Why the John Lewis Partnership Bond won't work for everyone

There has been a fair amount of grumbling in the press about John Lewis' new Partnership Bond. Merryn Somerset Webb takes a closer look.

I am mildly bemused by the general lack of enthusiasm in the press for the John Lewis Partnership Bond. There is a fuss about the fact that as a corporate bond it isn't covered by the Financial Services Compensation Scheme. There is muttering about the fact that it pays 2% of its 6.5% return in John Lewis vouchers (also redeemable at Waitrose), and about the fact that buyers are to be locked in for five years.

But, while I am possibly the greatest pessimist I know on all sorts of things, even I can't really imagine a scenario under which John Lewis doesn't exist. I went twice yesterday. And is the 2% in vouchers really a big deal? The bond is being sold mainly to John Lewis staff and card holders who presumably like shopping in John Lewis and so are likely to spend their income there anyway. It might be clever of John Lewis to make sure that a percentage of the interest they pay out makes it way back into their tills. But it doesn't make the bond a bad deal.

The naysayers might like to look at the returns available on other corporate bonds. Tesco offered 5.2% with its most recent deal, which although it does come with the benefit of tradability (you can buy and sell it on the LSE's retail bond market) is a lot less than 6.5%. Then if you visit www.fixedincomeinvestor.co.uk you can check out the yields to redemption of various other bonds with a five-year life. There is, for example, an outstanding Rolls Royce bond with five years andthree months to run. It has a yield to redemption of 3.57%. Then there is one from the European Investment Bank withfive yearssix months to go. 3.12%. Don't know about you but I'd rather hold John Lewis (even if I can't buy and sell it freely) at 6.5%.

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My colleague Tim Bennett points to the most serious mark against the John Lewis bond in his own article on it. It is inflation. I worry about this one too particularly asat MoneyWeek we all tend to think that the ongoing financial crisis will end with very high inflation. But the problem with this (as with many of our forecasts) is that we can't tell you exactly when our hyperinflation will turn up. And even if interest rates do start rising this summer (debatable given how low wage settlements are) it's impossible to know how fast they will rise. So I'm willing to imagine that Partership Bond investors will get a good few years of real returns out of the deal before things go wrong. They might take the risk of doing worse than the rest of us on interest from year three on. But they'll do a hell of a lot better than the rest of us in the first few years. And possibly for the full five years (it isn't a given we won't return to deflation). So while I agree with Tim that this makes the bond much less attractive than it would be in a constant low inflation environment I'm not sure it means that all savers should give the deal a miss.

It is true that higher-rate taxpayers can get a better deal in the fixed-rate cash Isa market - after tax their annual interest rate is a mere 3.9%, less than they can get on a five year fixed ISA deal at Northern Rock. But if I was a pensioner on a lowish income, I had savings looking for a high income home and I was prepare to balance the certainty of a high real return now against the possibility of a very low or a negative real return in a few years, I'd be grabbing my John Lewis account card and heading out to buy the bond.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.