Tesco ditches generous pension scheme to shore up finances

* Aims to close defined benefit scheme to all staff

* Scheme is 3.4 bln stg in deficit; obligations 11 bln

* Tesco (Xetra: 852647 - news) pumped in 542 mln stg in last financial year

By Simon Jessop

LONDON, Jan 8 (Reuters) - One of the last defined benefit pension schemes run by a FTSE 100 company and open to new members is set to close in plans announced by Britain's biggest retailer Tesco as it looks to shore up its balance sheet.

The scheme, which pays out an income for life to retirees based on average career earnings, has 350,000 members, including 203,000 active members of staff, and has a 3.4 billion pound shortfall in funds to pay forecast liabilities.

That has forced Tesco to pump in cash to close the gap - 542 million pounds in the last financial year alone, its accounts show - with more needed in the coming years to meet obligations of 11 billion pounds.

The company said on Thursday its pension scheme would be revalued in May and that it would consult on the planned changes in June, before implementing the changes in February, 2016. It would also have to put more money in, but gave no details.

A combination of people living longer lives and the need to reflect pension liabilities on corporate balance sheets has prompted most firms to shut their schemes in recent years, although many have done it in stages to soften the blow.

"Tesco was very unusual amongst FTSE 100 companies in keeping open its DB scheme. Most others started the closure process years ago," said David Blake, director of the Pensions Institute at Cass Business School in London.

"The scheme was therefore relatively very generous, but it was running (a) big deficit."

The plan to cut the scheme, announced in a much-awaited strategy update on Thursday alongside its Christmas trading statement, came as little surprise to many in the market.

"The pension scheme, as is, is almost unheard of these days. It seems anomalous that they offer it when others don't," said Nick Kirrage, fund manager at Tesco's eighth-biggest investor, Schroders (LSE: SDR.L - news) .

"I don't think it's the defining factor in whether Tesco fixes itself, but it's one of the reasonably obvious things to do over time."

As part of the strategic overhaul, chief executive Dave Lewis announced cost cuts, asset sales and the appointment of Matt Davis to head up its UK and Ireland (Other OTC: IRLD - news) business.

The need to woo investors follows a halving in the High Street stalwart's share price in 2014 following a series of profit warnings and an accounting scandal.

A 12 percent jump in the share price on Thursday suggested the update had gone down well with stock investors, leaving it on course for its biggest daily gain since December 2008.

Bond investors, meanwhile, were less impressed, and sold off the firm's debt on fears the turnaround plan would not be enough to halt a downgrade in its credit rating. (Additional reporting by James Davey and Neil Maidment, editing by David Evans)