A strong fourth quarter from Primark, Associated British Foods’ discount fashion chain, will offset weakness in its sugar business and keep it on track to meet full-year expectations.

Inflation hits ABF fund

Rising inflation is hitting ABF’s pension fund, in spite of the fact it is in surplus for accounting purposes, according to John Bason, group finance director, writes Norma Cohen.

The recent and largely unexpected surge in inflation is likely to carve about £10m in interest income from ABF’s profit & loss account when it reports its results as of September 13, he said. Accounting rules allow companies to report income from their pension scheme when it has excess assets to meet liabilities.

However, pensions experts say the experience of ABF is likely to be replicated throughout the UK, with many employers with schemes in deficit finding the surge in inflation even more painful than at the food wholesaler.

Dawid Konotey-Ahulu, partner at Redington Partners, a firm that advises companies on managing pension risk, said expectations of medium-term inflation had jumped from about 3.2 per cent a few months ago to about 4 per cent. The degree of pain varies with the maturity of the scheme and the mix of its members.

Schemes with large numbers of deferred and active members who will not begin drawing their pensions for many years will feel the pinch more acutely, he said. That is because current rules require final salary pensions to be revalued upward in line with inflation up to an annual ceiling of 5 per cent between the time an employee leaves the payroll and the date they begin to draw their pension.

But the rule for a scheme with £1bn in assets and an average duration of 20 years – meaning half of all liabilities will have been paid off in 20 years – is that each rise of 1/100th of a per cent in inflation will add £2m in liabilities.

The group said Primark’s performance and those from its other businesses, including brands such as Kingsmill bread and Twinings tea, would more than offset an expected sharp fall in profits from its sugar business.