The number of profit warnings issued by UK-listed companies with a defined benefit (DB) pension scheme increased by 6 per cent in 2023, according to EY Parthenon’s latest profit warnings report.

The research showed that a total of 72 warnings were issued by listed companies with a DB pension sponsor in 2023, compared to the 68 issued in 2022.

This means that nearly a quarter (24 per cent) of all profit warnings issued by UK-listed companies in 2023 came from companies with a DB pension scheme.

The final quarter of the year saw a particular increase, as 22 listed companies with a DB scheme issued warnings, marking a 10 per cent increase on Q3 2023, and the highest quarterly total since Q4 2021, when 22 warnings were also issued.

Companies with DB sponsors in the industrials sector issued the most warnings in Q4, according to the research, and also issued the most throughout 2023, at 29.

Rising costs were the most common issue facing companies, as almost a third (29 per cent) of warnings from UK-listed companies with a DB pension scheme cited rising costs and overheads as a reason for warning in 2023.

In addition to this, credit tightening remains key driver for profit warnings from companies with a DB pension scheme, as 27 per cent of profit warnings issued by UK-listed companies with a DB sponsor in Q4 2023 cited pressures from credit tightening as a key reason.

Whilst this marks a fall on the 35 per cent of sponsors that cited this as an issue in the previous quarter, EY noted that it remains "clearly higher" than a year ago in Q4 2022 when 13 per cent gave credit condition as a warning.

Commenting on the findings, EY-Parthenon partner and UK pensions covenant advisory lead, Katrina Brookes, stated: “The percentage of profit warnings from UK listed companies in 2023 exceeded levels seen at the peak of the financial crisis, with one in five DB sponsors warning in the last 12 months.

“It is unsurprising to see the increase, given the high costs and tightening credit conditions that companies dealt with in 2023. DB sponsors will be moving into 2024 with ongoing earnings challenges, alongside new pension regulations and guidance that also need to be addressed.

“In 2024, we see re-financing risk being a key area of concern, as interest rates remain relatively high and changing capital landscapes make it harder for some corporates to renew existing arrangements. There are still plenty of DB sponsors that haven’t yet dealt with the pain of re-financing in a higher interest rate world.

“This refinancing risk will play an increasingly important role as employer covenant has now been defined in legislation to ensure that both short term affordability and longer-term covenant horizon, are considered. Longer term financial resilience is a key factor when considering scheme endgame strategy.”

Adding to this, EY UK pensions consulting leader, Paul Kitson, said: “While the high interest rate environment is increasing the strain on companies' performance, it has also resulted in DB pension schemes being in relatively strong health, with many approaching or exceeding funding targets.

“There are significant surpluses emerging, giving rise to the question of whether there is true equitability between capital held in the pension scheme versus support for the corporate.

“Following the pension reform consultations announced in the Autumn Statement, trustees and sponsors will be closely monitoring the upcoming Spring Budget for details around how the industry will be expected to drive forward the change.”

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