Supermarket firm Tesco has reached an agreement with its pension trustees to make a one-off £2.5bn scheme contribution to eliminate its funding deficit.

Following the sale of its businesses in Thailand and Malaysia, Tesco has made the agreement to help wipe its pension deficit of £2.57bn.

The deficit had increased on an IAS 19 basis by £235m year-on-year, as of February 2020, its 2019/20 preliminary results report revealed.

Tesco attributed the rising deficit to an increase in the measurement of scheme liabilities due to a fall in corporate bond yields.

However, the firm stated that this was largely offset by strong asset performance, including that of its liability-driven investment portfolio, in addition to continued deficit contributions and the application of the latest actuarial assumptions.

Between February 2019 and February 2020, the firm made deficit contributions of £267m.

The supermarket company stated that the one-off contribution of £2.5bn would “significantly reduce the prospect of having to make further pension deficit contributions in the future”.

The agreement with the trustees also covers the key principles of the triennial scheme valuation, which will now be calculated as at 31 December 2019. The trustees will aim to conclude the valuation “as soon as is reasonably possible”.

Following the sale if its businesses in Thailand and Malaysia, Tesco will also return £5bn to its shareholders via a special dividend.

Tesco CEO, Dave Lewis, and CFO, Alan Stewart, received a cash allowance in lieu of pension of 25 per cent of base salary.

Executive pensions have faced increased scrutiny since September 2019, with the Investment Association cracking down on companies that have failed to align executive pension pay with their workforce.

Tesco has multiple defined contribution (DC) and defined benefit (DB) pension schemes, with its DC schemes being open to all employees in the UK.

The combined deficit of its DB schemes stood at £3bn, as of February 2020, up from £2.8bn in February 2019. Its DB deficit makes up 92 per cent of the company’s overall deficit, according to the report.

Commenting on the report, Lewis said: "Over the last five years we have focused on serving customers better, re-engaging our colleagues, completely resetting our relationships with our suppliers and as a result we have been able to add value for our shareholders.

“These endeavours put us in a strong operational and financial position to deal with the challenges of Covid-19.

“I would like to thank Tesco colleagues for their contribution to this turnaround journey and for their unbelievable commitment as we face into the Covid-19 crisis. Their contribution continues to be immense."

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