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COVID-19 uncertainty leads to drop in employer support for FTSE 350 defined benefit pension schemes, PwC analysis shows

Jul 14, 2021

The strength of employer support for their defined benefit (DB) pension schemes had dropped to levels similar to those seen at the start of the pandemic as of March this year, according to PwC’s latest Pension Support Index (PSI), meaning that some companies will find it harder to meet their pensions obligations given the impact of Covid-19.

PwC’s PSI tracks the ability of FTSE 350 companies to support their DB pension scheme obligations. It measures the profitability, cash generation and balance sheet strength of corporates that are sponsors of DB pension schemes and compares that to the size of the pension obligations that the company is exposed to. A rating from one to 100 is given, depending on the overall level of employer support offered to these schemes. The higher the rating, the greater the ability of the employer to meet their obligations to members.

In December 2019, the PSI stood at a high of 90. The impact of the first lockdown saw the PSI fall steeply to 81 in March 2020, before a short-lived recovery following the easing of restrictions in June 2020 contributed to an increase to 87. But further restrictions over the winter saw it drop back down to 83 in March 2021. For many companies included within the PSI, this is the first time that the report has been able to consider a full 12-month impact of Covid-19. The recent drop in the PSI score is primarily due to significant reductions to profitability and cash generation experienced by many FTSE 350 companies, as a result of the pandemic.

The analysis shows that some companies continue to provide a very good level of support, with 51% of schemes in the FTSE 350 having a score of 95 or over.

However, the proportion of schemes with a score of 60 or below, which suggests a lower level of support offered by the sponsor, has more than tripled to 17% compared to 5% in June 2020.

The majority of companies with a score of less than 60 will be able to meet their pension obligations as they fall due. However, there will be some schemes which have significant pension liabilities relative to the size of the sponsoring company, and for these schemes there may be constraints on the ability of the company to set aside sufficient cash to fund the scheme given the current economic environment.

Stephen Soper, pensions partner at PwC, said:

“The drop in the Pensions Support Index demonstrates that Covid-19 has clearly had a negative impact on the ability of companies to support their pension schemes. Over the last year, sponsors have had to navigate multiple lockdowns at both a national and regional level, as well as contend with disrupted supply chains and adapt their businesses so that they do not breach the changing government guidance.

“The significant increase in the number of sponsors which only offer limited levels of support shows that the future for some pension schemes looks increasingly uncertain. For trustees with weaker sponsors, now is a good time to be considering the full range of options, including the non-cash options, available to protect their covenant. ”

Total PSI score

Minesh Rana, PwC pensions restructuring director, added:

“Corporate insolvencies are at their lowest level for about a decade, largely driven by the level of government support provided to companies, which has masked the true decline in the performance of some sponsors and their underlying ability to support their pension schemes over the longer-term.

“A lot of uncertainty remains in how sponsors will be impacted as government support is unwound. We expect this will result in an increase in the levels of restructuring activity, including the potential for the new insolvency legislation introduced last year, being used in a pensions context.”

Ends

Notes for editors

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. The PSI compares the pensions obligations to the cash generation, profitability and net assets of companies supporting their schemes.

  • A score of more than 90 indicates that the legacy DB pension issue in the UK has been largely addressed and for an individual company this is likely to indicate that the company can comfortably support its pension obligations.
  • A score of between 75 to 90 indicates that the majority of companies will have addressed their pensions issues. However, there will be a need for continual monitoring of individual employers. This is because some companies could be vulnerable to a decline in their score should the recovery from the pandemic not be smooth or if there are significant one-off events (e.g. a corporate transaction or restructuring) which could significantly change the level of support available to the scheme.
  • A score of between 50 and 74 indicates that the majority of companies will still be able to meet their pension obligations as they fall due. However, there will be a proportion of schemes which are large relative to the size of their sponsoring employer. For these schemes there is material risk to members’ benefits and setting out a longer term plan for the scheme will be key.
  • A score of less than 50 would indicate that there are many schemes where there is a risk of a cut in members’ benefits resulting from the failure of the sponsoring employer. For companies and schemes in this position, there will be a need to consider the broad range of options available to address the pension obligations that the company is exposed to and to understand what steps can be taken to secure members’ benefits.

The PSI should not be viewed as a replacement for an employer covenant review or other professional advice.

  1. For more information please visit www.pwc.co.uk/pensions

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Jamie Harley

Jamie Harley

Head of media relations, PwC United Kingdom

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