M&S closes gap in its pension scheme with £400m injection

Marks & Spencer yesterday said it would plug a hole in its pension scheme by selling £400m of bonds.

The retailer has had to take the action after a £585m shortfall was discovered between the pension fund's assets and its liabilities. At present, the scheme is only 82 per cent funded, but after the £400m injection the scheme's assets will only be 6 per cent short of liabilities.

"By taking this action, we are providing reassurance to the scheme members," Alison Reed, the finance director, said. "This is an opportune time to raise the funds, taking into account current interest rates and demand in the corporate bond markets."

M&S closed its defined benefit scheme to new members of staff in April last year and an actuarial valuation of the scheme has been going on for the past few months. A number of companies with similar deficit problems, including Sainsbury and BAE Systems, have asked their staff to increase their own contributions to help share the burden of increased costs. Jardine Lloyd Thomson, the insurance broker, recently pledged £500m to its pension fund, but staff contribution levels look likely to be affected. M&S, however, said the £400m injection should be enough to safeguard its pension promises without having to ask employees to chip in.

Shares in Marks & Spencer rose 6p to 299p as the City welcomed M&S's decisive action to tackle its pension problem in a cost-effective manner. Many pension schemes have been struggling to combat the effects of longer life expectancy and increased costs on the funding of their schemes, which outweigh stock market improvements.

Under new accounting rules, known as FRS 17, which require the company to value its assets and liabilities of its pension fund every year, M&S still has a deficit in its pension scheme of about £1bn. "This is a non-cash item - it is just an accounting item and is not a deficit that needs to be plugged. The real deficit that needs action is the £585m, which we are now addressing with the bond issue," a spokesman for Marks & Spencer said.

Adopting the new accounting standard will actually benefit the company, cutting pension costs by £30m a year after taxation.

HSBC and Morgan Stanley have been appointed to manage the bond sale. M&S is likely to incur an interest charge of about £14m on the bonds.

In a separate move, the company declined to comment on news that it had tried to poach a key executive from Next to run its clothing division. Next confirmed that its product director Christos Angelides had been approached by M&S, but had turned down the prospect of such a move. Analysts are keen to see a heavyweight figure take on the position at M&S, whose clothing division has been struggling.