Predicting the unpredictable
Our Pension Support Index measures the ability of companies in the FTSE 350 to support their defined benefit promise.
This year’s Pensions Support Index (PSI) has returned to pre-recession levels. It has taken a decade to get back to the pre-recession high, with pension scheme covenant strength at the end of 2017 now at the same level as 2007.
However, the gap between those companies that are doing well and those that are struggling continues to increase, and the recent improvement masks the fact that there have been many winners and losers in 2017 within the FTSE 350.
Distress in the retail sector and political uncertainty have further exacerbated these variations. In the retail sector, changing market conditions have resulted in a number of high profile restructurings where trustees of pension schemes are impacted by either insolvencies or company voluntary agreements. In many of these recent situations, Trustees and the PPF have had a casting vote in the future of the sponsoring employers.
Trustees and sponsors are also being impacted by political change, in particular:
The past few months have seen increased scrutiny in the retail sector, with a number of businesses showing signs of distress, some high-profile insolvencies, as well as some industry-changing M&A. But what’s causing this, and what does the future hold for the sector?
What’s clear is that the seismic shifts that might have been expected a few years ago, as e-commerce took off or during the last recession, are finally beginning to happen, with slowing consumer spending and growing cost headwinds forcing many retailers to adapt or restructure in order to weather the storm.
As a result of the continued upheaval in the sector, we expect that trustees and sponsors will have to make tough decisions quickly in response to the challenges that retailers are facing.
When considering who will be the winners and losers from Brexit, those businesses which are focused on the UK markets and have supply chains and a workforce predominantly in the UK will be the least disrupted.
The greater the dependency on trade with Europe, or on European employees, the more disruptive Brexit will be for those sponsors. Regardless, all sponsors and pensions scheme trustees should have a plan. We have set out some of the key questions which trustees should be asking their sponsors.
Following a few high profile failures, the scrutiny on trustees, the Pensions Regulator and corporates is greater than ever.
The White Paper and the Pensions Regulator’s recent Annual Funding Statement call for:
Here are some of the key detailed points of emphasis.
The Pensions Support Index tracks the relationship between the financial strength of the FTSE 350 companies and their defined benefit pension obligations, indicating the overall level of employer support offered to these pension schemes. Rather than just looking at the absolute size of the obligations, we compare the deficit number to the cash generation, profitability and assets of companies supporting their schemes.
Where appropriate, calculations have been restated for updated actuarial assumptions.
The PSI should not be viewed as a replacement for an employer covenant review or other professional advice.
Director, Retail Strategy, PwC United Kingdom
Tel: +44 (0)20 721 23910
Senior Adviser, PwC United Kingdom
Tel: +44 (0)7803 726 179