The number of profit warnings issued by UK-listed companies with DB pension plans grew 22 per cent year over year in 2022.
According to the most recent Profit Warning Analysis by EY-Parthenon, DB scheme-using enterprises issued 67 warnings in 2022 as opposed to 55 in 2021. 15 warnings were issued in Q4 2022, which is a minor decrease from the 18 issued in Q3 2022.
By the end of 2022, there were 1,193 listed firms with UK registrations, of which 251 sponsored UK DB pension plans. 50 out of the 251 businesses warned about their profits in 2022.
In 2022, there were 305 profit warnings issued across all listed UK companies, a rise of 50 per cent from the previous year. The percentage of warnings given by UK-listed businesses in 2022 that were from DB sponsors was 22 per cent.
The consumer-facing industries, which have been dealing with inflationary pressures, shifting consumer behaviours, and a decline in customer confidence, accounted for more than 54 per cent (36 of 67 warnings) of the 2022 warnings from companies with a DB plan. The industries that issued the most warnings among DB-sponsored firms in 2022 were FTSE Travel and Leisure (seven), FTSE Food Producers (seven), and FTSE Retailers (5).
Rising expenses and overheads were the cause of a record 64 per cent of profit warning warnings issued by UK-listed DB sponsors in 2022. This is more than twice as many as in 2021 when 31 per cent of enterprises used this justification. 24 per cent of warnings in 2022, up from 13 per cent in 2021, mentioned the labour market, while 21 per cent of warnings mentioned supply chain problems.
In 2022, 31 million UK-listed companies—an increase from 23 in 2021—issued their third consecutive profit warning in a 12-month period. Within a year of receiving their third warning, one out of every five companies in this “risk zone” delist. Eight of the 31 businesses that are now in the danger zone have DB pension plans. In 2022, the London Stock Exchange delisted thirteen companies having DB pension plans.
EY-Parthenon Partner UK pensions covenant advisory leader Karina Brookes says: “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 per cent 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.”
EY-Parthenon head of pensions alternative financing solutions Eimear Kelly: “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.”