Recovery at Tesco hurt by pension black hole of £5.9bn

TESCO has revealed its pension deficit has doubled in the past six months to more than £5.9bn.

The ballooning pension black hole at Britain’s biggest grocer dampened the excitement of a 1.4pc sales boost as it said its turnaround strategy was working.

Analysts had warned that Tesco’s pension fund would fall even deeper into the red after gilt yields – payouts from Government bonds – dropped after the Bank of England slashed interest rates in the wake of the Brexit vote. It has also been struggling to reintroduce dividend payments which it was forced to cancel in 2014 after an accounting scandal.

But after revealing a glowing set of interim results, Tesco pointed towards a complex accounting method to explain its deficit figure – which had grown by £3.2bn. Alex Stewart, chief financial officer, said the accounting method linked the deficit to corporate yields, which have dropped due to quantitative easing – where the Government prints more money.

The supermarket will continue to pay £270m a year into the pension scheme, which has 350,000 members, of which 203,000 are current staff.

Chief executive David Lewis said: ‘We’ve done something very significant in moving from a defined benefit to a defined contribution scheme for a very large number of people.

‘We think that’s the right vehicle by which we can deal with volatility in the market place.’

However, Laith Khalaf, senior analyst at Hargreaves Lansdown, said: ‘For now the ballooning of the deficit is simply a problem on paper, but in March 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.’

It came as Tesco revealed that revenues were up 1.4pc to £27.3bn. Profits were down 28.3pc to £71m.

Shares flew off the shelves as investors reacted to the news, up 9.7pc, or 18.4p, to 207.1p.

Lewis said it showed the supermarket was ‘moving out of crisis’ after its accounting scandal two years ago when a £263m black hole was revealed in its accounts.