FTSE 350 companies’ ability to support their defined benefit (DB) pension obligations has returned to pre-recession levels. However, 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, new PwC analysis shows.
PwC’s Pension Support Index tracks the relationship between the financial strength of the FTSE 350 companies and the size of DB pension scheme commitments, rating the overall level of employer support offered to these schemes. This year’s score of 87 has improved and is now only 1 point lower than the previous high of 88, which was achieved pre-recession.
While the position of companies’ ability to pay their schemes has returned to pre-recession levels, the gap between those companies that are doing well and those that are struggling continues to increase. PwC warns there are still significant challenges on the horizon with Brexit, economic uncertainty and increased regulation all issues high on the agenda of scheme trustees and sponsors.
Jonathon Land, head of PwC’s Pensions Credit Advisory practice, said:
“This year’s index score has increased compared to last year due to improved company performance and better returns on investment for schemes. Whilst this brings the index back to the level it was ten years ago, it masks the fact that over this time there have been many winners and losers within the FTSE 350.
“Certain sectors, in particular retail, have been impacted by the growth in online sales, increased economic instability and uncertainty surrounding Brexit. At the same time, regulation is set to change and the demands placed by the Pensions Regulator on trustees and sponsors are set to increase.”
Kien Tan, PwC’s retail strategy director, said:
“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.
“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.”
Michael Moore, PwC’s senior adviser on Brexit, said:
“When considering who will be the winners and losers from Brexit, those businesses that are focussed 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 on how Brexit will impact them .”
Notes to editors
1. PwC’s pensions support index tracks the relationship between the financial strength of FTSE350 companies and their defined benefit pension obligations, indicating the overall level of employer support offered to these pension schemes.
2. The financial strength of the company is based on net assets, operating profit, profit before tax, cash from operations and market capitalisation, against the company’s estimated pension deficit.
3. The Index is out of a possible score of 100. If a score of over 90 is achieved this would indicate that companies’ legacy DB pension issues are under more control.
4. The calculations are based on historical data from publically available company statutory accounts and market capitalisation data.
5. For more information, visit www.pwc.co.uk/psi
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