The UK’s 5,000-plus corporate defined benefit (DB) pension schemes have overall remained in a surplus position over the past year despite asset and liability values both falling over January 2022, according to PwC’s Pension Trustee Funding Index.

This fall in asset and liability values still left a surplus of £30bn (€35.9bn) based on pension schemes’ own ongoing funding measures, PwC found.

PwC’s Adjusted Funding index showed a £200bn surplus – which incorporates strategic changes available for most pension funds, including a move away from low-yielding Gilt investments to higher-return, income-generating assets, and a different approach for potential life expectancy changes.

Raj Mody, global head of pensions at PwC, said: “In an unprecedented run, pension schemes have remained out of deficit for over 12 months. Despite inflation hitting a 30-year high, it’s likely that the surplus trend will be sustained.”

He noted that the inflation situation may even generate a greater surplus. “Although pension scheme benefits are linked to inflation, the increases are typically subject to a cap. In most schemes this cap is lower than the current rate of inflation, so scheme liabilities are not fully exposed to inflation volatility,” he explained.

He said that this would give some protection to the funding health of most pension funds, and potentially see even more surplus created as inflation tensions eventually subside.

“Running a pension scheme with significant surplus can cause challenges for trustees. Their powers are not always well designed to deal with such situations,” he said, adding that there can be pressure to spend some of the surplus on improving member benefits, which might sound appealing for members, but can be difficult for trustees to act fairly between different categories of membership.

UK listed companies with DB schemes see profit warnings increase

The number of UK listed companies with a defined benefit (DB) pension scheme that issued a profit warning increased by 69% in the final quarter of 2021 from 13 to 22, according to EY-Parthenon’s latest Profit Warning analysis.

The research revealed that companies with a DB pension fund accounted for over a quarter of all profit warnings (27%) last year. Of the 203 profit warnings issued by UK companies in 2021, 55 warnings were from 37 companies with a DB scheme.

There are 1,225 UK-registered listed companies in the UK, and 265 of them sponsor a UK DB pension scheme.

Research revealed that 14% of these firms issued a profit warning in 2021, significantly lower than the previous year, when almost 62% issued a profit warning.

Most companies issuing profit warnings with a DB pension scheme were from industrial or consumer-facing sectors, which have faced significant headwinds over the past 12 months, including supply chain risks, rising costs and labour shortages, EY-Parthenon said.

Within the industrials and consumer industries, companies in the FTSE aerospace and defense sector were the most severely affected, with 10 warnings issued by companies with a sponsoring DB scheme, followed by personal care, drug and grocery (6), retailers and food producers (4 warnings each) in 2021.

Overall, in 2021 the number of profit warnings issued by UK listed companies rose to 70 in the final quarter of the year, from 51 in Q3, with 44% citing vulnerabilities in the supply chain.

This was more acute in sectors that sponsor a UK DB scheme, with 64% of these companies citing supply chain as the main factor, followed by rising costs (36%), and the impact of the COVID-19 pandemic (23%) in Q4 2021, the research showed.

Karina Brookes, UK pensions covenant advisory leader and EY-Parthenon partner, said: “Companies with DB schemes are clustered in many of the most traditional sectors, and it is these that have been most exposed to supply chain disruption and rising energy costs over the last six months.”

She added: “These significant challenges, combined with the recent tapering of pandemic-related government support, which has shielded many companies from the impact of the pandemic, means we are only now starting to get some idea of the scale of the long-term impact of the pandemic.”

She said that trustees need to consider how ongoing uncertainty and increased risks could impact the long-term funding to their schemes and whether the covenant longevity of sponsors is sufficient.

“In order to best assess the sponsor’s future viability and the level of investment and funding risk in a scheme, it is crucial that sponsors and trustees are tuned in to moving market and sector dynamics, constantly monitor financial resilience and are considering ESG risks,” she noted.

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