Just 14 per cent of UK-listed companies with a defined benefit (DB) pension scheme issued profit warnings in the past 12 months, “significantly lower” than the 62 per cent recorded in 2020, research from EY-Parthenon has revealed.

Despite the year-on-year improvements, the analysis revealed that the number of companies with a DB scheme that issued a profit warning increased by 69 per cent in the final quarter of 2021 to 22, compared to 13 in Q3.

It also showed that companies with a DB scheme accounted for over a quarter (27 per cent) of all profit warnings in 2021, with 55 of the of the 203 profit warnings issues from 37 companies with a DB scheme.

Most companies issuing profit warnings with a DB pension scheme were from industrial or consumer-facing sectors, which EY-Parthenon explained have faced significant headwinds over the past 12 months, including supply chain risks, rising costs and labour shortages.

Companies within the FTSE aerospace and defence sector were the most severely affected within the industrials and consumer industries, with 10 warnings issued by companies with a sponsoring DB scheme.

EY-Parthenon partner and UK pensions covenant advisory leader, Karina Brookes, also noted that companies with DB schemes are clustered in many of the most traditional sectors, with these being the most exposed to supply chain disruption and rising energy costs over the past six months.

“These significant challenges, combined with the recent tapering of pandemic-related government support, which has shielded many companies from the impact of the pandemic, means we are only now starting to get some idea of the scale of the long-term impact of the pandemic," she stated.

In light of this, Brookes called on trustees to consider how ongoing uncertainty and increased risks could impact the long-term funding to the scheme and whether the covenant longevity of the sponsor is sufficient.

She continued: “In order to best assess the sponsor’s future viability and the level of investment and funding risk in a scheme, it is crucial that sponsors and trustees are tuned in to moving market and sector dynamics, constantly monitor financial resilience and are considering environmental, social and governance (ESG) risks.

“Many companies will need to adjust their corporate strategies to secure long-term viability, with some looking to sell non-core assets to shore up the business.

“Decision-makers of companies sponsoring DB schemes will need to ensure they are moving in accordance with the requirements of the Pension Schemes Act 2021 and consider how any strategy changes could impact the pension scheme’s position.”

EY-Parthenon head of pension risk transfer, Leah Evans, also suggested that there are growing options for sponsors to remove DB schemes from balance sheets at a more affordable cost, particularly amid the recent entrance of regulator approved consolidator in the market, with another expected to follow soon.

She said: “There are two main reasons companies may decide to transfer their liabilities to a third party such as a consolidator or insurer.

"Firstly, it removes the risk of the sponsor having to pay additional contributions when they may have other corporate priorities and so improves the sponsor’s covenant longevity.

“Secondly, it allows companies to respond more quickly and flexibly to market pressures as they no longer have to consider the impact on their pension scheme if it has already been secured separately.

"It will be interesting to see how the market looks even six months down the line, as activity is expected to ramp up in this space and we are aware of a number of potential new providers looking to enter the market.”

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