Profit warnings from companies with DB scheme surge 46%

Analysis by EY-Parthenon found that the number of listed companies increased from 13 in the first quarter of 2021 to 19 in Q1 2022. 

Just over a quarter of all UK-listed warnings issued in Q1 2022 came from companies sponsoring a DB scheme, with 53 per cent of warnings due to bigger overheads such as increased energy, fuel, wages, and material costs. 

Supply chain disruption was cited as the main reason for 26 per cent of warnings.

It’s imperative that trustees continue to monitor the covenant and identify early warning signs of disruption or distress

Karina Brookes, EY-Parthenon

Profit warnings down from end of last year

Most warnings from companies with a DB scheme were those from within industrial or consumer-facing sectors such as retailers, industrial support services and personal care, drug and grocery stores.

These are some of the sectors that have been most affected by cost and supply chain pressures and have been most exposed to the changes in business and consumer confidence. 

However, the number of warnings in Q1 2022 fell slightly from the fourth quarter of 2021 when there were 22 warnings from listed companies with a DB scheme.

In Q1 2022, the number of profit warnings issued by UK-listed companies overall increased 44 per cent year on year from 50 warnings in Q1 2021 to 72 warnings in the same period this year. 

Karina Brookes, UK pensions covenant advisory leader and EY-Parthenon partner, said: “As companies with DB schemes navigate an increasingly uncertain 2022, it’s imperative that trustees continue to monitor the covenant and identify early warning signs of disruption or distress.

“Scenario planning for unknowns such as rising inflation, interest rate hikes and increasing costs may prove useful in assessing the sponsor’s exposure to uncertainties and how they may impact performance in the near term.”

Using this analysis to set trigger events with sponsors could provide additional protection, she added. 

It comes as a study by CoreData Research found that half of institutional investors think the Ukraine crisis will pull the global economy into stagflation, while a fifth think it will cause a financial crisis worse than that of 2008. 

Brookes said that sponsors will be focused on their cost base and navigating another set of uncertain economic pressures, while the latest pensions legislation and delayed notifiable events regime create additional pressure on resources. 

“Sponsors should ensure they have a good team supporting them on pension matters, a strong relationship with pension scheme trustees, and a clear view on how corporate strategies may impact the scheme,” she said.

Improved funding levels

Leah Evans, EY-Parthenon head of pension risk transfer said that while market volatility is creating uncertainty for UK companies and their pension schemes, funding levels for many schemes have improved over the past 12 months. 

According to the Pension Protection Fund’s 7800 index, which tracks all DB pension funds in the UK, the funding ratio increased from 111.4 per cent at the end of March 2022 to 114 per cent, with assets of £1.7bn and liabilities of £1.6bn.

The improved funding ratio could provide some flexibility as sponsors adapt their business to reflect changing market conditions, Evans said, adding that where schemes can afford a buyout with an insurance company or, for schemes with weaker sponsors, a transfer to a consolidator could be beneficial for both trustees and members.

Lisa McCrory, the PPF’s chief finance officer and chief actuary, said the increase in the funding ratio was mainly due to the continued uptick in bond yields primarily driven by central banks trying to control inflation. 

“It’ll be interesting to see what impact the US and UK rate moves will have on the 7800 Index next month when coupled with ongoing Covid lockdowns in China and further heightened economic sanctions on Russia,” she added.