COVID-19: the move to a fragmented economy
The PSI score dropped to 83 in March 2021, reversing the gains seen in the second quarter of 2020 and is 7 points down on the high point of 90 reached in December 2019. The decline has predominantly been driven by significant hits to profitability and cash generation experienced by many FTSE 350 companies as a result of the pandemic.
The analysis shows there are some companies that continue to be in a good position to support their schemes. 51% of schemes in the FTSE 350 have a very high score of 95 or over. However, the percentage of schemes with a score of 60 or lower, which suggests a more limited level of support offered by the sponsor, is now 17% compared to 5% in June 2020. Many schemes will be facing the dual challenge of a material reduction in the level of sponsor support and a substantially increased level of uncertainty.
While liquidity remains tight for many, trustees with weaker sponsors should consider non-cash options as a way of protecting their covenant. In this environment there are likely to be both winners and losers, leading to what has been dubbed as the ‘fragmented economy’.
This divergence is coming at a time of increased focus on ESG and a more robust regulatory regime in the pensions industry. These challenges are in addition to those created through uncertainty due to new COVID-19 variants and continued travel restrictions (at the time of publication).
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 scheme position to the cash generation, profitability and assets of companies supporting their schemes.
The PSI should not be viewed as a replacement for an employer covenant review or other professional advice.