Profit warnings down but half of DB sponsors remain on life support

There were 13 profit warnings issued by listed companies with DB schemes in the first three months of 2021, 66 per cent down since the third quarter of 2020 and 41 per cent down since the fourth quarter, the figures showed.

They represent 26 per cent of all UK profit warnings, and four per cent of all UK-listed companies with DB schemes.

UK corporate failures are likely to increase later this year as government support measures taper through the summer months

Karina Brookes, EY-Parthenon

UK quoted companies issued 50 profit warnings in total during the first quarter of 2021, down 83 per cent from the 301 recorded in the same period last year, which represents the largest year-on-year percentage fall in UK profit warnings on record.

Despite the good news, however, 59 per cent of listed companies with DB schemes remain in the insolvency “danger zone” and are using government support measures. 

Pensions Expert reported in April that DB sponsors accounted for 43 per cent of the UK-listed companies that issued three profit warnings and claimed furlough support between March 2020 and March 2021.

EY’s updated figures show that a total of 64 UK-listed companies have issued at least their third profit warning in a 12-month period since March 2020, including 27 companies with DB schemes, though this figure remains unchanged from those reported in April.

Government’s support packages bringing relief

The consultancy stated it would usually expect to see 15-20 per cent of these companies entering administration within a year of their third profit warning, but to date none have done so, a fact attributed at least partly to the existence of the government’s coronavirus support packages.

Thirty-eight of the qualifying companies, including 16 with a DB scheme, used the government’s furlough scheme in January 2021.

Karina Brookes, UK pensions covenant advisory leader and EY-Parthenon partner, said: “The downwards trajectory of profit warnings from listed companies with DB pension schemes is very much in line with the broader UK picture. But these uncommonly low figures are disguising the multitude of challenges faced by businesses.

“While confidence can be taken from the end of lockdown and the roll-out of an effective vaccine, restarting and rebuilding won’t be without its challenges. For many businesses, pressures will intensify as operations restart, government support tapers, and working capital becomes stretched.”

EY analysis showed that government support, combined with a moratorium on winding-up petitions, successfully and significantly reduced corporate insolvencies over the course of the pandemic.

Had insolvency levels continued on the same trajectory as pre-March 2020, it is estimated there would have been more than 6,000 extra companies entering insolvency procedures.

However, Brookes warned that “UK corporate failures are likely to increase later this year as government support measures taper through the summer months”. 

“Given the increased powers provided to the Pensions Regulator, trustees and sponsors alike should conduct scheme and corporate scenario planning now to assess insolvency risk and how pension scheme liabilities can be better protected in a downside scenario,” she said.

Striking the right balance

Alan Hudson, EY-Parthenon UK&I turnaround and restructuring strategy leader, added: “We are likely to see the start of three overlapping waves of insolvencies in the UK.

“Companies that would have otherwise become insolvent in the past 15 months are back under pressure, the withdrawal of government support is also challenging companies weakened by the pandemic, and there are those companies which may be unable or too slow to adapt to rapid market change.”

Brookes said that trustees and sponsors “must ensure a careful balance is struck” between a company’s short-term survival and its long-term recovery, “which will benefit the DB scheme”.

“Being able to flex recovery plans in line with corporate performance will help achieve a more balanced outcome for all,” she said, though noting that “the ability to do this very much depends on the specifics of each case, with integrated risk management, underlying security and trustee governance protocols being integral to decision-making”. 

“In any event, strategic planning and early engagement with all stakeholders through regular, clear communication will help ensure the best outcome.”