On the go: The economic damage and uncertainty wrought by Covid-19 has seen a drop in employer support for defined benefit pension schemes, suggesting they will find it harder to meet their pension obligations as the pandemic’s fallout continues.
The Pension Support Index, produced by PwC, tracks the ability of FTSE 350 companies to meet their pension obligations by measuring their profitability, cash generation and balance sheet strength, and comparing the findings with the size of the pension obligations the companies are exposed to, giving them a rating of one to 100.
The higher the rating, the greater companies’ ability to support their obligations to members of their pension schemes.
The first lockdown saw the overall PSI rating fall to 81 in March 2020 from 90 in December 2019.
The easing of some restrictions in the summer of 2020 saw the rating stage a partial recovery, rising to 87 in June, but the return of restrictions caused it to drop once again — down to 83 as of March 2021.
PwC’s analysis showed that significant reductions in profitability and cash generation were the principal drivers behind the drop in the PSI score.
It noted that some companies continue to provide a very high level of support, with 51 per cent of those in the FTSE 350 scoring 95 or above.
However, the proportion of schemes suffering from a lower level of employer support — a score below 60 — tripled over the year, from just 5 per cent in June 2020 to 17 per cent currently.
Though the majority of these will be able to meet their pension obligations when they fall due, there will inevitably be some schemes with significant liabilities relative to the size of their sponsor, and these may suffer from constraints on the employer’s ability to set aside sufficient cash to fund the scheme, PwC noted.
Stephen Soper, pensions partner at PwC, said: “The drop in the PSI demonstrates that Covid-19 has clearly had a negative impact on the ability of companies to support their pension schemes.
“Over the past year, sponsors have had to navigate multiple lockdowns at both a national and regional level, as well as contend with disrupted supply chains and adapt their businesses so that they do not breach the changing government guidance.”
He continued: “The significant increase in the number of sponsors that only offer limited levels of support shows that the future for some pension schemes looks increasingly uncertain.
“For trustees with weaker sponsors, now is a good time to be considering the full range of options, including the non-cash options, available to protect their covenant.”
Minesh Rana, PwC pensions restructuring director, added: “Corporate insolvencies are at their lowest level for about a decade, largely driven by the level of government support provided to companies, which has masked the true decline in the performance of some sponsors and their underlying ability to support their pension schemes over the longer term.
“A lot of uncertainty remains in how sponsors will be impacted as government support is unwound. We expect this will result in an increase in the levels of restructuring activity, including the potential for the new insolvency legislation introduced last year being used in a pensions context.”
