The number of profit warnings issued in 2023 by UK-listed companies with a Defined Benefit (DB) pension scheme increased by 6% on the previous year, according to EY-Parthenon’s latest Profit Warnings report.
In total, 72 warnings were issued by listed companies with a DB pension sponsor in 2023, compared to the 68 issued in 2022.
Listed companies with a DB scheme issued 22 warnings in Q4 2023, an increase of 10% (2) on Q3 – making this the highest quarterly total since Q4 2021, when 22 warnings were also issued.
Across all UK-listed companies, 77 profit warnings were issued in Q4 2023, with more than a quarter (29%) of these warnings coming from companies with DB schemes. Companies with DB sponsors in the industrials sector issued the most warnings in Q4 and have issued the most throughout 2023 (29).
Over one-in-five (22%) of UK-listed companies with a DB pension scheme have issued a profit warning in the last 12 months.
Credit tightening remains key driver for profit warnings from companies with a DB pension scheme
Twenty-seven per cent (27%) of profit warnings issued by UK-listed companies with a DB sponsor in Q4 2023 cited pressures from credit tightening as a reason for the warning. Although these pressures have eased since Q3, when 35% of DB sponsors cited it as a reason, this is clearly higher than a year ago in Q4 2022 when 13% gave credit condition as a warning. Tighter conditions around securing finance continue to impact businesses.
Spending and contract delays also triggered an increasing number of profit warnings at the end of 2023 as cautious companies and consumers held back spending. Warnings citing delayed or cancelled contracts rose from 15% in Q3 to 23% in Q4, the largest increase of the quarter.
Karina Brookes, UK Pensions Covenant Advisory Leader and EY-Parthenon Partner, comments: “The percentage of profit warnings from UK listed companies in 2023 exceeded levels seen at the peak of the financial crisis, with one in five DB sponsors warning in the last 12 months.
“It is unsurprising to see the increase, given the high costs and tightening credit conditions that companies dealt with in 2023. DB Sponsors will be moving into 2024 with ongoing earnings challenges, alongside new pension regulations and guidance that also need to be addressed.
“In 2024, we see re-financing risk being a key area of concern, as interest rates remain relatively high and changing capital landscapes make it harder for some corporates to renew existing arrangements. There are still plenty of DB sponsors that haven’t yet dealt with the pain of re-financing in a higher interest rate world.
“This refinancing risk will play an increasingly important role as employer covenant has now been defined in legislation to ensure that both short term affordability and longer-term covenant horizon, are considered. Longer term financial resilience is a key factor when considering Scheme endgame strategy.”
Paul Kitson, UK Pensions Consulting Leader at EY, adds: “While the high interest rate environment is increasing the strain on companies' performance, it has also resulted in DB pension schemes being in relatively strong health, with many approaching or exceeding funding targets. There are significant surpluses emerging, giving rise to the question of whether there is true equitability between capital held in the pension scheme versus support for the corporate.
“Following the pension reform consultations announced in the Autumn Statement, Trustees and sponsors will be closely monitoring the upcoming Spring Budget for details around how the industry will be expected to drive forward the change.”
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