The ability of FTSE 350 companies to support their defined benefit (DB) pension obligations has returned to pre-recession levels, research from PWC has shown.
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, the analysis concluded.
PWC’s Pension Support Index tracks the relationship between the financial strength of the FTSE 350 companies and the size of their DB pension scheme commitments, rating the overall level of employer support offered to these schemes.
This year’s score, of 87 on a scale of 100, is only one 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, the accountancy firm said.
PWC also warned that there are still significant challenges on the horizon with Brexit, economic uncertainty and increased regulation.
According to Jonathon Land, head of PWC’s pensions credit advisory practice, the return of the index to a record high in 10 years “masks the fact that over this time there have been many winners and losers within the FTSE 350”.
He said: “Certain sectors, in particular retail, have been impacted by the growth in online sales, increased economic instability and uncertainty surrounding Brexit.”
Kien Tan, PWC’s retail strategy director, added: “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.
“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.”
One of these cases in FTSE 350 is Dixons Carphone, which saw its share price dropped as much as 20 per cent last week, after it revealed it is expecting a £300m profit in 2018 - a drop from £382m the previous year.
Frank Field, chairman of the Work and Pensions select committee, wrote to the retailer with questions about the deficit of its DB scheme.
Mr Land also argued that regulation is set to change, as the “demands placed by The Pensions Regulator on trustees and sponsors are set to increase”.
The pensions watchdog is expected to receive new legal powers from the government’s defined benefit white paper.
Besides creating new legislation to introduce a criminal offence to punish those found to have committed wilful or grossly reckless behaviour in relation to a pension scheme, the government wants to give the watchdog powers to disqualify company directors, and introduce new punitive fines.
The government will also consider if the introduction of a targeted mandatory clearance process for specific corporate transactions is necessary in the coming months.
maria.espadinha@ft.com
