Profit warnings from UK-listed companies with a defined benefit (DB) pension scheme fell by 21 per cent in H1 2023, although Q2 levels remained consistent year-on-year, analysis from EY-Parthenon has revealed.

EY-Parthenon’s latest Profit Warning analysis found that almost one-in-five (19 per cent) of all warnings issued by UK-listed companies in H1 2023 came from firms sponsoring a DB pension scheme.

In total, 141 profit warnings were issued across all UK-listed companies in H1 2023. UK-listed companies with a DB pension scheme issued 27 of these profit warnings in the first half of 2023, down from 34 in H1 2022.

However, the research showed that while the number of warnings from UK-listed companies with DB pension schemes had fallen to 12 in Q1, warnings in Q2 remained level year-on-year, with 15 warnings from companies with DB pension schemes issued in both Q2 2023 and Q2 2022.

Rising costs and overheads remained a key reason behind the warnings, as EY-Parthenon found that a third (33 per cent) of profit warnings issued by UK-listed DB sponsors in the first half of 2023 were due to rising costs and overheads.

This was also the primary reason for profit warnings in H1 2022, although the figure was almost double (65 per cent).

The research suggested that persistent economic uncertainty and rising interest rates have also played a significant role in driving warnings from UK-listed DB sponsors, with 26 per cent of warnings citing delayed or cancelled contracts and 22 per cent citing changing credit conditions.

Across all UK-listed businesses, 36 companies issued their third consecutive profit warning over the last 12 months, up from 31 at the end of Q1 2023. Of those companies in this danger zone, nine have a DB pension scheme.

In addition to this, the analysis found that six companies with a DB pension scheme delisted or announced their delisting from the London Stock Exchange in the first half of 2023.

Commenting on the findings, EY-Parthenon UK pensions strategy partner, James Berkley, stressed the need for corporate sponsors to engage trustees early in order to finalise financing negotiations in good time.

He continued: “UK companies have faced prolonged economic challenges, and in the second quarter of the year these have extended further into sectors with higher concentrations of DB sponsors, such as the industrial sector.

“These businesses are feeling the effects of tightening credit conditions caused by rising interest rates, as well as the continued economic uncertainty driving many companies to reduce spending, leading to delayed or cancelled contracts.

“As companies’ lending facilities reach maturity and need refinancing, trustees and The Pensions Regulator will be keeping a close eye on the impact these transactions might have on pension scheme affordability and access to capital.

“The current low-growth conditions aren’t forecast to ease in the immediate future, and contingency planning will become an important tool for trustees to mitigate risks and assess the long-term prospects of the corporate.

"Robust scenario planning will be crucial in understanding the sponsor’s exposure and anticipating factors that could affect performance, as well as whether interventions such as security or non-cash contributions should be sought from the sponsor to balance any additional risks to the covenant.”

Adding to this, EY UK pensions consulting leader, Paul Kitson, argued that although the bulk annuity market is feeling capacity constrained, there are measures that corporates and trustees can take to prepare for these transactions and be ready to capitalise as the market moves in their favour.

“Despite the extraordinary mix of challenges faced by UK businesses across the last two years, scheme funding levels continue to improve," he continued.

“This degree of divergence is unusual for the UK and both trustees and sponsors should continue to monitor funding positions closely to reassess whether schemes may be approaching, or even passed, their long-term funding targets."

Share Story: