The number of profit warnings issued by UK-listed companies with a Defined Benefit (DB) pension scheme increased 22% year-on-year in 2022.
EY-Parthenon’s latest Profit Warning Analysis found that 67 warnings were issued by companies with a DB scheme in 2022, compared with 55 in 2021. In Q4 2022, 15 warnings were issued, slightly down on the 18 issued in Q3 2022.
At the end of 2022, there were 1,193 UK-registered listed companies, with 251 sponsoring a UK DB pension scheme. Of the 251 companies, 20% (50 companies) issued a profit warning in 2022.
Across all listed UK companies, 305 profit warnings were issued in 2022, a 50% year-on-year increase. Warnings from DB sponsors in 2022 accounted for 22% of the total number of warnings issued by UK listed companies.
Over 54% (36 of 67 warnings) of the 2022 warnings from companies with a DB scheme were from consumer-facing sectors, which have been facing inflationary pressures, changing consumer behaviours, and a fall in consumer confidence. The sectors which issued the highest number of warnings amongst DB sponsored companies in 2022 were FTSE Travel and Leisure (7), FTSE Food Producers (7) and FTSE Retailers (5).
A record 64% of profit warning warnings issued by UK-listed DB sponsors in 2022 were due to rising costs and overheads. This is over double the figure for 2021, when 31% of companies cited this reason. Labour market issues accounted for 24% of warnings in 2022, up from 13% in 2021, and 21% of warnings cited supply chain issues.
Across the UK-listed market, 31m companies issued their third consecutive profit warning in 12 months in 2022, up from 23 in 2021.
On average one-in-five companies in this three-warning ‘danger zone’ delist within a year of their third warning. Of the 31 companies currently in the danger zone, eight have a DB pension scheme. Thirteen companies with a DB pension scheme delisted from the London stock exchange in 2022.
Karina Brookes, UK Pensions Covenant Advisory Leader and EY-Parthenon Partner, comments: “Over the last 12 months UK companies have been facing a myriad of issues including, rising costs, changing consumer behaviours, the cost-of-living crisis, and DB sponsors have been no different. At a time when regulation and guidance is focusing on the sponsor covenant, these macroeconomic challenges need to be fully understood and monitored by both trustees and corporates. Scenario planning to understand the impact of macroeconomic changes and sector specific challenges will be vital to determine whether the covenant horizon is aligned to the scheme’s longer-term objectives.
“Whilst corporates will be under pressure to manage increased costs, it’s important that trustees ensure the scheme is treated fairly alongside other stakeholders and demands on the covenant. The use of contingent assets may be something to consider here which can provide benefits for both sponsors and schemes.
“Although scheme funding levels are improving in many cases, it is important schemes have visibility on the covenant that will ultimately support pension payments to low dependency and support the underlying risk in the scheme through to endgame.
“Our latest Profit Warnings Analysis found that 5% of the DB sponsor population de-listed in 2022. With private equity looking to redeploy unused capital and corporates streamlining operations, we could see more companies delisting in 2023. Trustees in this position should engage with sponsors early on to ensure they are included in the decision-making process and are able to secure the best possible solution for all parties.”
Eimear Kelly, EY-Parthenon Head of Pensions Alternative Financing Solutions, adds: “2023 will be a milestone year for DB pension schemes and their corporate sponsors with The Pensions Regulator set to announce one of the biggest shake-ups to scheme funding in over 20 years as it consults on a new code. The changes are likely to place additional pressure on already stretched corporate sponsors to plug pension funding gaps at a time when the macroeconomic environment remains uncertain.
“Creative funding solutions such as contingent assets or asset-backed contributions could make a resurgence in the short to medium-term to help corporates meet their obligations to DB pension schemes.
“Whilst increased regulatory pressure to fund pensions will be challenging for many corporates, equally there were many schemes that started 2023 in a very strong funded position. Notwithstanding the current economic headwinds, insurance pricing remains keen by historical standards and for those schemes that are well funded, the coming months will be a good opportunity to start planning and preparing for an approach to the insurance market.”
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