Tesco’s pension deficit has more than doubled in six months
The market has responded positively to Tesco's new target for operating margin to move to four per cent by 2020, but Tesco also reported this morning that its pension deficit has more than doubled in six months.
The deficit has risen from £2.61bn to £5.85bn due to exceptionally low bond yields, leaving the scheme's trustees in a tight spot.
Read more: Analysts applaud Dave Lewis' efforts to turn around Tesco
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the pension deficit was "the mammoth in the room".
"For now the ballooning of the deficit is simply a problem on paper, but in March of next year Tesco undergoes its triennial pension valuation, at which point the deficit might start to harden into a cold hard cash call for the supermarket," Khalaf said.
"Much will depend on the pragmatism of the trustees at that point. Like trustees up and down the country they will be facing some tough questions, thanks to the recent steep drop in bond yields, which are used to calculate pension deficits.
Read more: Tesco posts increase in UK like-for-like sales but profit drops 28 per cent
"On the one hand trustees are obliged to force the company to make good any shortfall in the pension scheme, on other hand they know the black hole might well disappear if bond yields rise from their historic lows."
The retailer must also contend with the prospect of higher costs due to the recent plunge in the value of the pound. Analysts and investors will have to wait and see whether retailers will be able to past these costs onto consumers at a time of tough competition in the grocery sector, with discounters Aldi and Lidl putting pressure on prices.
Aldi has told Morning Wire that it wants a 10 per cent share of the grocery market, and it recently stated that it will not be beaten on price, showing just how stubborn Tesco's competition is.