John Lewis is taking a huge £60 million pension hit

John Lewis, the bellwether British department store, warned on Thursday that profits this year will be below last year’s figure due to huge pension costs.

The retailer said in its half-year report that pension charges for the year will be £60 million ($US92.1 million) “predominantly arising from volatility in the market driven assumptions.”

The issue is a steep fall in the discount rate, a key metric used to calculate the value of a pension plan. It looks at the interest rate on certain high-quality bonds to estimate how much “risk free” returns the pension plan can expect to get.

If the discount rate goes down, the estimate of returns goes down, and the company needs to put more cash into the pension plan to ensure there are enough assets to generate the eventual return needed.

John Lewis’ discount rate fell from 1.1% at the start of last year to just 0.35% at the start of this one, due to falling bond yields. Hence the big cost in topping up its pension plan.

Even strong trading won’t be enough to offset the £60 million needed so John Lewis warned profit for the year is set to be between £270 million and £320 million ($US414.5 million to $US491.3 million), against £341.6 million ($US524.5 million) last year.

John Lewis Partnership, which also includes upmarket supermarket Thursday, also announced a 2.1% rise in sales in the first half, but a 26% fall in underlying profit to £144.9 million ($US222.4 million). That was down to increased pension costs.

Chairman Sir Charlie Mayfield says in today’s statement: “This has been a solid first half for the Partnership in a difficult market.”

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