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Is Tesco right to change its pension scheme?

Tesco employees shouldn't protest too much about proposed changes to their pension plan – they're sitting on defined-benefit gold dust.


by Michelle McGagh on Mar 16, 2012 at 11:33

Is Tesco right to change its pension scheme?

Tesco (TSCO.L) can’t catch a break at the moment. Last month it was caught up in the government’s unpaid workfare – or should that be work(un)fair – scheme, and now its paid workers are planning a protest over changes to the supermarket giant’s pension scheme.

Britain’s largest private-sector company is making some significant changes to its defined-benefit (DB) scheme, including increasing the retirement age to 67 from 65 and aligning the scheme with the consumer price index (CPI) instead of the retail price index (RPI).

For those 172,000 actively working members of the scheme – there are 293,000 members in total – it means they won’t accrue full benefits until age 67, although they will still be able to retire at 65. But most galling for the workers is the shift to CPI for future benefits, which will cut pension payouts by up to 20%.

Being told you are having your pension cut 20% when Tesco racked up record profits last year of £3.8 billion is bound to sting, and that was despite a pretty poor showing from UK sales (most of the company’s increased profits came from Asia).

Despite a profit warning at the beginning of the year following a poor festive season it’s still set to make a profit ‘at the lower end of the forecasts’ this year.

Employees will no doubt point to the billions of pounds of profits and executive remuneration packages in their argument against the changes, but there is one very important fact they should consider before they grab their placards: Tesco is still operating a DB pension.

It is just one of three FTSE 100 companies that operates a DB scheme that is still open to new members – most DB schemes have been ditched in favour of substantially less generous defined contribution schemes that take pension risk away from the employer and put it on the individual.

The pension offered by Tesco will continue to be generous. It will increase in line with CPI up to a maximum of 5% inflation – double the legal minimum of 2.5%.

Tesco workers have to appreciate that, like the rest of us, they are living longer and will need to retire later: this is not Tesco’s doing, it is a fact of life – and the increase in pension age Tesco is implementing is in line with the government’s increases.

Having to work longer to receive less pension will never seem fair, but Tesco employees should count their blessings. They are still members of one of the last remaining DB schemes. I’m sure the employees of Shell (RDSb.L) – which closed its DB scheme at the beginning of the year – wish they had been offered such a deal.

Maybe Tesco employees shouldn’t jump the gun and remember that Every Little Helps when it comes to saving for retirement.

14 comments so far. Why not have your say?

Alasdair Lawrance

Mar 16, 2012 at 14:59

It's typical of people like Michelle McGagh (who she? - Ed) to patronise pension scheme contributors, and they somehow seem to think it's OK to defraud them and breach the contract with them, unilaterally. And we don't "need" to retire later - it's a policy choice made by this borderline 'tea party' conservative government. Without a decent pension, unattainable by a private pension provider, how is care in old age to be financed? Think ahead, please, Michelle, before you commit your right wing ramblings to print. Ever seen the cat lady in 'The Simpsons'? Don't take her as a role model.

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Mar 16, 2012 at 19:09

Alasdair - defraud? No - people cannot expect something for nothing, and if Tesco are saddled with excessive costs then they will shrink against the opposition and the some staff will lose jobs The staff should look at their employment contract more closely before any one can claim fraud

When many of the present employees joined they would not have expected to retire for so long. The world is changing and only a fool refuses to change with it. It is remarkable that Tesco have not closed their scheme and frozen benefits.

As someone with a personal pension which has seen the pension projections more than half over the last 15 years, why should I have to pay higher food prices out of my much reduced pension so that others are subsidised against longer lifespan?

This all about people refusing to bear their share of the costs of change, and expecting others who are doing so to pay for their bit too. It is not just bankers who can be greedy.

And how can you state that this is typical of people like Michelle McGagh when you clearly do not know the first thing about her? We do not know who you are either !! But obviously your views are typical of people like you :-)

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Mar 16, 2012 at 20:14

Alasdair, I have little doubt but that Red Ed and the dangly bits fella will have something to say, ignoring the fact that they and theirs are largely responsible state of affairs (in respect of which they continue to remain in denial).

Would that they have to suffer the fate they (and the public sector) IMPOSED on the private. A forlorn hope.

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Mar 16, 2012 at 20:46

Don't forget the key points - staff will still have a DB scheme and these are changes to future service only. Why change? because as people are living longer and pensions are costing more to fund. It's therefore not unreasonable to ask people who will benefit from this (as they will have pension for more years) to pay a little more. How do they pay a little more? Well, to get the same pension, they'll have to save to make up the difference. Wow, they can even do this through AVCs and still get tax relief.

Have been saying this to my public sector friends for months. You can't expect to take more out of the savings pot without putting more in. At some point, it just runs out before you die. Rather like Greece. Now we wouldn't want that would we? Would we?

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jack dickson

Mar 16, 2012 at 21:36

Tesco is only in business to satisfy its own greed; in making vast sums of money. Poorly motivated staff do not perform, which translates into poor service and loss of customers hence its now slow demise.

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Mar 17, 2012 at 01:14

Jack - you forget that the main shareholders of the FTSE 100 are our pension funds. So when you decry "profits" you shoot those in the foot who have Dc pensions. Meanwhile you support Tesco employees having pensions which are super gold plated. It all comes round to people paying a fair share for their benefits. And your comments are not backed up by fact - only surmise.

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Mar 17, 2012 at 10:00

Tesco has lost its way in the UK.... Last year, in a bid to maintain profits, they cut their staff levels to the bone and that resulted in poor staff morale and shocking customer service.

Bags normally easily available at checkouts are locked in safe rooms because no-one is allowed to order any.

