FTSE 350 DB pension support weakens following Covid-19 restrictions

Some companies may find it harder to meet their defined benefit (DB) pension obligations given the impact of Covid-19, PwC has warned, after analysis revealed that the overall strength of employer support for DB schemes dropped amid the lockdown restrictions.

PwC's Pension Support Index (PSI) revealed that whilst the level of employer support for DB pension schemes had begun to improve, it had once again fallen to levels similar to those seen at the start of the pandemic by March 2021.

The PSI tracks the ability of FTSE 350 companies to support their DB pension scheme obligations by measuring profitability, cash generation, and balance sheet strength, and then comparing this to the size of the pensions obligations that the company is exposed to.

Each company is awarded a rating of one to 100, depending on the overall level of employer support offered, with those with the highest ratings deemed to have the greatest ability to meet their obligations to members.

In its analysis, PwC revealed that whilst the PSI hit a high of 90 in December 2019, the impact of the first lockdown saw this fall “steeply” to 81 in March 2020.

Although a "short-lived recovery" amid the lifting of lockdown saw an increase to 87, further restrictions introduced over the winter resulted in a fall back to 83 in March 2021.

PwC attributed this latest drop to the "significant reductions" in profitability and cash generation experienced by many FTSE350 companies amid the pandemic, also noting that is the first time that the index has been able to consider a full 12-month impact of Covid-19.

Despite the overall fall in support, further analysis revealed that some companies continue to provide a very good level of support, with over half (51 per cent) of schemes in the FTSE 350 having a score of 95 or over.

However, the proportion of schemes with a score below 60, which suggests a lower level of support offered by the sponsor, has more than tripled over the past year, increasing from 5 per cent in June 2020 to 17 per cent in March 2021.

Whilst PwC clarified that the majority of companies with a score below 60 will still be able to meet pension obligations as they fall due, it acknowledged that there will be some schemes which have “significant pension liabilities” relative to the size of the sponsor.

For these schemes, PwC warned, there may be constraints on the ability of the company to set aside sufficient cash to fund the scheme given the current economic environment and challenges.

PwC pensions partner, Stephen Soper, commented: “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 last 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.

“The significant increase in the number of sponsors which 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. ”

Adding to this, PwC pensions restructuring director, Minesh Rana, said: “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.”

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