Above all, we felt the shift from a defined benefit to a defined contribution scheme grated with our values. It was too big a shift of responsibility from management to our employees, many of whom had little experience of long-term saving outside of the company schemes. That said, we also knew we needed to change: we could not continue as we were. So we approached the problem, admittedly a serious one, like any other business problem in the belief that if it was addressed head-on, it could be managed.
We shared the problem with our staff. We gave annual updates on the cost of providing a pension and asked staff to meet their share of the increase. Some senior staff contributed more than their share, because they trusted that the company was doing the best it could and they could see it was better than the alternative.
The problems and the closure of so many other schemes helped us in one sense. Whereas before employees may have taken the benefit for granted, now they certainly knew its value and were as determined as we were to see if we could manage our way through the problem. Offering a good pension became more of a competitive advantage in employment than ever before. It confirmed that our values meant something as Tesco followed its own path when it would have been easy to follow others.
We managed our pensions better, so that the cost of administering them actually dropped over time. We gave the subject much more attention. We employed better people to manage pensions and were able to run our scheme with very good returns (and with some of the lowest administration costs in the industry). We also continued to invest in equities, which may carry some risks but also give a higher return. Business is about risk, and a pension scheme is just another business risk. The expectation that you attempt to remove risk by investing in nil-risk assets is counter-intuitive. Poor return on the most ‘risk averse’ pension funds has resulted in the greatest risk of all becoming a reality—the closure of the fund.
Tesco today is responsible for more than 20 per cent of all members of open defined schemes in the UK private sector—a remarkable ratio for a business that employs about one per cent of the private sector workforce. A Tesco employee will retire on a pension which is two and a half times larger than that of someone who has made similar payments to a defined contribution scheme. Had we taken a different course, I doubt I could have looked an employee in the eye and said ‘We live our values.’ The decision was difficult, the financial costs in the short term ran into hundreds of millions of pounds, but it was the right thing to do.
— Terry Leahy
Copyright © 2012 by Terry Leahy. Reprinted with permission of Crown Business, a division of Random House, Inc.