More than half of defined benefit-listed sponsors that are currently at high risk of insolvency made a claim for government support in December, and could face uncertainty when this lifeline comes to an end, according to analysis from EY.
In the year to March 2021, 27 UK-listed companies with a DB scheme issued at least their third profit warning within a 12-month period, representing 10 per cent of all such listed UK companies.
At the same time, 15 of these firms claimed furlough support from the government in December, and more than a third (10 companies) are also using other lifelines offered for businesses that are struggling with the pandemic-led financial crisis, including the Coronavirus Business Interruption Loan Scheme, the Covid Corporate Financing Facility, and/or the deferral of business rates and value added tax.
A company is classed as an increased risk of insolvency due to statistics which show that up to one in five companies that have issued three profit warnings within a 12-month period enter administration within 12 months of the third warning, the consultancy explained.
Most of the UK’s DB pension obligations sit in those mature, traditional sectors that have been most negatively impacted
Marc Hommel, EY
Overall, DB sponsors account for almost half (43 per cent) of the UK-listed companies that issued three or more profit warnings between March 2020 and March 2021 and claimed furlough support in December.
It is the first time EY has included government support into its analysis of DB-listed sponsors, with previous stats showing that nearly two-thirds of these companies issued a profit warning in 2020.
Karina Brookes, UK pensions covenant advisory leader at EY, said: “Given the extraordinary pressures placed on all companies in the past year, it is not entirely surprising to see that those issuing a stream of red flags are also leaning on government support.”
In his Budget speech on March 3, chancellor Rishi Sunak announced the extension of the furlough scheme, alongside other support measures, until the end of September.
Brookes said: “The time extension provided by government for financial support now stretches beyond summer, meaning that for firms gearing up to transition away from support and back to self-sufficiency post-pandemic, now is the time for action.
“Pressures on cash flows are unlikely to ease in the short term, and sponsors must ensure they are able to navigate the long-term economic impact of the pandemic.”
Marc Hommel, UK pensions actuarial leader at EY, was not surprised by the number of DB sponsors that made recent furlough claims and issued three or more profit warnings in 2020.
Alternative funding structures attracting 75% of DB sponsors
As many as three in four defined benefit scheme sponsors could be using contingent funding as an alternative to the traditional deficit recovery contribution route, according to analysis from LCP.
“Most of the UK’s DB pension obligations sit in those mature, traditional sectors that have been most negatively impacted,” he explained.
“Never has it been more important for corporate sponsors and trustees to collaborate on how best to manage the challenges faced by companies seeking to put themselves back into a sustainable, robust business position while also looking to protect promises made to pension scheme members.
“We are seeing increasing creativity and innovation in pension funding agreements, with the goal of enabling trustees to share in the upside as business conditions improve in exchange for relaxing funding demands in the short term to enable companies to recover.”
