The number of UK listed companies with a defined benefit scheme which issued a profit warning went up by 69% in the final quarter of 2021, from 13 to 22, new figures by consultancy EY-Parthenon show, increasing the need for trustees to monitor the sponsor covenant. 

 

However, the high warning figures still 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. 

  

In Q4 last year, the majority (64%) of the warnings were due to supply chain issues, mostly in the industrial or consumer-facing sectors. Companies within the FTSE aerospace and defence 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.   

 

  

Companies with DB schemes are clustered in many of the most traditional sectors, which have been most exposed to supply chain disruption and rising energy costs over the last six months. This and the tapering of government support means the scale of the long-term impact of the pandemic is only now becoming clear, said Karina Brookes, UK pensions covenant advisory leader. 

  

“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,” she advised. 

  

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, she said, highlighting that this will need to be done in compliance with the Pension Schemes Act 2021, which tightens the notification regime for corporate activity. 

 

 

Any post-pandemic adjustments could also see companies try to move pension liabilities to a third party. Leah Evans, EY-Parthenon head of pension risk transfer, said the recent authorisation of a DB consolidator – with a second one expected to follow soon – means "there are growing options for sponsors to remove DB schemes from balance sheets at a more affordable cost”. 

 

Evans suggested that there could be considerable movement: “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.” 

 

Will more employers look to offload DB liabilities given the uncertain economic outlook?