Pensions Support Index 2018

Predicting the unpredictable

Our Pension Support Index measures the ability of companies in the FTSE 350 to support their defined benefit promise.

Predicting the unpredictable: where next for pensions?

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:

  • Brexit – where some business models will or already have been fundamentally changed
  • Regulation – where demands placed by the Pensions Regulator on Trustees and sponsors continue to increase.

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The retail sector

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.

What’s changing?

Cautious consumers

Our Quarterly Consumer Sentiment Survey found that sentiment has continued to decline, with more Britons now saying they will be worse off than better off in 12 months’ time, reflecting the restrained wage growth and increased inflation we have seen over the past year.

Not surprisingly, consumers also say they’re going to cut back on their discretionary spending. In fact, more consumers say they will spend less rather than spend more on every category other than grocery shopping.

Cost headwinds

At the same time as shoppers spending less and putting pressure on the top line, retailers are having to contend with higher costs and squeezed margins. Some of the biggest challenges have been around people costs (e.g. National Living Wage, the Apprenticeship Levy), property costs (notably business rates) and input costs (due to Sterling depreciation).

Channel shift

Internet shopping, whether by PC or by mobile phone, continues to grow rapidly, meaning that store-based shopping is in decline in many categories. According to our research, 16 stores a day closed in 2017.

This has put pressure on traditional retailers to:

  • reduce their store portfolios
  • invest in online, multichannel and supply chain
  • improve the attractiveness of their remaining stores.

On top of these pressures, they are also competing against new online competitors unencumbered by legacy store costs.

New operating models

While historically the most common way to achieve profitable growth was store roll out, either at home or abroad, legacy retailers are now having to think differently in order to succeed. As well as investing in multichannel, technology, customer experience and other innovation, we are likely to see more retail M&A, either to add new categories and use surplus space (e.g. Sainsbury's/Argos), to tap into faster growing markets (e.g. Tesco/Booker), or simply to add scale and buying power (e.g.Sainsbury's/ Asda). Meanwhile, legacy retailers that have yet to prune their store portfolios, are uninvested, or are not fleet of foot, risk being the next casualties in an increasingly challenging and competitive operating environment.

Brexit: who will be the winners and losers

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.

Questions for trustees to consider

  1. How will Brexit affect the UK economy and the value of the GBP? How might changes to regulation impact your sponsoring employer across borders?
  2. What does trade between the UK and the rest of the world look like following Brexit and what implications will this have on your sponsoring employer?
  3. What impact will changes to immigration in the light of Brexit have on your employer’s workforce and operating model and how can you prepare?

Regulation: what will change?

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:

  • Improved governance and greater scrutiny of Trustees and their long-term targets
  • The Pensions Regulator to have a clearer, quicker and tougher approach to corporates and their actions in relation to schemes versus other stakeholders
  • Corporates to clearly articulate how they have considered their DB schemes in transactions via a “Statement of Intention”

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.

Contact us

Jonathon Land

Partner, Pensions Credit Advisory Leader, PwC United Kingdom

Tel: +44 (0)7879 411796

Kien Tan

Director, Retail Strategy, PwC United Kingdom

Tel: +44 (0)20 721 23910

Michael Moore

Senior Adviser, PwC United Kingdom

Tel: +44 (0)7803 726 179

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