Sainsbury’s has set up a £500mn loan facility to ensure its defined benefit scheme has enough liquidity to face collateral calls on its liability-driven investments.
The purpose of this facility, put in place on October 18 for three months, was to further enhance the Sainsbury’s Pension Scheme's “resilience in the event of unexpected substantial further rises in interest rates”, the retail company stated in its 2022 interim results, published on November 3.
The central bank announced an emergency £65bn bond-buying programme on October 10 following the so-called “mini” Budget on September 23, which saw falling government bond prices prompt a series of collateral calls from DB schemes that some feared would lead to a 'doom loop' that would crash the market.
Issues arose specifically around pension funds’ LDI strategies, designed to protect against falling interest rates. Most schemes had conducted stress tests for a scenario in which there was a 1 per cent rise in long-term gilt yields, but the 4 per cent rise exceeded the contingency plans of several, prompting the BoE’s intervention.
The scale and speed of the increase in interest rate expectations since the mini budget, and volatility within the markets, resulted in the group deciding to put in place a loan facility to the scheme of £500mn
Sainsbury's
There has been some dispute as to the true severity of the crisis. Several industry experts were quick to reject the suggestion that there could be a widespread collapse of pension funds, and the Pensions Regulator — which some felt should have been more proactive in addressing LDI and its role in the crisis — suggested that most schemes had “sensible waterfall measures in place” to face collateral calls.
Some schemes approached their sponsoring employers for advances on contributions, in order to preserve their hedging ratios and lock in these stronger funding levels. Pensions Expert is aware of at least one scheme that was approached by its own sponsor with a view to doing the same.
In the interim report, Sainsbury’s stated that “although a temporary intervention by the Bank of England and subsequent policy changes have stabilised the market, gilt yields remain significantly higher than they were prior to the mini budget”.
This has resulted in a significant decrease in the value of the group’s pension scheme assets, and also its liabilities, it said.
The retailer noted the scheme “adopts a collateral sufficiency framework which ensures sufficient high quality liquid assets are maintained in order to meet liquidity requirements, even in times of market stress”.
However, the “scale and speed of the increase in interest rate expectations since the mini budget, and volatility within the markets,” resulted in the group deciding to put in place a loan facility, it added.
Scheme moves to surplus
Sainsbury’s Pension Scheme had a surplus of £130mn as of September 30 2021, when its triennial actuarial valuation was concluded. This compares with a deficit of £538mn in 2018.
The scheme has two segregated sections — the Sainsbury's section and the Argos section. While the former had a surplus of £231mn, the later had a deficit of £101mn.
However, the sponsor has stopped contributions due to the scheme being fully funded. It paid £23mn into the scheme in the first half of 2022.
Nevertheless, the Argos section will continue to benefit from payments from an asset-backed contribution set up in July 2019.
Under this structure, properties with a value of £1.35bn were transferred into a property holding company, a wholly owned subsidiary of the retailer, and leased to other group entities.
The scheme holds an interest in the partnership and it is entitled to annual distributions up to 20 years, the interim report stated.
The pension fund will receive approximately £58mn a year until 2030, and subsequently approximately £28mn a year for the remaining period (increasing by 2 per cent a year).
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The distributions are made through three payment streams: one for the Sainsbury’s section, another to the Argos section, and a switching payment stream, paid to either section.
Since the Sainsbury’s section reached its funding target, the payment of £15mn a year was permanently switched off, while the switching stream — currently £24mn a year — moved to the Argos section from March 2022, after previously being paid to the Sainsbury’s section.
This payment will continue until 2038 or until both sections have reached their funding targets, if earlier, the retailer noted. The Argos section also continues to receive a payment of £20mn a year under its own payment stream.
