Profit warnings from UK-listed companies with a DB pension scheme reach highest level since 2021

• UK-listed companies with a defined benefit (DB) pension scheme issued 20 warnings in Q3 2023
• 26% of all profit warnings issued by UK-listed companies in Q3 2023 came from companies with DB pension schemes
• 40% of warnings from UK-listed companies with a DB pension scheme in Q3 2023 cited rising costs and overheads, while 35% cited credit tightening
• One-in-five (20%) UK-listed companies with a DB pension scheme has issued a profit warning in the last 12 months

The number of profit warnings issued by UK-listed companies with a Defined Benefit (DB) pension scheme increased 18% year-on-year in Q3 2023, according to EY-Parthenon’s latest Profit Warnings report.

Listed companies with a DB scheme issued 20 warnings in Q3, the highest quarterly total from DB sponsors since Q4 2021, which saw 22 warnings, and the highest third quarter total since 2020, when 32 warnings were issued by DB sponsors. 

Across all UK-listed companies, 76 profit warnings were issued in Q3 2023, with more than a quarter (26%) of these warnings coming from companies with DB schemes. 

DB sponsors in the industrials sector issued seven warnings in Q3, while companies in consumer-facing sectors also issued seven warnings. Together the two sectors account for more than two-thirds (70%) of all profit warnings from DB sponsors issued in Q3 2023. 

One-in-five (20%) UK-listed companies with a DB pension scheme has issued a profit warning in the last 12 months.

High costs and challenging credit environment drive DB profit warnings

Forty per cent (40%) of profit warnings issued by UK-listed DB sponsors in Q3 2023 cited rising costs and overheads, an increase on the 33% of warnings that cited this reason in both Q1 and Q2 2023. 

Persistent pressure generated by high interest rates and economic uncertainty amongst consumers also continued to play a role in warnings from UK-listed DB sponsors. More than a third (35%) of Q3 warnings cited tightening credit conditions, a small rise on the 33% that cited it as a reason in Q2, while 20% of Q3 warnings cited weaker consumer confidence, the same proportion as Q2. 

Karina Brookes, UK Pensions Covenant Advisory Leader and EY-Parthenon Partner, comments: “Most UK companies have experienced persistent economic pressure over the last year and recent stresses mean DB sponsors have been particularly exposed. Industrial and consumer-facing sectors have higher concentrations of DB sponsors and these businesses have had to contend with tightening credit conditions driven by rising interest rates and prolonged economic uncertainty, which is causing consumers to reduce or delay spending. Corporates that are transitioning to a higher interest rate environment will find the refinancing experience more challenging than previously and those that are successful will need to contend with higher servicing costs. 

“Trustees should carefully monitor how market turbulence is affecting their scheme sponsor and consider what distress triggers they need to look out for, as well as their options for additional protection. These options will need to be examined in the context of the scheme’s progression on its journey plan, which may have changed significantly following the movement in gilts. Sponsors will need to manage creditors equitably when considering cost reduction programmes and refinancing activity however striking a balance may prove challenging.”

Paul Kitson, UK Pensions Consulting Leader at EY, adds: “The year-on-year rise in profit warnings from DB sponsors comes as schemes face higher funding levels. Despite the challenging environment, it’s important to remember there are options for trustees and employers in distressed situations which can be unlocked, for example, employers and schemes may have the opportunity for contributions to cease without impacting member benefits. We’ve also seen the first Superfund transaction with more expected to follow opening new options for trustees and sponsors alike. 

“Trustees and sponsors will also be closely monitoring the Autumn Statement later this month. Despite the absence of a Pensions Bill in the King’s Speech, we may still see proposed changes to the pensions eco-system announced.”