The number of profit warnings issued by UK-listed companies with a Defined Benefit (DB) pension scheme fell by 21% year-on-year in H1 2023.
EY-Parthenon’s latest Profit Warning analysis found that almost one-in-five (19%) of all warnings issued by UK-listed companies in H1 2023 came from firms sponsoring a DB pension scheme. Across all UK-listed companies, 141 profit warnings were issued in H1 2023, a four per cent rise on the 136 warnings issued over the same period in 2022 with a significant increase in warnings from technology sectors in Q1 2023.
UK-listed companies with a DB pension scheme issued 27 profit warnings in the first half of 2023, down from 34 in H1 2022. Twelve warnings were issued by UK-listed companies with a DB pension scheme in Q1 2023, down from 19 warnings in Q1 2022. However, warnings in Q2 remained level year-on-year, with 15 warnings from UK-listed companies with DB pension schemes issued in both Q2 2023 and Q2 2022.
Forty-one per cent (11 out of 27 warnings) of the H1 2023 profit warnings from UK-listed companies with a DB pension scheme were from the industrial sector, and 26% (seven out of 27 warnings) were from the consumer-facing sector.
Rising costs and overheads remain key reason for DB profit warnings
Over a third (33%) of profit warnings issued by UK-listed DB sponsors in the first half of 2023 were due to rising costs and overheads. This was also the primary reason for profit warnings in H1 2022, although the figure was almost double (65%).
Persistent economic uncertainty and rising interest rates have also played a significant role in driving warnings from UK-listed DB sponsors, with 26% of warnings citing delayed or cancelled contracts and 22% citing changing credit conditions. This contrasts to H1 2022, where supply chain issues were the second most prominent cause of profit warnings (29%), and labour issues were the third most prominent cause (26%).
Across all UK-listed businesses, 36 companies issued their third consecutive profit warning over the last 12 months, up from 31 at the end of Q1 2023. On average, one-in-five companies in this three-warning ‘danger zone’ delist within a year of their third warning.
Of the 36 companies in this danger zone, nine have a DB pension scheme. Six companies with a DB pension scheme delisted or announced their delisting from the London Stock Exchange in the first half of 2023.
James Berkley, EY-Parthenon UK Pensions Strategy Partner, comments: “UK companies have faced prolonged economic challenges, and in the second quarter of the year these have extended further into sectors with higher concentrations of DB sponsors, such as the industrial sector. These businesses are feeling the effects of tightening credit conditions caused by rising interest rates, as well as the continued economic uncertainty driving many companies to reduce spending, leading to delayed or cancelled contracts. As companies’ lending facilities reach maturity and need refinancing, trustees and The Pensions Regulator will be keeping a close eye on the impact these transactions might have on pension scheme affordability and access to capital.
Corporates will need to engage trustees early in order to finalise financing negotiations in good time.
“The current low-growth conditions aren’t forecast to ease in the immediate future, and contingency planning will become an important tool for trustees to mitigate risks and assess the long-term prospects of the corporate. Robust scenario planning will be crucial in understanding the sponsor’s exposure and anticipating factors that could affect performance, as well as whether interventions such as security or non-cash contributions should be sought from the sponsor to balance any additional risks to the covenant.”
Paul Kitson, UK Pensions Consulting Leader at EY, adds: “Despite the extraordinary mix of challenges faced by UK businesses across the last two years, scheme funding levels continue to improve. This degree of divergence is unusual for the UK and both trustees and sponsors should continue to monitor funding positions closely to reassess whether schemes may be approaching, or even passed, their long term funding targets. Though the bulk annuity market is feeling capacity constrained, there are measures that corporates and trustees of small and large schemes can take to prepare for these transactions and be ready to capitalise as the market moves in their favour.”
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