When was the last time you were served at the checkout by an actual checkout operator? More likely these days it will be someone from another dept. who is a 'relief cashier' and that means that their own department suffers.

Re-stocking 'cages' litter the aisles, whereas previously they would only be there for a minimal time (see relief cashiers above).

The heating has been turned down and lighting kept to a minimum.

This chage to the pension scheme is just another attempt to bolster profits.

Tesco is putting in less and the employees are putting in more.

We're not talking about a company that is on the skids here. Seems more like a greedy monster.

Their upper management and executives are amongst the highest paid in the sector.

It is particularly unfair to foist these changes on people who are nearing retirement and if anyone thinks that a pension of £3,450 p.a. after 20 years of service is gold-plated then I stand in absolute amazement!!!

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Mar 17, 2012 at 10:32

Momak - I do not know on what basis a pension of £3,450 pa is quoted, but I do know that this would cost a private annuity buyer well over £100,000. The simple fact is that the maths shows that the pension relative to the years worked and the pay IS gold plated.

If the pay is poor then that is a different matter, but a 50% final salary scheme payable at 65 after 40 years service is likely to be paid for 20 years, so in simple terms it is worth 25% of pay less any contributions the employee makes.

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Alasdair Lawrance

Mar 17, 2012 at 10:45

Jon et al -

Regardless of the detail of the figures, ( how long, how much, who pays etc), why are you so intent on dragging everyone down to the same abysmal level of the rip-off that the private sector offers? (For starters, they don't even preserve the value of your capital invested). Surely you should be trying to improve the performance and integrity of private pension providers? Or are you just collective masochists?

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Mar 17, 2012 at 12:34


You're right about salary levels being a different thing, but it is also indicative of the fact that the various companies' schemes are not as costly as they would make out.

Alasdair is correct in saying that we don't all need to ensure that we drag everything down to the lowest common denominator.

At the end of the day people are not interested in pecentages/gold-plated/DB or any other guff that is spouted; it's money in their pocket in their retirement years that is important.

As is the case with government and business decision makers; the all-encompassing statements and decisions that they make does not affect themselves in any meaningful way.

They have to face the reality that the miserly way that companies and governments treat their people adds up to a poor existence in retirement.

All these key decision makers could do so much better for the people whose lives they affect....... but in the end they don't really care.

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Michael Stevens

Mar 17, 2012 at 14:53

Very fair for employees, the government should follow with one scheme for all state employees. Contributions should be50/50%

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Mar 17, 2012 at 23:24

Alasdiar - you do not seem to appreciate that one person's pension is another person's cost. You appear to think that real wealth can be plucked out of nowhere. If the private sector universally had pension schemes like Tescos, then you would have to pay more for everything. Then we would be less competitive widening the trade gap, so Sterling would slide making all imports more expensive. Energy fuel food costs would go through the roof. Then all those on index linbed benefits would get more - costing their employers / taxpayers more and it would all go round in a circle ! The bottom line is that ALL employees in DB schemes need to pay more themselves so that the employer contribution is the same for everyone. This would be the level playing field.

Momak - at the end of the day the maths is objective and right. This is not guff and is not "spouted". Your language appears to indicate that you are in denial about the truth. And why should employers and governments be expected to pay for retirement? What is wrong with employees taking responsibility for their own future and taking the decision to spend less and save more? That is what millions in private industry do. Obviously people need to be paid the "rate for the job", but then they need to live within their means, including a hefty pension/saving amount.

yes - many people are interested only in what they can get and have a short term desire to ingratiate themselves. They have to get real. Perhaps our educational system is failing us by not illustrating how to manage personal finances.

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Alasdair Lawrance

Mar 18, 2012 at 08:32

Jon -

Please don't be so condescending. I understand perfectly well how it works, and so I know that firms like Tesco are only interested in their profits. Most public sector schemes are fully funded, not "pay-as-you-go" (ie., where current workers' contributions pay the pensions of retirees), and your ideas about energy fuel and food costs are just wrong. Fuel prices are controlled by a mainly Middle Eastern cartel (OPEC) and food prices are increasingly affected by speculators. If people don't have a decent pension, how are they to pay for the usurious charges of the pretty useless care homes? Like Pubcos, they are just property companies with a minimum wage sideline. "Wake up and smell the coffee", as the young people say.

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Mar 18, 2012 at 09:32

Thanks Alasdair - but although you state "why are you so intent on dragging everyone down to the same abysmal level of the rip-off that the private sector offers?" you have not offered any constructive alternative. The points are :

1. Longer life spans have made the DB schemes unaffordable unless the employees pay a far larger share of the contributions (or work another 10 years :-).

2. Most public sector schemes are NOT fully funded. Just look at the balance sheets where you will see huge deficits. For example the WM Police have a total annual salary cost of some £600m and a pension deficit of £4500M. And those few that are have generally done so only with huge contributions from the taxpayer. The maths is stacked up against funds performing well enough without big subsidies.

Fuel prices are largely pinned to the US Dollar. So if Sterling falls, fuel costs more. There may be other factors, but this is a significant one - look at the graphs - and as you know food, clothing, energy will also cost more.

Anything which causes inflation is stealing from the savers and those on fixed incomes. These are the prudent ones who's example could have been followed such that we would now have no deficit or financial crisis. Therefore anything which does so such as increased employer pension costs is also further devaluing the pensions of those with annuities who had, in your eyes, such raw deals already.

The simple point is that better pensions for the millions without DB schemes has to be paid by someone in real terms - not in inflated paper. Surely those who have come into windfalls might be asked to pay somehting towards those windfalls ? And even taxing the "rich" 100% would be just a drop in the ocean. Those on a roll in DB schemes have to come to their senses and understand the true value of their benefits and either reduce their salaries or pay far more.

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