Employers' support for FTSE 350 companies’ defined benefit (DB) pension schemes dropped to a three-year low in March due to Covid-19, but recovered as lockdown was eased in the summer, according to PwC.

PwC’s Pensions Support Index (PSI) revealed that FTSE 350 schemes’ sponsors’ overall PSI score fell to 81 in March 2020, the lowest since mid-2017, effectively wiping out nearly half the gains made since the financial crisis.

However, by the end of June 2020, employers’ PSI score rose to 87, just one point lower than at the same point last year.

Despite the improvement, PwC warned that the second lockdown and further restrictions over winter means the outlook remains “uncertain”.

The PSI tracks the relationship between the financial strength of the FTSE 350 companies and their DB pension obligations, comparing the deficit number to the cash generation, profitability and assets of companies supporting their schemes.

PwC noted that the PSI scores for the travel, leisure, hospitality and retail sectors have been hardest hit, while employer schemes for technology and telecommunications firms have “held up”.

“The onset of the pandemic led to substantial falls to the value of pension scheme assets due to adverse market movements and material increases in scheme deficits,” commented PwC partner and senior pensions adviser, Stephen Soper.

“The severe challenges facing the consumer discretionary sector, not just during the Covid-19 crisis but also in recent years, has meant that many companies operating in this sector have limited or reduced ability to support their pension schemes.

“In addition, pension schemes may also have held direct or indirect holdings in retail or travel and leisure businesses as part of their asset mix, making them susceptible to fluctuations in the value of these businesses.”

PwC explained that although the outlook remains uncertain, scenario planning has improved in recent months. While management teams felt uncomfortable sharing forecasts that could change at short notice at the start of the crisis, there has been a recent increase in the amount of financial information that sponsors are sharing with trustees.

“It’s been eight months since the first lockdown, and despite the continued uncertainty, management teams are becoming increasingly comfortable sharing their best view of how their business is expected to perform over the short to medium term with trustees,” PwC pension director, Minesh Rana, said.

“In many cases companies have outperformed their forecasts from earlier this year and I have seen growing confidence from management teams in the achievability of forecasts being shared now.

“In a number of cases we’ve also found it effective to plan for a number of scenarios, rather than waiting to see which scenario would play out.

“This is going to become particularly important during the second lockdown as it will mean trustees can have an informed voice in the discussions with other key stakeholders whilst they are taking place, rather than being notified of what has happened later down the line, when all meaningful decisions have been taken.”

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