The number of profit warnings from UK-listed companies with a DB schemes increased 46 per cent year on year, according to figures from accountants EY-Parthenon.
In total there were 19 of these profit warnings in the first quarter of this year, up from 13 in the same period 2021.
The accountants point out that across all listed companies there were 72 profit warning issues in this quarter. But this more just over a quarter were from companies with DB pensions. However it added that the number of these companies issuing profit warning had dipped slightly when compared to the fourth quarter of 2021.
The majority of companies with a DB pension scheme that have issued a profit warning in recent months were from industrial or consumer-facing sectors. These are some of the sectors that have been most affected by cost and supply chain pressures and have been particularly sensitive to the subsequent changes in business and consumer confidence.
Rising overheads, including increased energy, fuel, wages, and material costs, were cited as the main reason for issuing a profit warning, with 53 per cent of firms claiming this in Q1 2022, followed by supply chain disruption, which accounted for 26 per cent of warnings.
EY-Parthenon’s analysis also shows that 18 UK companies with a DB scheme have been acquired since the start of Q1 2021. Of the total 1,232 UK-registered listed companies, 262 still have a DB scheme attached.
Karina Brookes, UK pensions covenant advisory leader and EY-Parthenon partner says: “Listed companies with DB pensions schemes tend to be clustered in consumer and industrial sectors – sectors which are being most adversely impacted by rising costs and supply chain disruption.
“These companies are now also having to navigate growing inflationary pressures and a squeeze on consumer incomes, which is likely to continue over the course of this year at least.
“As companies with DB schemes navigate an increasingly uncertain 2022, it’s imperative that trustees continue to monitor the covenant and identify early warning signs of disruption or distress.
“Scenario planning for unknowns such as rising inflation, interest rate hikes and increasing costs may prove useful in assessing the sponsor’s exposure to uncertainties and how they may impact performance in the near term. Using this analysis to set trigger events with sponsors could provide additional protection. As schemes mature, consideration of longer-term risks such as ESG in the context of the scheme’s longer term funding journey will be crucial to ensure time horizons are aligned.
“Sponsors, on the other hand, will be focused on their cost base and navigating another set of uncertain economic pressures. At the same time the latest pensions legislation and the delayed notifiable events regime create additional pressure on resources. Sponsors should ensure they have a good team supporting them on pension matters, a strong relationship with pension scheme trustees and a clear view on how corporate strategies may impact the scheme.”
Leah Evans, EY-Parthenon head of pension risk transfer, adds: “The recently published Annual Funding Statement from The Pension Regulator provided trustees and sponsors with a helpful steer of how to reflect current market volatility in their scheme management.
“Whilst market volatility is creating uncertainty for UK companies and their pension schemes, funding levels for many schemes have improved over the last 12 months, which should offer some comfort to trustees and allow sponsors a level of flexibility as they adapt their business to reflect changing market conditions. In particular, where schemes can afford a buy-out with an insurance company or, for schemes with weaker sponsors, a transfer to a consolidator, this could be beneficial for both trustees / members who achieve an increase in security for members as well as sponsors, who can focus on their corporate strategy.”
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