The number of profit warnings issued by UK-listed companies with a defined benefit (DB) pension scheme increased 22 per cent year-on-year in 2022, analysis from EY-Parthenon has revealed.

EY-Parthenon’s Profit Warning Analysis detailed that 67 warnings were issued by companies with a DB scheme in 2022, an increase of 12 on the 55 that issued warnings in 2021 .

The analysis also revealed how the number of profit warnings changed by quarter, with 15 warnings being issued in Q4 2022, a decrease on the 18 that were issued in Q3 2022.

Looking across all listed UK companies, the analysis found that 305 profit warnings were issued in 2022, with warnings from DB sponsors in 2022 therefore accounting for 22 per cent of the total number of warnings issued by UK listed companies.

According to the analysis, a record 64 per cent of profit warnings issued by UK-listed DB sponsors in 2022 were due to rising costs and overheads as the reason for the increased issuing, over double the figure for 2021, when 31 per cent of companies cited the same reason.

The research also showed that over 54 per cent of the 2022 warnings from companies with a DB scheme were from consumer-facing sectors, noting that these sectors have been facing inflationary pressures, changing consumer behaviours, and a fall in consumer confidence.

In particular, the sectors that issued the highest number of warnings amongst DB sponsored companies in 2022 were FTSE travel and leisure, FTSE food producers, and FTSE retailers.

The analysis additionally detailed that, across the UK-listed market, 31 companies issued their third consecutive profit warning in 12 months in 2022, up from 23 in 2022, suggesting that these companies could be in the 'danger zone' for delisting.

Of the 31 companies currently in the danger zone, eight have a DB pension scheme.

EY-Parthenon partner and UK pensions covenant advisory leader, Karina Brooks, commented: “Over the last 12 months UK companies have been facing a myriad of issues including, rising costs, changing consumer behaviours, the cost-of-living crisis, and DB sponsors have been no different.

“At a time when regulation and guidance is focusing on the sponsor covenant, these macroeconomic challenges need to be fully understood and monitored by both trustees and corporates.

“Scenario planning to understand the impact of macroeconomic changes and sector specific challenges will be vital to determine whether the covenant horizon is aligned to the scheme’s longer-term objectives.”

Brooks also stated that the analysis found that 5 per cent of the DB sponsor population de-listed in 2022 and that, with private equity looking to redeploy unused capital and corporates streamlining operations, more companies could delist in 2023.

EY-Parthenon head of pensions alternative financing solutions, Eimear Kelly, added: “2023 will be a milestone year for DB pension schemes and their corporate sponsors with The Pensions Regulator (TPR) set to announce one of the biggest shake-ups to scheme funding in over 20 years as it consults on a new code.

“The changes are likely to place additional pressure on already stretched corporate sponsors to plug pension funding gaps at a time when the macroeconomic environment remains uncertain.

“Creative funding solutions such as contingent assets or asset-backed contributions could make a resurgence in the short to medium-term to help corporates meet their obligations to DB pension schemes.

“Whilst increased regulatory pressure to fund pensions will be challenging for many corporates, equally there were many schemes that started 2023 in a very strong funded position.

"Notwithstanding the current economic headwinds, insurance pricing remains keen by historical standards and for those schemes that are well funded, the coming months will be a good opportunity to start planning and preparing for an approach to the insurance market.”

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