The number of profit warnings issued in Q1 2024 by UK-listed companies with a Defined Benefit (DB) pension scheme decreased for the first time in 12 months, according to EY-Parthenon’s latest Profit Warnings report.
In total, 18 warnings were issued by listed companies with a DB pensions sponsor in Q1 2024 compared to 22 issued in Q4 2023 – a decrease of 4 (18%). However, the 18 warnings in Q1 2024 represents a 29% year-on-year increase from the 14 warnings issued in Q1 2023.
Across all UK-listed companies, 70 profit warnings were issued in Q1 2024, with more than a quarter (26%) of these warnings coming from companies with DB pension schemes. Companies with DB sponsors in the Household Goods and Home Construction sector issued the most warnings in Q1 (3) closely followed by Industrial Support Services and Banks (2).
Almost a quarter (24%) of UK-listed companies with a DB pension scheme have issued a profit warning in the last 12 months.
Credit tightening remains key driver for profit warnings from companies with a DB pension scheme
Rising costs, tightening credit and contract issues were cited as the main reasons for warnings for UK-listed companies with a DB sponsor. For the first time since Q1 2022, weaker consumer confidence was not cited as a reason for any warnings from companies with a DB pension scheme.
Commenting on this, EY-Parthenon UK pensions covenant advisory and partner, Karina Brookes, said: “While the number of profit warnings from companies with DB-pension schemes has declined for the first time in the last 12 months, the number is still higher than this time last year. Macroeconomic pressures are continuing to challenge businesses, and many DB sponsors have moved into 2024 with earnings challenges due to the high costs and tightening credit conditions that characterised much of 2023.
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By GlobalData“Notably, consumer confidence wasn’t cited as a reason for any warnings from companies with a DB pension scheme for the first time in two years this quarter, suggesting consumer spending is returning as inflation falls. However, while there are signs that economic recovery may have begun, new pensions regulation, and ongoing election and geopolitical uncertainty, mean there are challenges facing sponsors in the short, medium and longer-term. Depending on long-term goals, covenant over the entire horizon of all schemes – even those that are well-funded – must remain an important consideration.”
EY UK pensions consulting leader, Paul Kitson, concluded: “Credit tightening continues to challenge many corporate sponsors of UK DB pension schemes, so CFOs must consider whether run-on could provide a much-needed additional source of income in the future.
“While it is positive to see profit warnings from companies with DB pension schemes fall this quarter, the overall increase in warnings year-on-year mean covenant assessment remains essential. Critical to this consideration is identifying what third party capital may be required to make run-on feasible.”