Friday, March 24, 2023

Sainsbury’s offered to lend £500mn to pension scheme after mini-Budget

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Supermarket chain J Sainsbury set up a £500mn loan facility for its pension scheme at the height of the gilt market crisis that followed the Truss government’s “mini” Budget in September.

Finance director Kevin O’Byrne said the decision was made after the Bank of England reiterated that it would cease buying gilts to stabilise the market on October 14, prompting fears of more volatility.

Yields on UK government bonds spiked sharply after then chancellor Kwasi Kwarteng announced £45bn of tax cuts funded by additional borrowing on September 23.

The market turmoil caused widespread stress for defined-benefit pension schemes employing liability driven investment strategies, which use gilts as collateral for debt-funded derivative purchases.

“We decided to put a short-term loan in place should they require it,” O’Byrne told reporters. “If there was a spike on the Monday or the Tuesday we didn’t want them to have to do anything irrational like sell assets at the wrong time”.

“In the end the insurance policy was not needed because [the UK] changed chancellor on the Friday after we made the decision and we had a very different environment by the Monday,” he added. “The pension scheme in the end managed [demands for collateral] completely within their own resources.”

The £500mn facility — equivalent to about a third of Sainsbury’s gross cash balances as of mid-September — will expire in January.

O’Byrne said that the trustees of the scheme were reviewing the strategy after recent events. “We are giving it some thought . . . we think [LDI] has a strong role to play particularly in a well-funded scheme which should be well hedged and our funding levels were well protected.”

The scheme’s latest triennial valuation showed a surplus of £130mn, and a note in the group’s half-year accounts pointed out that the rise in yields will have reduced the liabilities further.

Sainsbury’s disclosure came as the UK’s second-largest supermarket group reported underlying pre-tax profit of £340mn for the 28 weeks to September 17, down 8 per cent on last year but slightly ahead of analysts’ forecasts.

Sainsbury’s maintained its full-year underlying profit forecast of £630mn-£690mn, saying it would now target £1.3bn of cost reductions within the business by 2024, which it would use to offset cost inflation and keep prices down for consumers. It said this represented an increase on its previous target of reducing its cost-to-sales ratio by 2 percentage points.

In common with rivals, chief executive Simon Roberts said customers were budgeting carefully and trading down as household budgets came under pressure.

“We are seeing a marked shift to own-label in food and a return to more eating at home,” he said, adding that while customers were buying fewer items, basket sizes were holding up better than rivals and fewer of its shoppers were switching to discounters.

Same-store grocery sales, excluding fuel, were up 3.7 per cent in the second quarter, partly reflecting the impact of rising food prices, though they fell slightly in the half.

Sales at Argos, the general merchandise chain acquired in 2017, increased in the second quarter for the first time in more than a year, which Roberts attributed to better availability and pricing as well as customers already shopping for Christmas.

“We’re seeing customers bring spend forwards — we’ve just had a month end and you can see where customers are using the pay cheque to start to get ready for Christmas, we’ve seen that this month and last,” he said.

But he cautioned that “the big step-up in sales to Christmas is still to come and it is too early to say how customer demand will play out”.

Sainsbury’s has closed hundreds of standalone Argos stores over the past three years and relocated them inside its supermarkets. But on Thursday it said it would close around 60 fewer Argos stores than previously expected over the coming 18 months, as landlords offered rent cuts to keep them occupied.



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