. Brian Souter got on the goat of a lot of people for some homophobic stuff he spouted in the 90s. His family trust now owns Mobius, a life co we use a lot – so I’ll forgive him!

    My point’s really about Tesco so , if you’re reading a later version of the blog- all this Souter/Stagecoch stuff will be airbrushed out – except for George’s (as usual) excellent contribution.

  3. Martin Buck says:

    Good points but does not bring to light other parties that bear responsibility for Tesco’s current pension deficit; actuaries and the market leading professional pension consultants. Trustees hire them for the advice, actuarial talents and recommendations. I believe it is a legal requirement to do so, but they bear no liability for the results of their guidance.

    Secondly, DB plans themselves are not to blame, but the assumptions on returns and growth projections utilised by actuaries. I never understood what true value an actuary delivers. And, yes, I have had several work for me in the past. Over rated and under dynamic analysts that are fiven way too much credibility.

    Finally, unions and executives. I wonder what would come to light if the 500 highest ranking Tesco executives pension benefits were brought to light. Secondly, renegotiate the accrual schedule to be more in line with actual market instrument oerformance over the last 30 years. That would put the actuary to a valuable use for a change. And the union representatives would have to recognise the materail facts, and not threaten to strike; as all too often we read about.

    I believe there is an great opportunity for a Trustee Pension board of Tesco to engsge with an Independent Pension Consultant that only represents the interests of the pension to fulfill it’s responsibilities as it’s corr function.

    • George Kirrin says:

      Martin, legal requirements also spell out that it is the trustees’ assumptions, not the actuaries’ assumptions.

      Your point about executive pensions is well made, but if these are funded then it is more of an issue for the shareholders and their representatives, the non-executive directors. The trustees are there to deliver the pension promises which have been made by the employers and using the capital which has been entrusted to them.

      I believe actuaries are good at estimating future liabilities. The Morris Review (which is now ten years ago, but its criticism is still valid today) right up front (paragraph 1.19 on page 14) “…. questions whether actuaries are necessarily best-placed to advise on asset allocation or fund manager selection.”

  4. henry tapper says:

    I can’t comment on the quality of the advice given to the trustees or the quality of the trustee decision making. My question is about how Tesco thought it sustainable to contract so many staff into a plan where they were responsible for such an open-ended benefit.

    I made this point in 2012 when they announced their strategy.

    As regards the actuary’s capacity to help with investment decisions, I would agree with George (and Morris) – they aren’t necessarily expert. But for many smaller schemes, the actuary is the most expert resource to hand and is the least worst bad option!

  5. Mark says:

    I wondered if Tesco’s auto-enrolment of hundreds of thousands of low-paid, itinerant staff into a DB scheme was actually something of a genius move. There are people on this board with far greater actuarial expertise than I, so they can tell me if the following is wrong – but this is how I see it.

    These auto-enrollees are low-paid and their contributions will be small. But there are a LOT of them. Even if you assume average salary of this population well below £20k, a 1% contribution on that multiplied by several hundred thousand staff = a total annual contribution in the tens of millions. And that’s before the NI tax relief. That’s gotta help (a bit) with that deficit, in the short term.

    And the long-term liability being created by those contributions will, in all probability, be manageable. These shelf-stackers and fish-counter staff won’t stay with Tesco for long. They’ll leave the company after a few years, and leave their pot in the scheme. After they leave, it gets uprated with CPI, not RPI. Over decades, it’ll dwindle. And the longer they leave it there the more of the investment return on it that Tesco gets to keep.

    And if they cash it out, don’t they get a transfer value that factors in the deficit in the scheme? I.e. they “take the pain” of their personal, individual (tiny) “share” of the deficit. Tesco doesn’t have to pay it, which it will for anyone who stays in the scheme. With Pot Follows Member now in the air and all this media buzz around taking ownership of your pot, it’s at least possible that more of Tesco’s younger, more mobile deferred DB members might cash out their pots, than would have done in a previous generation.

    So, overall, isn’t Tesco getting a large cash boost today, in exchange for creating a liability (for this AE population) that will likely reduce in value considerably in the coming decades? So in other words, all else being equal, Tesco ends up ahead on the deal?

    Tiny pots, small contributions, and (hopefully) a smaller liability. Every little helps, indeed.

    Does this seem crazy to anyone?

    • George Kirrin says:

      AE contributions to pay current pensions could be viewed as having elements of a Ponzi scheme to some.

      Whether the contributions (and the manner in which that entrusted capital is invested) are sufficient to pay AE pensions as they fall due (including AE pots transferring out) is another story. Your comment highlights the folly of looking at pensions as balance sheets rather than as cash flows.

      • Mark says:

        Ponzi scheme for sure … nevertheless that is the way that DB funds operate, is it not?

        I’m not saying it’s necessarily a morally correct or even sensible strategy … just that it may be the one they have pursued. But to recast the enquiry in cashflow terms … what they might be expected to end up with here is a (large) number of short-dated cash inflows expected to last for two, three, five years … and a similar number of decades-delayed cash outflows whose value will not keep pace with the most generous metric of inflation in the interim, and which may be further reduced by transfers-out according to the vagaries of actuarial prediction. From the perspective of an FD who might be handing on the reins in 10 years or less … cash today is a lot nicer than liabilities of indeterminate size decades hence.

  6. henry tapper says:

    Can’t agree with the Ponzi comment – DB schemes are properly regulated and members get proper protection – that is not a characteristic of a Ponzi though all collective pension arrangements depend on new entrants replacing old.

    It is a shame that Tesco’s noble ambition to offer everyone a DB plan was not sustainable but that is not the same as saying member’s accrued benefits are at risk- as far as I can see – they are not!

    • George Kirrin says:

      Henry, why should “all collective arrangements depend” on new for old? It may be accepted wisdom, but why can’t trustees invest smarter so that current pensioners are paid out of the investment income and, when necessary, planned sales of investments to pay their pensions as they fall due? This would leave new money to be invested to do the same for new members when they expect it.

      I’m not advocating separate pots for each member, because I see the potential
      economies of scale and pooling from collective investing, but I would hope inter-generational cross-subsidy was not required in practice, other than perhaps for reasons of short-term (later repaid with interest) liquidity.

  7. henry tapper says:

    George, I think this is what my colleague Derek Benstead is advocating. The investment income pays the pensions and there is as little buying and selling as possible.
    The system works through scale and pooling and the idea’s there’s statius with no need for one generation to cross subsidise another.

    It needs a bit of work setting up and I reckon- practically – it will get scale by becoming a way to spend your pot to begin with (using the assets built up in DC) but it could be extended to provide a whole of life pension in due course.

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