On the go: Profit warnings issued by UK-listed companies with defined benefit pension schemes increased by 38 per cent year on year in the third quarter of 2022.
According to EY-Parthenon analysis, the number of profit warnings issued by listed DB sponsors rose from 13 in Q3 2021 to 18 in Q3 2022, making up 21 per cent of all profit warnings from UK-listed companies, down from 25 per cent in the previous period.
Of the total 1,217 UK-registered listed companies, 258 sponsor a UK DB pension scheme, EY-Parthenon said.
Across all listed UK companies, 86 profit warnings were issued in Q3 2022 – the highest third-quarter total since 2008 and an increase of 69 per cent year on year from Q2 2021, when 51 were issued. The rise has been driven by a significant increase in warnings from consumer sectors, which rose almost three-fold year-on-year, the company added.
More than half of DB sponsors to have issued a profit warning during Q3 2022 (10 out of 18) were constituents of consumer-facing sectors, including personal care, drug and grocery stores, food producers, and travel and leisure. These sectors have been particularly sensitive to inflationary pressures and hit hard by falling consumer confidence, EY-Parthenon stated.
Of the 18 profit warnings issued by UK-listed DB sponsors in Q3 2022, 11 cited rising costs and overheads as the principal driver of the warning, while three warnings were led by labour market issues (17 per cent).
Supply chain challenges, which had accounted for 38 per cent of warnings in Q3 2021, featured in just two warnings during the third quarter of the year.
Across all UK-listed companies, 28 have issued their third consecutive profit warning in the last year and are in the three-warning ‘danger zone’, EY-Parthenon noted.
Of the 28 companies currently in the danger zone, six have a DB pension scheme.
EY-Parthenon partner and UK pensions covenant advisory leader Karina Brookes noted that “UK companies have been buffeted by headwinds from every direction through the first nine months of the year”.
“Rising interest rates and inflationary pressures are seriously exacerbating existing challenges of rising costs and ongoing supply chain disruption, which is particularly acute for consumer-facing businesses, where falling retail sales and diminished consumer confidence is also now having a big impact,” she said.
Brookes pointed out that many sponsors of DB pension schemes “running liability-driven investment strategies have also faced short-term liquidity issues amid unprecedented moves in UK government bond markets”, and that “in some cases, the only option for trustees has been to ask sponsors for additional funding to bridge the gap”.
“With limited signs of relief for sponsors’ cost pressures over the near term, it is crucial trustees closely monitor the strength of sponsor covenants for early signs of distress and engage in scenario or even contingency planning.
“Trustees and sponsors – especially for schemes already in the ‘danger zone’ – must work tightly together to balance contributions and underlying security to support the sponsor’s long-term survival.
“For schemes not yet in the ‘danger zone’, now is the time to consider any strategy adjustments to the scheme’s funding and investment strategies to ensure both sponsor and scheme remain aligned and able to face into the challenging economic climate.”
