Annual Report and Accounts 2015
John Lewis Partnership plc
51
The majority of our spend continues to be invested in our store base, either on new shops or the refurbishment of existing ones. However, to enhance the agility and robustness of our systems and infrastructure, and invest in our future capability given the changing dynamics within retail, we have also significantly increased our capital investment in distribution and IT in the year.
Investment in Waitrose was £388.5m, up £100.8m (35.0%) on the previous year, and investment in John Lewis was £231.9m, up £67.1m (40.7%).
Financing
In December 2014, we issued a £300m 4.25% bond due in 2034, and used the net proceeds of £294.1m to prepay previously-agreed deficit reduction contributions to the pension scheme. As a consequence, at 31 January 2015, net debt was £780.2m, an increase of £294.4m (60.6%).
Net finance costs on borrowings and investments decreased by £6.0m (10.2%) to £52.8m. The year-on-year decrease reflects the repayment of a £100m bond at the end of the previous year. After including the financing elements of pensions, long service leave and non-cash fair value adjustments, net finance costs increased by £5.1m (5.4%) to £99.6m.
Pensions
The pension operating cost before exceptional item was £194.5m. This is an increase of £26.8m or 16.0% on the prior year costs. The increase reflects changes to financial assumptions, growth in scheme membership, and a one-off cost in the year of £6.5m for an increase in future pension liabilities. The one- off cost followed our decision to take all paid overtime into account when calculating holiday pay for Partners, for holiday taken from 1 November 2014.
Pension finance costs were £37.6m, an increase of £2.3m or 6.5% on the prior year, reflecting a higher accounting pension deficit at the beginning of the year than at the beginning of the previous year. As a result, total pension costs before exceptional items were £232.1m, an increase of £29.1m or 14.3%.
Following the conclusion of the triennial actuarial valuation of our defined benefit pension scheme as at 31 March 2013, we agreed to increase the ongoing contribution rate to 16.4% of members’ gross taxable pay. We also agreed to put in place a plan to eliminate the deficit over a 10 year period through a one-off contribution and annual deficit reduction contributions. However, to secure long-term debt at low interest rates, we issued a £300m bond in December 2014. We used the net proceeds of the issue to prepay almost seven years of the previously-agreed deficit reduction contributions to the pension scheme. In the year, total contributions to the pension scheme therefore totalled £492.8m, an increase of £229.9m or 87.4% on the prior year.
The total accounting pension deficit at 31 January 2015 was £1,249.3m, an increase of £245.9m (24.5%) since 25 January 2014. Net of deferred tax, the deficit was £1,018.4m. The accounting valuation of pension fund liabilities increased by £1,082.8m (25.7%) to £5,301.0m. This mainly reflects market volatility in the financial assumptions as the real discount rate used to value the liabilities decreased substantially from 1.10% at the beginning of the year, to 0.35% at the end of the year. Pension fund assets increased by £836.9m (26.0%) to £4,051.7m, including the £294.1m one-off contribution made by the Partnership in December 2014.
Pension review
The Partnership amended its pension arrangements after a thorough consultation within the business. Partners were involved throughout and we used technology to facilitate this. For example, we live streamed meetings, and relevant pages on the company intranet received thousands of hits.
A final decision was taken in January 2015, after a two year process. The outcome was to adopt a hybrid scheme with a non- contributory Defined Benefit scheme based on a Partner’s final salary, but at a reduced accrual rate of 1/120ths. The Defined Contribution section of the scheme will see Partner contributions matched up to 4.5% of basic pay plus 3% of their basic pay each month on a non-contributory basis. The new proposals will be implemented in April 2016.
The pension scheme has 121,000 members of whom 52,000 are current Partners.
IT’S ABOUT MAKING SURE THE PENSION IN THE FUTURE IS BOTH AFFORDABLE TO THE PARTNERSHIP AND FAIR FOR PARTNERS GOING FORWARD.
Sir Charlie Mayfield Chairman, John Lewis Partnership
Introduction
Partnership difference
Principles
Strategy
Performance
Governance
Financial statements
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