M&S faces £127m ‘sting in the tail’ charge following DB closure

Marks and Spencer’s (M&S) decision to close its defined benefit (DB) scheme to future accrual from April 2017 has resulted in a £127m charge.

In half-year results published on 8 November the retail giant said the change in status of members from active to deferred means they will see an annual increase in their pensionable salary.

Under the scheme rules, active members have accrual capped at 1% but deferred members have their benefits linked to the Consumer Price Index (CPI). As all DB members now become deferred, rather than active, the annual increase in their pensionable salary is linked to CPI, rather than being capped at 1%.

With interest rates so low, sterling weakened since the UK’s vote to leave the European Union (EU) and inflation expected rise in the coming years, closing a DB scheme to future accrual is more expensive.

AJ Bell senior analyst Tom Selby said there was a “sting in the tail” for M&S upon closing the scheme. “This just goes to show the huge costs associated with DB pensions, even when a company moves to ditch their responsibilities.”

First Actuarial senior consultant Derek Benstead added: “The increase in liability restores to members part of the value they lost when the cap on pensionable salary was introduced in the first place. Nevertheless members are likely to be worse off, and M&S better off, relative to the position before the pensionable salary cap was introduced.”

The surplus of the DB scheme shrunk on an IAS 19 basis from £824.1m at of 2 April 2016 basis to £571.2m as of 1 October 2016.

M&S explained this is due to the decrease in the discount rate from 3.4% to 2.3% which reflects the reduction in corporate bond yields and the changes to the scheme.

M&S first revealed its plans to close its DB scheme in May and confirmed it would act on the decision in September.

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