Nearly two-thirds (61 per cent) of listed defined benefit (DB) pension scheme sponsors issued a combined 228 profit warnings in the first nine months of the year, a new annual high, according to EY analysis.

The firm's latest quarterly analysis of UK profit warnings found that 44 per cent of the total 524 profit warnings issued during the period were issued by listed DB schemes, with more expected due to ongoing market uncertainty.

Furthermore, 90 per cent of the profit warnings issued by listed DB sponsors during the first three quarters were Covid-19 related, whilst 100 per cent of the 32 profit warnings made in Q3 were Covid-19 related.

The firm emphasised that the 23 per cent of listed companies in the UK (1,204) who have a DB scheme are more concentrated in “traditional industries”, which are “particularly vulnerable” to the current economic landscape.

It highlighted, for instance, that 57 per cent of listed DB scheme sponsors sit within industrial and consumer discretionary FTSE sectors, which tend to issue the most profit warnings.

Indeed, it also found that just 34 per cent of all listed companies had issued profit warnings compared to 61 per cent of listed companies that have a pension scheme.

Commenting on the findings, EY UK actuarial leader, Gareth Mee, said: “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.

“Boards that plan carefully, are agile in their response and allocate capital wisely will have the best chance of riding this challenging economic period.”

Adding to this, EY UK pensions covenant advisory leader, Karina Brookes, stressed that scheme sponsors are "clearly facing significant market challenges".

She continued: "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."

Brookes argued that assessments of covenant should not only provide a view of past performance, but 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.

She concluded: “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.”

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