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Last updated: November 28, 2012 9:54 pm
Two of Britain’s corporate stalwarts Marks and Spencer and Invensys have taken big steps towards reducing their runaway pension deficits in a sign that employers are adopting a more realistic approach to clearing their retirement debts.
M&S said it had slashed its deficit by nearly three quarters, thanks to a conservative investment strategy in recent years, while industrial conglomerate Invensys said it would sell a division and use the proceeds to pay down pension debt.
Shares in Invensys jumped more than one-quarter on Wednesday after it sold its rail division to Siemens for £1.7bn – a move that will wipe out almost all of the engineering group’s hefty pension deficit.
Invensys has long been weighed down by its pension scheme. The FTSE 250 company has for some time been considering the sale of part or all of its business and earlier this year was the target of a preliminary takeover approach from Emerson Electric of the US.
But its £490m pension deficit proved to be a stumbling block for potential bidders for the entire company, leading to Siemens’ move to cherry-pick the British group’s rail division.
Invensys said it would funnel £400m of the rail division proceeds to pay off much of its pension deficit, which stood at £490m at the end of September. An additional £225m will be placed in a reservoir trust for future pension liabilities.
Many British companies have unveiled what they believed to be comprehensive approaches to clearing their pension debts in recent years, only to be derailed by unexpected rises in life expectancy and sharply falling interest rates.
In addition, Invensys said £625m will be returned to shareholders in the form of a special dividend worth 76.7p per share. Its shares rose 27 per cent to 280p.
M&S, the high-street mainstay, which is struggling to revive its fashion business, said at the end of March its pension deficit had fallen to £290m compared with £1.3bn in 2009. Its shares rose by more than 2 per cent.
The biggest single contributor to the sharply lower deficit was a rise in the market value of the scheme’s portfolio, which is 70-75 per cent invested in gilts and fixed income. The average UK pension scheme holds almost half its assets in equities.
The smaller deficit has paved the way for M&S to halve its cash contributions to the scheme. The company will contribute £28m in cash each year between 2013-14 and 2016-17, compared with the £60m it had agreed to contribute annually until 2017-18.
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