- Profit warnings from UK-listed companies with a DB scheme increased by 9 quarter-on-quarter in Q4 2021, but remain significantly below the 2020 peak
- In the last 12 months, 14% of UK listed companies supporting a DB scheme have issued a profit warning, compared with 62% in 2020
- 64% of warnings by UK-listed companies with a DB scheme were due to supply chain issues in Q4 2021
The number of UK listed companies with a Defined Benefit (DB) pension scheme which issued a profit warning increased by 69% in the final quarter of 2021 from 13 to 22.
EY-Parthenon’s latest Profit Warning analysis revealed that companies with a DB pension scheme accounted for over a quarter of all profit warnings (27%) in 2021. Of the 203 profit warnings issued by UK companies in 2021, 55 warnings were from 37 companies with a DB scheme.
In total, there are 1,225 UK-registered listed companies in the UK, and 265 of them sponsor a UK DB pension scheme. Fourteen per cent of these firms issued a profit warning in 2021, significantly lower than the previous year, when almost 62% issued a profit warning.
Most companies issuing profit warnings with a DB pension scheme were from industrial or consumer-facing sectors, which have faced significant headwinds over the last 12 months, including supply chain risks, rising costs and labour shortages.
Within the industrials and consumer industries, companies within the FTSE Aerospace and Defense sector were the most severely affected, with 10 warnings issued by companies with a sponsoring DB scheme, followed by Personal Care, Drug and Grocery (6), Retailers and Food Producers (4 warnings each) in 2021.
Overall, in 2021 the number of profit warnings issued by UK listed companies rose to 70 in the final quarter of the year, from 51 in Q3, with 44% citing vulnerabilities in the supply chain. This was more acute in sectors which sponsor a UK DB scheme, with 64% of these companies citing supply chain as the main factor, followed by rising costs (36%), and the impact of the COVID-19 pandemic (23%) in Q4 2021.
Karina Brookes, UK Pensions Covenant Advisory Leader and EY-Parthenon Partner, comments: “Companies with DB schemes are clustered in many of the most traditional sectors, and it is these that have been most exposed to supply chain disruption and rising energy costs over the last six months. These significant challenges, combined with the recent tapering of pandemic-related government support, which has shielded many companies from the impact of the pandemic, means we are only now starting to get some idea of the scale of the long-term impact of the pandemic.
“Trustees need to consider how ongoing uncertainty and increased risks could impact the long-term funding to the scheme and whether the covenant longevity of the sponsor is sufficient. In order to best assess the sponsor’s future viability and the level of investment and funding risk in a scheme, it is crucial that sponsors and trustees are tuned in to moving market and sector dynamics, constantly monitor financial resilience and are considering ESG risks.
“Many companies will need to adjust their corporate strategies to secure long-term viability, with some looking to sell non-core assets to shore up the business. Decision-makers of companies sponsoring DB schemes will need to ensure they are moving in accordance with the requirements of the Pension Schemes Act 2021 and consider how any strategy changes could impact the pension scheme’s position.”
Leah Evans, EY-Parthenon Head of Pension Risk Transfer, adds: “With the recent entrance of a TPR approved consolidator in the market, and another expected to follow soon, there are growing options for sponsors to remove DB schemes from balance sheets at a more affordable cost. There are two main reasons companies may decide to transfer their liabilities to a third party such as a consolidator or insurer. Firstly, it removes the risk of the sponsor having to pay additional contributions when they may have other corporate priorities and so improves the sponsor’s covenant longevity. Secondly, it allows companies to respond more quickly and flexibly to market pressures as they no longer have to consider the impact on their pension scheme if it has already been secured separately. It will be interesting to see how the market looks even six months down the line, as activity is expected to ramp up in this space and we are aware of a number of potential new providers looking to enter the market.”