Marks & Spencer yesterday put a further gloss on its regilded reputation by unveiling a £500m pension fund rescue which uses its own property, needs no cash injection, and will have no impact on its profits or balance sheet. The novel property partnership with its pension fund will keep the final salary scheme open, and achieve an immediate reduction of £500m on a £700m deficit.

However, it will require employee contributions to rise from nil to 7% for those who opt to maintain present benefits.

M&S will offer the 26,000 active members of the 123,000-member scheme two continuing non-contributory options but with lower benefits.

Its principal commitment is to increase its own contributions from the current 16% of salary to 26%, across the board.

However, unlike Sainsbury, which securitised £350m of property for a cash injection into its fund, M&S will retain full control and ownership of the £1.1bn property portfolio which it is only "loaning" to the fund.

Chief executive Stuart Rose, who was this week named "world business leader of the year" for turning round the retailer, said: "When I came to the business (May 2004) I said I would deal with all the major issues. This has been an overhanging issue for some time."

He denied that introducing employee contributions meant the end of an era at M&S, long regarded as one of the nation's most paternalistic employers.

"The pension scheme is still a very valuable pension scheme. It is absolutely in the upper quartile of pension schemes in the UK."

Rose added: "We are not proposing to close the scheme, which I think is very important to our membership."

Analysts reacted by marking up M&S shares, on hopes that the deal might free up cash for spending or giving back to shareholders, though when asked about such potential Rose responded: "There is no plan B."

Finance director Ian Dyson commented: "What Sainsbury did was to raise money then put all the cash into the pension fund, we are cutting out the middle bit which is going to a third party. We are keeping it all within the M&S group the key benefit to us is that we retain ownership of the property."

The group said the triennial actuarial valuation of the scheme's deficit of £704m was significantly lower than the £1bn previously estimated.

Instead of contributing cash into the fund M&S had agreed with the pension scheme's trustees to inject £1.1bn of property assets into a partnership with the scheme, with £500m value going to the fund, and immediately reducing the fund's deficit by this amount.

M&S will lease back the properties, paying rent of £50m for 15 years (equating to a net present value of £500m) with the remaining £200m expected to be met by future investment returns.

M&S retains not only flexibility to substitute properties in the portfolio but the benefit of any capital gains over the 15 years.

The group said: "From its perspective, the pension scheme receives a significant income yielding asset, backed by a strong portfolio of M&S property."

Staff who opt not to make a contribution will have to accept either a 5% a year inflation cap on their final pensionable salary, or a lower one-sixtieth accrual rate of pension than the current generous rate of one-forty-fifth of salary.