Annual report and financial statements 2009
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Financial review
Pension
| Pension deficit bridge | £m |
|---|---|
| Net pension deficit at 3 February 2008 | (68) |
| Actual vs expected return on scheme assets | (425) |
| HIgher discount factor | 328 |
| Funding above annual service cost | 103 |
| Other | 13 |
| Net pension deficit at 1 February 2009 | (49) |
The continuing volatility in the financial markets does not change our view that, on completion of the actions arising from the Pension Review announced last year, these schemes are adequately funded for the long term. The markets will have to be continually monitored for emerging trends to ensure this continues to be the case. The move from a final salary basis to one of Career Average Revalued Earnings (CARE) is the final action planned from the review, and is intended to make the schemes affordable for the future. If, following the consultation, the proposals are adopted, then it is anticipated that the valuation of the liability will decrease by c.£90m.
Scheme valuations for accounts purposes were inevitably impacted by the turmoil in the financial markets, which had an effect on both the asset values and the liabilities of the schemes. The return on scheme assets was £425m worse than actuarially expected, due mainly to falls in the equity markets. This was offset by the reduced long term value of scheme liabilities resulting from a rise in the long term real discount rate.
The injection, as planned, of £100m of additional funding in the year combined with the move to CARE for future benefit accrual will leave the schemes well funded for the long term and in a small surplus position on current actuarial assumptions.
Financing
The Group has a £1.1bn revolving credit facility which is not due to mature until September 2012. At the year end £250m had recently been drawn, allowing significant headroom for the Group’s activities and investments.
The Group’s bonds, originally issued by Safeway plc, were retained in the acquisition of the Safeway Group in 2004. The next bond repayment is due April 2010 for €250m. Moody’s rating of these bonds was upgraded to Baa1 in March 2008.
Net debt
Net debt at the year end increased slightly from £543m to £642m. Increases in capital expenditure, additional pension funding, and the share buyback have required significant cash funds. Much of this was funded by cash generated from operations, demonstrating our solid underlying cash flow. Despite this high level of investment, we were pleased to have utilised only £250m of the revolving credit facilities at the year end.
Net debt
£m
Optimisation Plan
Our Optimisation Plan is to strongly improve operating margins, whilst shaping for growth.
The Optimisation Plan was announced in March 2006 as a medium term plan to bring profitability back in line with sector standards after the integration of Safeway. The objectives were simple – to apply the Morrisons philosophy to the new bigger business while adapting it where necessary. The plan identified areas where savings could be made, or margins improved, as well as areas where investments were necessary to shape the business for growth.
Savings from Phase 1 were achieved in the prior year.
| Savings £m* | Phase 1 (06-08) |
Phase 2 (07-10) |
Total | Investment £m | Phase 2 (07-10) |
|
|---|---|---|---|---|---|---|
| Gross margin | Better buying, sales mix and wastage control |
110 | 100 | 210 | – | – |
| In-store | Realising efficiencies | 90 | 50 | 140 | Store refresh programme | 180 |
| Manufacturing | Managing capacity | – | 15 | 15 | New abattoir | 70 |
| Distribution | Rationalisation | 30 | 25 | 55 | New capacity in the South | 90 |
| Centre/IT | Elimination of dual running costs | 30 | 10 | 40 | New systems across the business | 110 |
| Total savings | 260 | 200 | 460 | Total investment | 450 |
* Contributions to EBITDA.
The investment of £450m is in addition to normal planned capital expenditure, including new space, of £400m annually.