- 228 profit warnings have been issued by listed DB scheme sponsors in the first nine months of 2020
- Nearly two thirds (61%) of listed DB scheme sponsors have issued profit warnings this year, of which 90% have been COVID-19 related
- 32 profit warnings have been issued by listed DB scheme sponsors in the last quarter (Q3 2020)
In the first nine months of the year, nearly two-thirds (61%) of listed defined benefit (DB) pension scheme sponsors issued 228 profit warnings, constituting 44% of the total 524 profit warnings issued during the period, according to the latest EY quarterly analysis of UK profit warnings.
The number of profit warnings issued by all UK quoted companies in the first nine months of 2020 has reached a new annual high, with more expected due to continued market uncertainty, evidencing the increasing pressure on companies currently balancing calls on cash flows, while meeting pension promises.
Of the total number of listed companies in the UK (1,204), 23% (281) have a DB scheme, and are concentrated in more traditional industries that are particularly vulnerable to the current economic climate. Thirty-four per cent of all listed companies have warned in the first three quarters of 2020, versus 61% of the total of listed companies that have a pension scheme. Ninety per cent of profit warnings issued by listed DB sponsors in the first three quarters of 2020 have been COVID-19 related.
Sectors under pressure include large number of firms with DB schemes
Profit warnings issued by DB sponsors in the first nine months of 2020 have been concentrated in industrial and consumer discretionary sectors, which reflects the focus of sponsors in these industries. The five FTSE sectors with the highest number of warnings are: Travel and Leisure (28), Industrial Support Services (22), Construction and Materials (18), Retailers (16) and Household Goods and Home Construction (14).
Listed companies with a pension scheme can be found in all but six of the FTSE sectors, and 57% sit within Industrial and Consumer Discretionary FTSE sectors (those listed above), which account for 36% of the total listed market. These sectors tend to issue the most profit warnings, which has been acutely the case during COVID-19.
DB scheme sponsors issue more than half of all Q3 profit warnings
Listed DB scheme sponsors issued 32 profit warnings in Q3; 55% of the total 58 profit warnings issued over the three-month period, with 100% of profit warnings issued by DB sponsors in Q3 being COVID-19 related.
The third quarter is typically the quietest period for corporate reporting and in 2020 this was amplified by the significant fall in earnings expectations earlier in the year, and the increase in activity as COVID-19 restrictions were relaxed and as government initiatives kicked in.
Looking at the last quarter (Q3), the FTSE sectors issuing the highest number of profit warnings from a firm with a DB scheme were: Aerospace and Defense and Construction and Materials.
Gareth Mee, UK Actuarial Leader at EY, comments:
“The sheer volume of profit warnings issued by companies with a pension scheme in the year to date underlines the market pressures many firms are facing as they work to keep the wheels turning on operations, while also continuing to meet their pension obligations to members. It is vital that Boards do not underestimate the depth and extent of both the immediate and long-term challenges ahead, as COVID-19 is not a temporary earnings challenge and will likely change how business and investors operate. Given the volatility, now is a good time to consider a plan for pension scheme de-risking.
“The financial market backdrop is volatile. The lower than ever yield environment, the US election and Brexit amongst other potential risk events will increase the pressures across many pension schemes’ investment portfolios. In addition, ongoing local lockdowns and further disruption to the UK’s economic recovery will prolong the hardship in many sectors. As we look to the end of the year, the mounting red flags of financial stress add to the growing concern of the hundreds of thousands reliant on pension schemes for their future wellbeing. Boards that plan carefully, are agile in their response and allocate capital wisely will have the best chance of riding this challenging economic period.”
Karina Brookes, UK Pensions Covenant Advisory Leader at EY, comments:
“Scheme sponsors are clearly facing significant market challenges. Many impacted businesses are being forced to double down on cash conservation and re-financing efforts, and requests for contribution deferrals to schemes have increased during COVID-19, especially within certain sectors.
“In such a challenging market, it is more important than ever that the strength of the employer covenant and the support available to schemes is raised in all key decision-making. Assessments of covenant should not only provide a view of past performance, but must also consider financial resilience, future growth assumptions, inherent challenges within the sector, the covenant horizon span, and the ability to react and respond to change.
“At a time of change within the regulatory regime for DB scheme funding including an increased focus on the role of covenant, headlined by The Pensions Regulator’s new DB funding code and the recent publication of guidance for trustees around the superfund regime, the pensions industry is working together to secure members’ benefits. The headwinds facing the sectors where DB schemes are commonly found are acute, and the response from scheme stakeholders must be robust and innovative. In response we expect to see an uptick in covenant-led decision making, as trustees look to improve their pension scheme’s resilience in these uncertain economic times.”
Notes to Editors
- EY has been conducting profit warnings research and analysis since 1999
- The latest EY Profit Warnings analysis can be found here